BEIJING, Aug 3 — The People’s Bank of China warned the country’s credit and money supply have increased rapidly and indicated it will refrain from broader monetary easing to support growth.

“The total debt level has been rising relatively quickly”, the PBOC said in its second-quarter monetary policy report on Aug. 1. “Our existing money supply and credit are already relatively large and their growth is also high.”

The International Monetary Fund said last week that China’s reliance on debt and investment has created “rising vulnerabilities” and that failure to change its growth pattern increases the likelihood of a sharp economic slowdown. The Washington-based lender urged the nation’s leaders to lower the country’s annual expansion target, rein in credit and speed up reforms.

“Restructuring and reform of the economy remains an arduous task,” the central bank said in its 54-page report. “It’s not appropriate to expand overall liquidity sharply to solve structural problems.”

The PBOC reiterated its “prudent” monetary-policy stance and pledged to “keep overall liquidity stable while improving its structure.” It said it will exploring resolving local- government debt problems in “market-oriented” ways.

The central bank reiterated it will use tools including open market operations, reserve requirement ratios, relending, standing lending facilities, and short-term liquidity operations to adjust liquidity, according to the report.

Monetary Easing

Governor Zhou Xiaochuan is trying to balance implementing Communist Party orders to protect this year’s 7.5 per cent economic-growth target without resorting to broader monetary easing that stokes debt and inflation risks. The central bank has turned to unconventional tools including relending and selective cuts to banks’ reserve requirement ratios to channel credit to areas targeted by Premier Li Keqiang.

China Business News reported in June that the PBOC created a revamped relending tool known as pledged supplementary lending to manage medium-term interest rates and lower the cost of financing for some industries and lenders. The paper said on July 21 that the PBOC conducted a 1 trillion yuan (RM520.344 billion) transaction with China Development Bank Corp, the country’s largest policy lender.

The banking regulator said last week it approved CDB to start a housing-finance business to provide loans for shantytown renovation and related city infrastructure.

‘Deepen Reform’

While the PBOC’s report made no mention of pledged supplementary lending, it did say it will “deepen reform” of CDB to support shantytown redevelopment and city infrastructure. The bank is proposing to become the sole financier to local governments, as mounting debt threatens efforts to promote urbanization, its chairman, Hu Huaibang, wrote in February.

Expansion in China’s economy-wide credit has exceeded nominal gross domestic product growth in every quarter since 2008, according to data compiled by Bloomberg. Financing rose 16.6 per cent in June from a year earlier, compared with the second quarter’s 8.5 per cent increase in GDP unadjusted for inflation.

Outstanding credit rose to 206.3 per cent of GDP last quarter from 202.1 per cent in January-to-March, according to data compiled by Bloomberg.

China’s stock of aggregate financing, its broadest measure of credit, rose by 73 per cent of GDP in the past five years, the IMF said in its report last week. Out of 43 countries studied by the the lender over 50 years, only four saw credit expansion on a similar scale to China and all four had a banking crisis within three years following the boom, it said. — Bloomberg