China's central bank does not see an immediate need to ease monetary policy further, but will keep conditions accommodative to support a recovery in the world's second-largest economy, four policy sources told Reuters.
A stronger-than-expected rebound in activity in the second quarter has reduced the urgency for the People's Bank of China (PBOC) to act, after policymakers announced unprecedented emergency measures early in the year to deal with the shock from the coronavirus crisis.
The PBOC also wants to avoid the side-effects caused by excessive stimulus, such as a surge in debt and risks of bubbles in the property market, said the sources, who are involved in internal policy discussions.
Moreover, policymakers are keen to save their ammunition amid uncertainty over how long it will take the global economy to recover and rising Sino-US tensions, the sources said.
"We should keep monetary policy stable in the near term and leave some space for the future," one of the sources said.
The PBOC did not immediately respond to Reuters' request for comment.
The PBOC has rolled out a raft of steps since February, including cuts in lending rates, banks' reserve requirement ratios (RRR) and targeted support for virus-hit companies such as cheap loans.
That marked an escalation in the current easing cycle that started in early 2018, although it has not slashed interest rates to near zero or embarked on quantitative easing as have many other major central banks.
The economy grew 3.2% in the second quarter, following a record 6.8% slump in the first three months of 2020 as the virus and strict measures to contain it paralyzed much of the country.
That was backed by record first-half bank lending of 12.09 trillion yuan ($1.73 trillion).
PBOC Governor Yi Gang has pledged to keep liquidity ample and boost new loans to nearly 20 trillion yuan this year, but he has also said China would need to consider withdrawing policy support at some point.
While the PBOC is likely to slow the pace of easing, the sources said further cuts in banks' reserve ratios and interest rates may still be needed to support accelerating government bond issuance - part of fiscal stimulus to spur growth — or if the economy falters again.
While many factories appear to be back to nearly full speed, consumers are cautious about spending, and many smaller, private companies continue to struggle.
"There is still room for cutting RRR and interest rates, especially RRR," said a second source.
On Monday, China kept its benchmark lending rate steady at 3.85% for the third straight month, after it was cut by a total of 46 basis points since last August.
The PBOC has also cut the average reserve ratio, or the amount of cash banks must hold as reserves, by 520 basis points since early 2008, to 9.4%.
"Whether we need to roll out more easing steps will depend on the economic performance. The recovery trend is clear," said a second source.
"The frequency of monetary policy easing will decline in the second half, but that does not mean we will tighten policy."
In May, Beijing scrapped its annual growth target due to huge uncertainties caused by the pandemic. Analysts have long said high targets encouraged excessive spending and wasteful investment.
Guo Kai, vice head of the PBOC's monetary policy department, said this month that loans would not be used effectively if credit supply is too fast, and speculative activity could grow if interest rates are too low.
Policymakers are tolerating some rises in debt levels as they focus on spurring growth, but they are carefully watching for any resurgent property speculation as home prices have soared well beyond the reach of ordinary people, insiders said.
Average home prices in China rose 0.6% in June, the fastest pace in a year, while Chinese stock markets have rallied strongly in July.
"Debt should not be a big concern - every country has seen rises in debt - we should worry about the property sector, there are definitely worries about money flowing into property," said a source.