News Analysis: Substantial monetary easing unlikely for China

China is unlikely to inject liquidity into the market on a large scale as policy makers have vowed a neutral monetary environment for supply-side reforms, economists said.

The People's Bank of China (PBOC) stressed "prudent monetary policy" in a quarterly report last Friday, reinforcing its stance a day after Britain slashed its interest rate to a record low.

The central bank said if it repeatedly cuts banks' reserve requirement ratio (RRR), a strong signal of easy monetary policy, market interest rates will drop and depreciation pressure on the yuan will increase.

The PBOC report came days after the economic planning National Development and Reform Commission (NDRC) swiftly revised an article on its official website, deleting "lower RRR and interest rates at a proper time."

The NDRC overstepped its mandate, as it is allowed to participate in the making of monetary policy, but not to decide it, said Deng Haiqing, chief economist at brokerage JZ Securities.

The deletion indicated that the government and the PBOC are not considering any cuts in the RRR or interest rates, said Deng.

After a number of reductions, China's benchmark interest rates are at record lows, leaving little room for further cuts. But many investors expect RRR cuts amid economic headwinds as the ratio is relatively high compared with that of other major countries.

In the aftermath of the global financial crisis, many central banks, including the PBOC, have resorted to monetary easing measures to prop up growth.

Large-scale monetary easing, which is typically used to boost demand, will not work when economic woes are rooted in the supply side, said Wan Zhe, chief economist at the China National Gold Group Corporation.

Many of China's economic problems are structural, and the key solution is to push forward supply-side structural reforms, said Friday's PBOC report.

The report proposed using macroeconomic policies to stabilize market expectations and made it clear that monetary policy should create a "neutral and proper" financial environment for the reforms.

Such reforms aim to reduce ineffective and low-end supply of products and services while expanding effective and medium-to-high-end supply.

The economists said substantial monetary easing will cause excessive liquidity in the market and consequently dampen government efforts to reduce overcapacity, one of the most difficult tasks of the reforms.

"China has soberly recognized the root problem and its prudent monetary policy has showed that the world's second largest economy, which has a global influence, is very responsible," said Wan.

China International Capital Corporation (CICC), an investment bank, said in a research note that the central bank's neutral stance does not mean an immediate tightening of liquidity.

"In contrast, we believe that the PBOC will keep monetary conditions broadly stable but rely more on open market operations and various lending facilities in policy implementation," said the CICC.

With monetary policy becoming more neutral, fiscal and quasi-fiscal policies will move to the center stage, it added. Endi