China severely underestimated this year's global economic slowdown and further cuts to Chinese interest rates or bank reserve requirements hinge on any new deterioration in the external environment, a central bank adviser said Thursday.
Chen Yulu, a professor at the Renmin University in Beijing and an academic adviser to the monetary policy committee of the People's Bank of China, was speaking to reporters on the sidelines of a conference in the capital on global economic conditions and capital flows.
"We have indeed underestimated the severity of the external economic situation," Chen said, adding that the global economy could remain sluggish for an extended period.
Asked whether the central bank would opt to boost the economy by further cutting interest rates or required reserve ratios for banks to spur commercial lending, Chen said: "It will hinge on the degree of deterioration of the external situation."
The central bank cut interest rates twice in June and July and lowered the reserve requirement ratio three times since late 2011, freeing an estimated 1.2 trillion yuan (US$190 billion) for new lending.
But it has held off on more aggressive easing measures since then, despite further signs of cooling demand at home and abroad. Instead, it has opted to pump short-term cash into money markets to ease credit strains, a move analysts say reflects concerns about renewed property and inflation risks.
On Tuesday, the central bank said it would "fine tune" policy to cushion the economy against global risks while closely watching the possible impact from recent policy loosening in the United States and Europe.
Vice Governor Liu Shiyu yesterday told reporters that support for economic growth must be balanced by the need to curb inflation.
Chen reiterated the point, saying policy-makers were acutely aware of the risk of loosening policy too far and setting off another round of house price inflation.
"Monetary policy faces a dilemma. On the one hand it (the central bank) needs to stabilize economic growth and on the other hand, it's very worried about the problem of property prices," Chen said.
He said the use of money market operations was more reflective of the bank's push for financial sector reforms that let the markets take a more active role in setting the price of capital, adding that it could not simply loosen policy to boost the economy as it needed also to spur structural change.
The central bank injected a net 365 billion yuan into money markets this week, traders said, the largest weekly injection to date, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.
Investors broadly welcome China's plans for reform, but are concerned that the government's timing is off and that the economy could be derailed by a global economic downturn that has sapped overseas orders for exports from China's factories.
Liu sought to play down the risks facing China's economy, saying slowing growth this year was a desirable outcome of macroeconomic adjustments.