China's central bank to maintain prudent policy, keep yuan steady

HONG KONG/BEIJING (Reuters) - China's central bank said on Friday it would maintain its prudent and neutral monetary policy to ensure ample liquidity and keep the yuan largely stable, as global economic uncertainties increase due partly to trade frictions.

The world's second-largest economy faces increasing headwinds due to an intensifying tit-for-tat trade dispute with the United States, rising corporate borrowing costs and sharp falls in Chinese stocks.

"Trade frictions, geopolitics and the normalisation of monetary policies in major economies have increased uncertainties in global economic and financial markets," the People's Bank of China (PBOC) said.

The PBOC said in its second-quarter monetary policy implementation report that it will fine-tune policy in line with changes in the economy and use various policy tools to ensure ample liquidity, ruling out any forceful stimulus.

The central bank will strike a balance between stabilising economic growth, pushing structural adjustments and preventing risks, it said, vowing to fend off systemic financial risks.

"We will take further effective measures to carry out counter-cyclical adjustments when necessary and regulate macro-prudential policies to maintain stability in the yuan exchange rate levels," it said in the report, posted on its website http://www.pbc.gov.cn

The weighted average lending rate for non-financial firms, a key indicator reflecting corporate funding costs, inched up 1 basis point in the second quarter to 5.97 percent, following a rise of 22 basis points in the first quarter and a rise of 47 basis points in 2017.

The slower rise in corporate borrowing costs suggests the central bank's increased liquidity injections have gained traction as interbank funding costs have been falling.

The PBOC has cut banks' reserve requirements three times this year to pump out more cash to encourage bank lending and soften the impact from a de-risking drive that has pushed up borrowing costs and fuelled debt defaults among some firms.

The central bank also said it would provide more financial support for small enterprises, which are a key driver of the economy and have been encountering financial difficulties as banks have become more cautious over credit quality.

The central bank will enhance the yuan's two-way fluctuations by allowing market forces to play a bigger role in setting the exchange rate, it said.

Still, the central bank said it will keep the yuan "basically stable at a rational and balanced level".

The yuan has weakened 6.3 percent against the dollar since mid-June as worries about a steeper economic slowdown rise due to an escalating trade war with the United States.

(Reporting by Lee Chyen Yee in Singapore, Twinnie Siu in Hong Kong and Kevin Yao in Beijing; editing by Mark Trevelyan)