Market-oriented reform of interest and exchange rates to deepen next year

China will maintain a prudent monetary policy, which is flexible, precise, reasonable and moderate next year, while providing financial support in key areas and preventing financial risks, according to the People's Bank of China, the central bank.

The country will also improve the mechanism for regulating the money supply and keep the macro leverage ratio basically stable, while properly handling the relationship between economic recovery and risk prevention, the PBOC said.

The central bank statement follows a meeting held on Friday, after the conclusion of the annual Central Economic Work Conference, which outlined the key priorities for next year.

China will deepen the market-oriented reform of interest and exchange rate regimes, and keep the yuan exchange rate generally stable on a reasonable and balanced level, the central bank said.

Financial support for key areas, especially for small and micro enterprises and private businesses, will continue, it said. Policy tools like relending and rediscounting will be used to help financial institutions increase lending for technology innovation, green development and manufacturing.

The PBOC also reiterated its intent to prevent and defuse financial risks, especially for small and medium-sized banks. The macro-prudential policy framework needs to be improved further, while financial technology companies should start following the regulations for the financial sector, it said. "We must firmly oppose monopoly and unfair competition and prevent any disorderly expansion of capital."

The PBOC will hold an annual meeting in due course to factor in the special work requirements for next year, said the central bank.

As China's economic growth recovers, economists expect policymakers to consider a normalization of the policy stance, including the monetary policy. "This shift, however, will not be sharp or abrupt," said Lu Ting, chief economist in China with Nomura Securities.

The annual Central Economic Work Conference, which concluded in Beijing on Friday, had vowed to keep macroeconomic policies consistent, stable and sustainable, while ensuring stable leverage. As far as monetary and credit policies are concerned, the central bank will keep broad money supply, or M2, and aggregate financing growth in line with China's nominal GDP growth.

Lu from Nomura said he expects growth in outstanding aggregate financing to gradually slow from the current 13.6 percent to around 11.5 percent by the end of next year. "We don't expect any rate increases before the end of next year."

Yan Se, a professor at the Guanghua School of Management of Peking University, said liquidity and credit in the second half of next year may be at relatively better levels, while the renminbi still has room to gain by the end of the first quarter of 2021. "Under the moderate monetary policy, it is unlikely that the yields from China's Treasury bonds would be higher than 3.5 percent."

According to the central bank, next year, bond market reforms will get further impetus along with the opening up of the financial sector and the stable, cautious progress in renminbi internationalization.