PBOC Adviser Says Easing Restrained by Concerns on Homes

China's Premier Wen Jiabao
China’s growth is poised to decelerate for a seventh quarter as Premier Wen Jiabao sticks to a campaign to make home prices more affordable, curbing domestic demand while Europe’s debt turmoil slows exports. Photographer: Nelson Ching/Bloomberg

A People’s Bank of China academic adviser said the risk of a rebound in property prices may help explain why the government is holding back from easing monetary policy to counter a deepening economic slowdown.

That concern is ``a big restraint,” Chen Yulu, president of Beijing’s Renmin University, said yesterday to reporters after speaking at a forum in the city. Further cuts in reserve requirements or interest rates depend on how much external demand worsens, Chen said.

The government has refrained from easing since interest-rate cuts in June and July and a reduction in banks' reserve requirements in May. China’s growth is poised to decelerate for a seventh quarter as Premier Wen Jiabao sticks to a campaign to make home prices more affordable, curbing domestic demand even as Europe’s debt turmoil slows exports.

“China’s monetary policy is in a quite difficult position,” said Chen, 45. “On one hand, it has to stabilize growth; on the other hand, it has to avoid a rebound in home prices.”

Separately, Chen said Japan’s prospects of developing Tokyo as a center for offshore yuan business are being diminished by a conflict over uninhabited islands in the East China Sea. “Relevant exchanges between the two sides have been cut off,” Chen said. “I really hope the halt is temporary.”

Hong Kong, Singapore or London could replace Tokyo, and Taiwan is also a possibility, for building offshore yuan business, Chen said. “Tokyo had a first-comer advantage,” he said. “But it seems Japan is giving that up -- that’s a huge pity.”

Funds Injection

China’s central bank injected a record net 365 billion yuan ($58 billion) into the financial system this week via reverse-repurchase operations and bill redemptions, the most since Bloomberg started compiling the data in 2008. The country’s financial markets will be shut next week for the National Day and mid-autumn holidays.

The country is not repeating past “one size fits all” easing measures, and “that’s the direction of monetary policy that we will continue to uphold -- the reverse-repo operations exactly reflect such an orientation,” Chen said.

An inspection in July ordered by the State Council found increases in prices and easing policies by some local authorities among issues that needed “particular attention,” the official Xinhua News Agency reported on Aug. 17.

Data last week showed prices for newly constructed homes in China rose in fewer cities in August than the previous month. The slowdown follows restrictions on mortgage credit and purchases of multiple homes.

Forming Bubbles

“Once property bubbles are formed, there is no country in the world that is able to address the problem effectively --most countries have to go through a crisis,” Chen said. “China must seek a soft landing and can’t afford such a crisis.”

The U.S. Federal Reserve’s third round of asset purchases, or quantitative easing, will have less effect on the rest of the world than the second round that began in 2010 because the U.S. economy “is now in better shape, which means a bigger part of the additional liquidity can be absorbed” in the U.S., Chen said.

— With assistance by Xin Zhou

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