Move will help contain risks that might emerge in battle to combat debt levels

China is likely to slightly loosen its credit policy in the second half of the year.

This will help to contain risks that could emerge during the process of economic deleveraging and disposing of loss-making "zombie" companies, analysts said.

Li Xunlei, chief economist at Zhongtai Securities Co Ltd, said that the monetary authority will likely guide more on-balance sheet bank loans into the markets to ensure sufficient credit supply after the regulators moved to contain surging risky off-balance sheet financing by banks.

"Things will become more transparent and risks will be better managed by bringing the financing back onto the banks' balance sheets," Li said.

Monetary officials and policymakers in Beijing have maintained that China will continue with a prudent monetary stance. But they have also emphasized the importance of policy fine-tuning to "provide a good credit and financial environment" for the structural reforms.

Market interest rates have been on the rise as the regulators pushed financial deleveraging to curb risks and increased the crackdown on irregularities in the shadow banking sector.

The weighted average lending rate has climbed above 5.5 percent since the second quarter of the year, according to data from the People's Bank of China. Companies have also been canceling their bond issuance plans due to higher interest rates.

Ba Shusong, chief economist at the China Banking Association, said in an article published in Financial News, the PBOC-affiliated newspaper, that higher interest rates could undermine corporate profitably, which will harm the deleveraging effort.

Ba said easing credit policy could help offset the negative impact of higher interest rates on smaller businesses.

The Chinese government has made economic deleveraging a top policy priority. Cutting the debt ratio of State-owned enterprises, accelerating the disposal of the zombie companies, and stabilizing the rise of economic leverage have been the short-term targets. This long-term goal is to improve corporate efficiency through market-oriented reforms.

Yu Pingkang, chief economist at Changjiang Pension Insurance Co Ltd, said that a slightly loosened monetary policy to prevent any substantial economic downturn can be expected as the government has limited leverage in its fiscal policy.

Li at Zhongtai Securities said that policymakers would take the step in the second half of the year to accelerate the deleveraging of SOEs as private investment had picked up in the first half and will offset the potential decline of SOEs' investment.

lixiang@chinadaily.com.cn