PBOC to continue its hands-off policy

People's Bank of China to only 'conduct fine-tuning' as nation carries out essential economic reforms

China's central bank said on Tuesday that it will continue its hands-off stance on the money market, as it maintains a "stable" monetary policy that facilitates the nation's essential structural reforms.

The central bank "will neither loosen nor tighten liquidity (but) will conduct fine-tuning in response to market changes", said the People's Bank of China in a quarterly monetary policy report it posted on its website.

The PBOC's announcement came just one day after Premier Li Keqiang warned against further expansion of already loose monetary policies. China's credit supply, he said, already is more than 100 trillion yuan ($16.4 trillion).

It also sheds light on how the nation's leaders will map out China's monetary policies at a crucial Nov 9-12 meeting, widely believed to be establishing a roadmap for where the world's second-biggest economy is going under the new leadership.

Most experts agree that China's $8.5 trillion economy is in need of change, as the current path, relying as it does on exports and investment, appears unsustainable.

To reshape the economy, the government has indicated it will seek growth led by consumption.

"The economy may experience a relatively long period of deleveraging and dealing with overcapacity," PBOC said in the report, since there are risks to the economy after years of rapid expansion driven by fast credit growth.

But China's credit supply still is growing at a rapid clip, despite efforts to slow it down through reforms.

M2, the broad measure of the money supply, grew 14.2 percent year-on-year to 107.7 trillion yuan by the end of September. The growth rate was 0.2 percentage point higher than at the end of June and 0.4 percentage point higher than the end of last year.

Outstanding bank loans grew 14.6 percent to 75 trillion yuan, a rate that was 0.5 percentage point lower than at the end of the second quarter.

The PBOC said inflation is likely to shoot up further amid rapid credit growth and property prices that have recently seen revitalization.

The consumer price index, the main gauge of inflation, rose 3.1 percent year-on-year in September, 0.5 percentage point faster than a 2.6 percent rise in August. It also exceeded market consensus of a 2.9 percent rise.

The biggest economic debate revolves around the property market and local government debt, PBOC said.

Mortgage loans increased by 1.2 trillion yuan from the year's start to the end of September, as markets have become "overheated" in some regions and have exceeded banks' ability to extend loans.

October saw the highest home prices yet this year, driven by strong demand.

The government will use market mechanisms to ease local government debt, the PBOC said without elaborating.

Beijing, which has said it doesn't know the full extent of those debts, said it is set to announce the findings of a recent audit.