China’s central bank said Thursday it will make stabilising economic growth a bigger priority, signaling rising concern over the slowdown in the world’s second-largest economy.
The People’s Bank of China, in its second-quarter monetary policy report, added new language on growth as it repeated a standard formulation that it would balance the three objectives of maintaining steady and relatively fast growth, adjusting the economic structure and managing inflation expectations.
In addition, it said it would “put stabilising growth in a more important position.” The change signals that it sees the slowdown as the biggest risk in the Chinese economy, and that it may take further measures to boost growth.
That added language echoes recent comments by China’s top political leadership, including President Hu Jintao, who used it earlier this week. But it is new for the central bank, having not appeared in the previous quarter’s monetary policy report.
China’s economy grew 7.6 percent in the second quarter compared with a year earlier, the slowest rate since the global financial crisis. Combined with the still-unfolding sovereign-debt crisis in Europe and slow growth in the US, China’s decelerating economy has cast doubt over the global economic outlook.
Softening demand there has been cited by companies ranging from chemical giant BASF BASFY -2.63 percent SE to apparel maker Nike Inc. NKE -0.49 percent
“The Chinese economy currently faces many difficulties and challenges,” the PBOC said on Thursday.
“The tasks of restructuring the domestic economy and expanding domestic demand remain huge, and domestic growth drivers still need to be strengthened,” it added.
The state of the global economy also poses risks, it said, predicting that global growth will remain relatively weak for an extended period.
At the same time, the PBOC warned that stimulus efforts could trigger inflationary pressures.
“As costs for labour, resources and some tradable goods are seeing significant upward price pressure…the ability of expansionary policies to boost growth could decline, and the impact on inflation could be strengthened,” the PBOC said.
The PBOC also warned that the country’s consumer-price index could rebound in August, but it said that the extent of the rebound is unlikely to be large.
The PBOC has already lowered interest rates twice this year in an effort to boost growth.
It has also lowered the required reserve ratio, the percentage of deposits that banks must hold in reserve rather than lend out, three times since November.
In an interview, Zong Liang, an economist at the state-run Bank of China Ltd, said there is room for further cuts in the reserve ratio, especially since China’s foreign-reserve pile is growing more slowly. “The trend will be to cut the reserve requirement ratio for years to come,” he said.
The PBOC usually issues new yuan to buy most of the foreign currency that enters the country, which swells the domestic money supply and pushes the PBOC to keep raising banks’ level of required reserves to soak up excess liquidity.
But now, in a fundamental shift for the Chinese currency, the yuan has seen downward market pressure since late last year. Companies and investors are less eager than they once were to convert dollars and other foreign currencies to yuan, because its appreciation is no longer a sure bet.
That in turn means that the Chinese central bank is buying less in foreign currency and has slowed yuan issuance, reducing excess liquidity and giving it room to lower the reserve-requirement ratio, Zong said.
“Now, given the slowing accumulation of forex positions, the central bank has to change its money-supply channel,” he said.
Zong said he expects two more cuts in the required reserve ratio this year.
A moderating trade surplus and increasing Chinese investment abroad have also contributed to the decline in foreign-exchange inflows. In the first half of the year, China acquired $63.6 billion of forex reserves, data from the State Administration of Foreign Exchange showed, down sharply from $281.0 billion in the same period a year earlier. In the second quarter, China sold $11.2 billion of forex reserves.