China's central bank will moderately loosen its monetary policies and continue the financial supply-side structural reform as domestic and external uncertainties rise, China International Capital Corporation Limited (CICC) predicted.

Given the downward pressure of the global economy, the People's Bank of China (PBOC), the central bank, is reasonably expected to slightly loosen its monetary policies to tackle the falling demand caused by the targeted tightening financial supervision and rising U.S.-China trade tensions, said the CICC, an investment banking firm, in an analytical report.

The PBOC is likely to lower the interest rates of open market operations (OMO) while adopting the reserve requirement ratio cut to maintain market liquidity and stable growth in the money supply, the CICC reckoned, noting that it is unlikely that the central bank will resort to large-scale easing due to inflation pressure.

Apart from moderate counter-cyclical efforts, it appears that the central bank will continue focusing on "financial supply-side reform" to cope with the complex structural issues in the Chinese economy.

The central bank will press ahead with market-oriented lending rate reform to improve banks' loan prime rate mechanism guiding the effective lending rate lower for the real economy.

It is possible that the pace of capital injection will speed up within the year to solve the inadequate capital issue for medium-sized and small banks.

Also, the central bank will continue to channel more funding to small and medium-sized enterprises (SMEs) via OMO tools and positive incentives for banks. By June 2019, the weighted average lending rate for SMEs has dropped 66 bps to 4.78 percent compared with that of 2018. 

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