PBOC’s Hu says falling inflation biggest risk to China’s economy
Senior central bank official says fear of falling prices behind the recent cut in interest rates, playing down concerns about slowing growth
The People's Bank of China sees falling prices as the biggest risk to the economy and also the primary reason behind its first interest rate cut in two years, deputy governor Hu Xiaolian said.
Indicating more steps might be taken, Hu yesterday told a financial forum: "The emphasis that the prudent monetary stance will stay intact doesn't mean we wouldn't adopt various monetary tools."
The comments were the first from a senior PBOC official on the central bank's policy thinking after the one-year lending benchmark rate was unexpectedly lowered by 40 basis points last Friday, while deposit rates were cut by 25 basis points, along with a lift in its upper float limit.
Calling the falling inflation the "most prominent problem", Hu said: "Cutting benchmark rates was aimed at making the actual interest rates more reasonable, in a bid to help ease the financing burden facing companies."
She played down concerns about slowing growth, although many analysts believe the rate cut was also prompted by worries over economic prospects. The job market was generally sound, Hu added.
China's inflation rate eased to a near-five-year low of 1.6 per cent in the past two months, far below the official goal of about 3.5 per cent for this year. The producer price index has stayed negative for two years amid sluggish industrial demand.
The State Council has held a series of meetings aimed at removing the funding bottlenecks for small companies as most of them have had to resort to the shadow banking system, at annual interest rates of more than 10 per cent, or even 20 per cent.
The deflationary pressures, which make borrowing more costly, were largely linked to the cooling property sector and excessive capacity in industries such as steel.
Hu said the 7.4 per cent expansion in gross domestic product in the first three quarters of the year was "in a reasonable range" and expressed "full confidence" in healthy growth ahead.
She also defended the controversial monetary policy adopted earlier this year, such as injecting liquidity into selected banks, saying the so-called "targeted easing" had been the "right" strategy to boost funding efficiency.
However, critics say these steps, largely opaque and hard to monitor, failed to push down the soaring funding costs.
Mizuho Securities Greater China chief economist Shen Jianguang said Beijing had been "politicising its monetary policy" by intentionally refraining from cutting rates even when facing urgent needs.
Shen expects more rate cuts next year, as the economic data for this month is likely to disappoint, with fourth-quarter GDP growth expected to slow to 7.2 per cent.
