China central bank says to continue prudent, neutral monetary policy

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

HONG KONG (Reuters) - China’s central bank said on late Friday that it will maintain a prudent and neutral monetary policy and keep liquidity conditions stable, as it seeks to fend off systemic risks in the world’s second-largest economy.

The People's Bank of China (PBOC) will also keep the yuan CNY=CFXS stable while increasing the currency's two-way flexibility, it said in its third-quarter monetary policy implementation report.

The central bank aims to maintain an appropriate monetary environment for the country’s supply-side reforms and higher quality economic growth, it said.

The PBOC will improve its “twin pillar” framework by combining its monetary policy with macro-prudential assessment (MPA), while using multiple monetary policy tools to manage liquidity.

“We will comprehensively use price and quantitative tools to strengthen fine-tuning in a preemptive way to keep liquidity in the banking system basically stable,” the central bank said.

The central bank on Friday also issued sweeping guidelines to tighten rules on asset management businesses, the latest step by Beijing to fend off systemic risks in the country’s rampantly growing shadow banking sector.

The PBOC will work under the newly established State Council Financial Stability and Development Committee to strengthen supervision coordination, it said.

The weighted average lending rate for non-financial firms, a key indicator reflecting corporate funding costs, edged up 9 basis points in the third quarter to 5.76 percent, following a rise of 14 basis points in the second.

Borrowing costs in China have risen this year as regulators seek to squeeze out speculative lending and a further rise in debt levels. Some analysts say higher interest rates from the deleveraging drive will hurt small, private firms.

Reporting by Twinnie Siu and Zhang Min, Kevin Yao; Editing by Robin Pomeroy and John Stonestreet