China is saving stimulus for trade war winter as yuan weakens

The People's Bank of China late Friday called for a "rational" view on current headwinds, signalling that the targeted approach to shoring up output would continue.[YICHUN, China] Chinese policy makers are holding back from rolling out the big guns of monetary stimulus, keeping options in reserve as the trade standoff with the US risks morphing into a global currency war.

"Policy makers are fine with the current state of the economy," said Larry Hu, head of China economics at Macquarie Securities in Hong Kong."But if growth continues to slow, at certain point, the priority will shift to growth stabilisation."Former central bankers gathered for a policy symposium in the far North East warned Saturday that the confrontation with the US is deepening.

It's in that kind of scenario that China may be forced to turn to more aggressive monetary support, even in the face of rising domestic debt risks and asset price bubbles. Efforts to prop up growth have already propelled the stock of corporate, household and government debt to more than 300 per cent of gross domestic product, according to an Institute of International Finance report last month.

So far, policy makers haven't given any hint of changes to the one-year lending rate which would affect the price of borrowing across the whole economy, or reducing the price of loans to banks in the wake of the US Federal Reserve's latest cut. Instead, officials from PBOC have signalled that an impending reform of the interest rate system could do the work of a rate cut, by transmitting policy more effectively.

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