Local factors to gauge key policy

China's monetary policy will be determined primarily by the domestic economic situation, which requires relatively a lower interest rate level to reduce companies' financing costs, said analysts.

They made the comments as the People's Bank of China, the central bank, took no action after a benchmark interest rate rise by the US Federal Reserve, in line with market expectations.

A statement issued by the PBOC on its website said that it had skipped open market operations on Sept 27 as liquidity levels in the banking system were "relatively high." And the liquidity could absorb factors including maturing reverse repos and government bond issuance.

China's central bank followed the Fed's rate hikes to lift the open market operation interest rate twice, in March and December last year, respectively. The moves were targeted to keep a relatively stable interest rate spread between the two countries and maintain a stable Chinese currency. It stood pat in June after the Fed's second hike this year.

"The US interest rate increase has little pressure on the renminbi exchange rate," said Sheng Songcheng, an advisor to the PBOC. "Following the Fed's rate hike is unsuited to China's domestic economic situation."

He suggested reducing financing costs for the real economy, as a measure to support stable economic growth.

A State Council executive meeting, presided over by Premier Li Keqiang on Sept 26, mandated further fiscal and financial policy support to innovation and entrepreneurship, including targeted cuts of the reserve requirement ratio, more relending by the central bank, looser listing requirements on small and medium-sized enterprises in technology, and lowering the tax burden.

The market expected a further reduction of the RRR, or the cash amount that should be deposited in financial institutions, by the end of this month or in early October, as maintaining sufficient liquidity is one of the priorities for monetary policy.

"It appears another RRR cut is very likely in the near future, although the net impact on the interbank rates would be less clear, because of the need to stabilize renminbi exchange rate," said a research note from the Goldman Sachs.

"Considering China's domestic situation, which is at a different stage of the economic cycle compared with the US, China now should not tighten (the monetary policy), but may moderately ease under some circumstances," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, who served on the Monetary Policy Committee of the People's Bank of China from 2004 to 2006.

China's monetary policy should remain independent, along with a flexible renminbi exchange rate.

To ease the renminbi's depreciation pressure, analysts suggested taking macroprudential measures to guide the market expectation and monitor the cross-border capital flows.

The PBOC signed a memorandum of cooperation on Sept 20 with the Hong Kong Monetary Authority for the issuance of bills. This move will offer more renminbi liquidity management tools for financial institutions, and provide a better foundation for financial institutions to develop renminbi products.