PBOC Moves Aimed at More Credit-Market Discipline, U.S. Says

The U.S. expressed approval of steps the People’s Bank of China took during a credit crunch last month, as officials from the world’s two biggest growth engines prepared to hold economic talks in Washington.

The PBOC’s delay in providing liquidity in interbank markets in recent weeks signaled to market participants that they need to have more discipline and greater prudence in lending decisions, Obama administration officials said during a briefing today. The U.S.-China Strategic and Economic Dialogue is scheduled for July 10-11.

The PBOC withheld any comments for four days after the overnight lending rate between banks hit a record 11.7 percent June 20 before signaling on June 25 that any liquidity support during the cash squeeze would be focused on banks that lend to help the economy.

The U.S. has been urging Chinese officials to reduce government involvement in the economy since the bilateral talks started in 2006. An administration official praised the central bank’s moves today as aimed at a more efficient, market-based financial system.

The meetings this week will be hosted by Treasury Secretary Jacob J. Lew and Secretary of State John Kerry and will include their counterparts from Beijing, Vice Premier Wang Yang and State Councilor Yang Jiechi. U.S. Vice President Joe Biden will open the talks and the Federal Reserve Chairman Ben S. Bernanke plans to attend, according to the officials, who spoke on condition of anonymity because the talks haven’t started.

Talks Agenda

The focus will be on growth, bilateral investments, cybersecurity, trade and regional security issues, according to the U.S. officials. Also on the agenda will be climate change, energy security, export credits and government procurement, they said.

China’s leaders recognize they need to shift their economy to rely more on consumption, innovation and services, and less on investment, exports and heavy industry, one of the officials said.

The Chinese delegation is likely to ask about the Fed’s plans for tapering record monetary stimulus. Zhu Guangyao, China’s vice finance minister, said at a July 5 briefing in Beijing that while the Fed’s decision to exit its policy of quantitative easing shows its confidence in the U.S. economy, it will have spillover effects. China wants to see more global coordination over the timing and process, he said.

Before it's here, it's on the Bloomberg Terminal.