PBOC Warns on Trade, Pledges Targeted Stimulus and Steady Yuan

The People’s Bank of China warned that the escalating trade war could destabilize the global economy, and vowed to continue with targeted stimulus at home while keeping the currency steady.

“Trade friction and uncertainties in global policy could impact the global economy negatively” by driving up inflation, damaging household and corporate confidence and causing financial market turbulence, the PBOC said in its quarterly monetary policy report published late Friday.

The world’s second-largest economy is facing potentially severe disruptions from the impending increase of tariffs on goods sold to the U.S., and the associated uncertainty that the worsening trade war brings. The government has still room for maneuver with fiscal policy, while the PBOC has said it will remain supportive without flooding the economy with cash.

Policy makers will keep a balance between tightening and easing measures, while making “good use” of targeted monetary tools, according to the report. Language on pursuing “structural deleveraging” was added back to the report, signaling renewed focus on debt risks even amid a darkening outlook.

Output slowed more than expected in April on sluggish consumption and worsening industrial output, potentially undermining China’s ability to deal with the escalating trade war with the U.S. At the same time, the current pace of economic expansion is close to the potential growth rate, the PBOC report said, suggesting interest-rate cuts are not in view for now.

“Monetary policy will keep liquidity conditions and credit growth stable, and the central bank is ready to provide counter-cyclical support should the growth trajectory worsen abruptly,” Eva Yi and Liang Hong, economists at China International Capital Corp. wrote in a note Sunday.

“The Chinese economy has some deep-seated problems” as some traditional sectors are in adjustment, manufacturing and private investment growth have both slowed and economic growth has relied heavily on property and infrastructure investment, the central bank said in the report.

While reiterating that credit growth should be appropriate, the bank stressed the need to improve credit structure, meaning it would want to enhance its ability to direct credit to the needy parts of the economy.

The yuan traded onshore broke the 6.9 to the dollar level on Friday as its weekly slide extended to the longest since August amid trade tensions with the U.S.

China has accumulated the experience and has ample policy tools to cope with forex market fluctuations, State Administration of Foreign Exchange head Pan Gongsheng said in an interview with Financial News published on the PBOC website Sunday.

China’s stable economic and financial performance provides strong support to keep the forex market and Chinese currency steady, said Pan, who is also deputy governor of the PBOC. China’s forex market is expected to see more capital inflows this year, he added.