Monetary easing to persist in near term

China's monetary conditions are likely to remain reasonably accommodative in the coming months, continuing to support credit expansion while contributing to steadier capital market expectations, analysts said on Monday.

They said that the focus of the People's Bank of China, the country's central bank, on preventing idle capital circulation should not be seen as an effort to cool the recent stock market rally, but rather as a move to ensure funds flow into the real economy instead of idling within the banking system.

Nevertheless, they noted that near-term cuts in the reserve requirement ratio — the proportion of deposits banks must keep as reserves — or interest rates appear unlikely given the recent pickup in China's core inflation, with any new significant easing moves likely to depend on economic data and may potentially occur in the fourth quarter.

Li Chao, chief economist at Zheshang Securities, said monetary policy is likely to remain moderately accommodative rather than shift toward tightening in the coming months.

Li said that as external shocks linger and domestic structural challenges persist — including insufficient demand and excessive competition on the supply side — a moderately accommodative policy is needed to offset the downward economic pressures, with further cuts in the RRR and interest rates possible this year.

The PBOC pledged in its second-quarter monetary policy report on Friday that it will strive for better implementation of the moderately loose monetary policy, maintain abundant liquidity, help maintain price levels at a reasonable range and promote a decline in overall social financing costs.

Meanwhile, the report pointed to the need to enhance the efficiency of fund utilization, prevent idle capital circulation and strike a proper balance between supporting the real economy and maintaining the financial sector's own soundness.

Yang Fan, chief macro and policy analyst at CITIC Securities, said the central bank's emphasis on preventing the circulation of idle capital highlights its focus on curbing the use of low-interest loans for nonproductive purposes such as redepositing into higher-yield deposits or buying wealth management products, rather than tightening credit to reduce leverage in the financial system.

A report from Chasing International Economic Institute said the sign that some households have reallocated funds from deposits into stocks — shifting away some wealth management products that idle capital may circulate in — is something policymakers would likely welcome as it channels capital more directly into the real economy.

Data from the central bank showed that deposits at nonbank financial institutions — such as securities firms and insurance companies — rose by 2.14 trillion yuan ($298.17 billion) in July. The increment was 1.39 trillion yuan higher than the same period last year, which experts said pointed to an accelerated flow of money into the stock market.

The report added that the possibility of the PBOC cutting the RRR and interest rates later this year cannot be ruled out amid the rising likelihood of the US Federal Reserve restarting rate cuts.

Markets are awaiting US Fed Chair Jerome Powell's monetary policy outlook message this week at the Jackson Hole Economic Policy Symposium, especially on whether the Fed is poised to cut interest rates in September.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, however, said the near-term probability of an RRR cut is low, given that the economy has performed well in the first half.

"The central bank is more likely to rely on tools such as the medium-term lending facility and outright repos to keep market liquidity ample," Wang said.