By Kevin Yao

BEIJING (Reuters) -China’s central bank will use policy tools such as the reserve requirement ratio (RRR) and medium-term lending facility to weather the challenges facing the world’s second-largest economy, a senior bank official said on Friday.

Momentum in China’s post-pandemic recovery has slowed sharply after a brisk pickup in the first quarter, increasing pressure on policymakers for fresh stimulus measures.

According to the needs of the economic and price situation, the People’s Bank of China (PBOC) “will make comprehensive use of various monetary policy tools, such as the reserve requirement ratio, medium-term lending facility, open market operations,” said Zou Lan, head of the PBOC monetary policy department.

“In recent years, China has insisted on implementing a prudent and normal monetary policy, with sufficient policy space and abundant policy tools,” Zou told a press conference, adding that the bank will keep credit growth appropriate and guide banks to increase lending to small and private firms.

The central bank will step up “countercyclical adjustments” to support the economic recovery, PBOC Deputy Governor Liu Guoqiang told the press conference.

China’s exports fell last month at their fastest pace since the onset three years ago of the COVID-19 pandemic, data showed on Thursday. The economy likely grew 7.3% in the second quarter from a year earlier due to a low base, according to a forecast of Monday’s data in a Reuters poll, but momentum is rapidly faltering.

The central bank cut the RRR – the amount of cash that banks must hold as reserves – in March, and cut its benchmark lending rates by a modest 10 basis points in June, the first such reduction in 10 months.

Analysts polled by Reuters expect the central bank to cut the RRR by 25 basis points in the third quarter.

Downward price pressure is building as consumer prices teetered on the edge of deflation and producer deflation worsened in June. But Liu said China has not seen deflation and there were no deflationary risks for the second half.

YUAN STABILITY, PROPERTY SUPPORT

China will keep the yuan basically stable and prevent sharp fluctuations, Liu said, adding that the currency will be underpinned by China’s economic recovery, a current account surplus that is about 2% of GDP and foreign exchange reserves of more than $3 trillion.

“We have the confidence, conditions and ability to cope with various shocks and maintain the smooth operation of the foreign exchange market,” Liu said. “As for the specific policy tools, we will use them reasonably according to the needs of the situation.”

The currency rose on Friday, partly on Liu’s reassurances.

Zou said there was room for making “marginal optimisation” of property polices considering profound changes in supply and demand in the real estate market.

Special loans worth 200 billion yuan ($28 billion) to help developers finish pre-sold housing projects will be extended to May 2024, Zou said. The original cutoff was March this year, the state-backed Securities Times reported.

Regulators this week extended some policies in a November rescue package in November to shore up liquidity in the embattled property sector, which accounts for one-fourth of China’s economic activity.

($1 = 7.1283 Chinese yuan renminbi)

(Additional reporting by Liangping Gao and Ellen Zhang; Editing by Shri Navaratnam and William Mallard)

---