Chinese monetary authority's balance sheet shrinks in July

The balance sheet of China's monetary authority shrank in July after three consecutive months of rises, confirming the central bank's intention to create a neutral monetary environment, according to a research note released Sunday.

At the end of July, the monetary authority's balance sheet shank by 282.8 billion yuan (42.5 billion U.S. dollars) from a month earlier, compared with an expansion of 786.8 billion yuan in June, said the People's Bank of China (PBOC), China's central bank.

"Together, the balance sheet change seem to confirm the PBOC's intention to neutralize monetary policy," the China International Capital Corporation (CICC), an investment bank, said in a research note.

The PBOC said in a quarterly monetary policy report earlier this month that it will maintain a neutral policy stance to create a financial environment conducive to structural reforms.

If the PBOC repeatedly cuts banks' reserve requirement ratio (RRR), a strong signal of monetary easing, market interest rates will drop and depreciation pressure on the yuan will increase, the report said.

The balance sheet contraction may be one reason behind the PBOC's warning of the currency deprecation effect of frequent RRR cuts, the research note said.

"Looking forward, we think the PBOC will keep liquidity conditions largely stable, although it may be cautious in using RRR or interest rate tools," the CICC said. Endi