However, a report from Huatai Securities said the central bank will continue relaxing the monetary policy, in line with the Central Government's call for sustained growth. Dwindling orders from Europe and other trade partners have sapped China's exports, and the decline of the yuan's counterparts in foreign exchange reserves will force the central bank to further cut the reserve requirement ratio, the amount of funds that commercial banks must keep in reserve.

In the first half of 2012, the reserve requirement ratio was cut twice, down 0.5 percentage point on February 24 and May 18 respectively, to add to liquidity. It's highly possible that the central bank will further lower the ratio, said a report from Huatai Securities.

No major changes

China's monetary policy is facing complications, in which it has to sustain growth, prevent inflation and support the country's structural adjustment.

In light of this, the central bank pointed out that it would continue a prudent monetary policy by making it more forward-looking, targeted and effective. The ultimate goal is to create a stable yet moderate financial atmosphere for China's structural adjustment, said the central bank.

That's to say, China's monetary policy won't see major adjustments in the upcoming several months. Even if adjustments are necessary, the central bank will take a very cautious approach to them.

China has a high-level interest rate and reserve requirement ratio, which creates room for making cuts. But interest rate adjustments should depend on three elements: economic growth, inflation and interest rate differences between China and other countries. The adjustment of the reserve requirement ratio mainly depends on the liquidity of currencies, but the yuan counterparts of foreign reserves are still uncertain in the second half of 2012.

There are five highlights for the monetary policy in the next few months, according to the central bank report released on August 2.

First, the amount of credit will be increased to maintain a reasonable level of social financing. The central bank will guide financial institutions to support the real economy in a more targeted and forward-looking way.

Second, efforts will be intensified in structural adjustment, as in supporting labor-intensive and strategic emerging industries like environment protection, media, modern service and high-end manufacturing, and restricting lending to industries with high energy consumption, pollution and overcapacity. The Central Government will also prohibit bank loans to speculative activities in the property sector.

Third, the central bank will push market-based reform of interest rates and the reform of renminbi's exchange rate formation mechanism. It will expand renminbi settlement in cross-border trade and investment and widen channels for its outflow and inflow.

Fourth, the central bank calls for carrying forward financial reforms and pledges to give financial support to the reform of local financial institutions.

Finally, authorities at all levels should maintain a stable financial system and avoid system-wide risks. The central bank will urge all financial institutions to strengthen internal control and their risk-control systems. Besides, it will intensify supervision over local governments' financing platforms, financial institutions' off-balance-sheet activities and financial risks of the property market. Right now, loans of local governments' financing platforms are a main source of risks for financial institutions.

China's monetary policy in the coming months will be more prudent. Without system-wide financial risks, the main direction won't be altered, according to a report by GF Securities.

Monetary Policy in H1 2012

- Steady and moderate growth of money supply. M2, a broad measure of money supply that covers cash in circulation and all deposits, grew by 13.6 percent from the previous year to reach 92.5 trillion yuan ($14.54 trillion) at the end of June. The growth rate is 0.2 percentage point higher than that at the end of March and almost the same as that at the end of last year.

- Overall renminbi settlement in cross-border trades. In the first half of 2012, yuan-settled cross-border trade totaled 1.25 trillion yuan ($196.8 billion), up 31 percent year on year. Among the total, 868.7 billion yuan ($136.56 billion) went to goods trade and 383.3 billion yuan ($60.25 billion) to service trade and other regular items.

- Increase of yuan's flexibility. At the end of June, the central parity of the yuan against the U.S. dollar was 6.3249, down 240 basis points and depreciated for 0.38 percent compared with the end of 2011. Since its exchange rate reform in 2005, yuan has appreciated for 30.86 percent against the dollar by the end of June 2012.

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