The People's Bank of China (PBC), the central bank, has various tools for stabilizing the economy and does not need to rely on quantitative easing (QE), experts said Wednesday.
Their comments came after the chief economist at the PBC said on Tuesday that speculation about possible QE measures was "groundless."
China is not about to launch QE by having the central bank buy local government bonds, China Business News reported Tuesday, citing Ma Jun, chief economist at the PBC.
"There is ample liquidity in the banking system, so it is not necessary for the central bank to directly buy newly issued local government bonds. The PBC could also inject more liquidity by further lowering the RRR," E Yongjian, a research fellow at Bank of Communications in Shanghai, told the Global Times Wednesday.
Ma said the PBC has enough monetary policy tools at its disposal to sustain reasonable growth in liquidity and money supply, including directional refinancing, interest rates and the reserve requirement ratio (RRR).
QE is a monetary policy measure used by central banks to stimulate the economy by buying specified amounts of financial assets from the market.
Ma's remarks followed a Reuters report on Monday that cited sources as saying that the PBC was considering purchasing assets from commercial banks.
The report led to market speculation about the possibility of a Chinese version of QE, as the upcoming local government debt swap program is expected to tighten market liquidity, increase market interest rates, and raise local government financing costs.
In March, Zhu Guangyao, China's vice finance minister denied speculation that the country was planning to roll out a QE program after China announced a quota worth 1 trillion yuan ($161.2 billion) for local governments to convert part of their maturing debt obligations into bonds.
Local governments in China are facing severe pressure from the debts they have built up, resulting in the need for the debt swap plan. According to data from the National Audit Office, local governments had accumulated total debts of 17.9 trillion yuan by the end of June 2013, up 67 percent from the end of 2010.
Ma also said the PBC had no plans to accept local government bonds as collateral when extending loans to commercial banks and noted that the central bank is forbidden by law from buying local government bonds directly.
The PBC did not reply to a request from the Global Times for comment by press time Wednesday.
The discussion about QE measures has not taken into account the boost in liquidity provided by the recent RRR cuts, analysts with Australia and New Zealand Banking Group (ANZ) said in a research note sent to the Global Times Wednesday. Also China still has room "for further conventional monetary policy easing," they said.
The market will be able to absorb the newly issued local government bonds without seeing a surge in bond yields, the ANZ research note said, adding that there is a possibility of a further interest rate cut in the near future.
"Given the accumulation of large local government debts and the fact that the economy is still slowing, the central bank has room to expand money supply by indirectly buying the local bonds, such as purchasing bad assets or even high-quality assets from commercial banks," Zhang Lei, a Beijing-based macroeconomic analyst with Minsheng Securities, told the Global Times on Wednesday.
"But it may choose not to do so, because the money it injects in that way may not enter the real economy but go into the capital market instead. The money injection could also put pressure on the value of the yuan, resulting in its depreciation and adding to the risk of capital outflows," Zhang said.
Ma said China would pursue a prudent monetary policy this year, and the plan to swap high-interest local government debt for government bonds would not tighten liquidity conditions.
The central bank has announced two rounds of RRR cuts so far this year - one in February and the other in April - to help lower financing costs for corporations.
