China central bank to ensure smooth, orderly deleveraging, assistant governor says

BEIJING (Reuters) - China's central bank will continue to force financial institutions to cut debt but ensure the process is smooth and orderly to limit its impact on market liquidity, an assistant central bank governor said in remarks published on Monday.

Higher short-term funding costs, driven by a regulatory crackdown on banks' riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of a five-yearly leadership transition later this year.

The drive to force financial institutions to deleverage, which led to adjustments in their assets and liabilities, could affect the stability in market supply and demand of funding, Zhang Xiaohui wrote in the bank's China Finance magazine.

"While sticking to the general policy on deleveraging, we should pay more attention to strengthening supervision coordination, having a good grasp of policy strength, rhythm, stabilizing market expectations and maintaining steady and orderly structural adjustments," Zhang said.

The PBOC, which guided market interest rates higher during the first quarter, has injected substantial liquidity to help avoid an end-June cash crunch.

China's overall debt levels are still high, despite initial results in the deleveraging efforts, she said, conceding difficulties in striking a balance between deleveraging and maintaining steady economic growth.

The PBOC will be in charge of coordinating a new financial oversight body mandated by President Xi Jinping to get China's often siloed regulators to work together to contain growing credit risks.

The central bank will maintain its prudent monetary policy to keep money supply and credit growth appropriate while keeping liquidity basically steady, Zhang said.

The PBOC will step up its support for the real economy while curbing financial risks, she added.

China will push forward with market-based exchange rate reform, she added, striking a balance between greater currency flexibility and maintaining foreign exchange stability.

It will also improve the exchange rate mechanism and two-way fluctuations, in an effort to maintain the yuan currency's stable position in the international monetary system.

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