August 7, 2015 / 11:53 AM / 4 years ago

China central bank warns of economic weakness due to reforms

BEIJING (Reuters) - China’s economy may face headwinds in coming months due to its reform efforts, the central bank said on Friday and it warned that monetary policy was being blunted by a lack of new growth drivers and lukewarm appetite for new investment.

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014. REUTERS/Petar Kujundzic

Yet despite the pain of reforms, the People’s Bank of China said the world’s second-largest economy should not be powered by strong stimulus in the medium term, and must instead depend on a retooled growth engine to drive activity.

In its second-quarter monetary policy report, the central bank also cautioned that more financial innovation in China was heightening risks by increasing volatility in asset prices and raising debt levels.

“The economy is still relatively reliant on policies intended to stabilize growth and on government-led investment,” the central bank said in the 64-page report.

It reiterated its stance by saying that policy would be kept prudent, though there would be a focus on keeping it "appropriate" and neither too tight nor too loose. The yuan CNY=CFXS will also be kept at a reasonable level and more flexibility will be introduced to the exchange rate, it said.

Buffeted by a housing slowdown, wobbly foreign and domestic demand and most recently, a stock market crash, China’s economy has had a difficult year.

Growth has hovered at 7 percent in the first six months and is widely expected to stay at that level for the year, which would leave China with its worst economic performance in a quarter of a century.

The central bank did not comment directly on the outlook for interest rates and reserve requirements, which analysts expect authorities to cut or relax in coming months to stoke growth.

But it promised to stabilize financial markets and financial market expectations, without referring to recent stock market falls that wiped out as much as a third of share prices at one point.

The bank also said consumer inflation was running at a low level, and noted that monetary policy would not target changes in the price of any specific good, with elaborating.

The price of pork has surged in recent weeks and is expected to add to consumer inflation, though few analysts expect that price spike to tip policymakers into tightening mode.

Reporting by Koh Gui Qing; Editing by Robert Birsel

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