The People's Bank of China said the nation should “appropriately fine-tune” its policies, according to a statement yesterday that summarized the monetary policy committee's second-quarter meeting in Beijing. It was the first time since September that the panel, led by Governor Zhou Xiaochuan, has used the “fine-tune” phrase.

The comments were released following an easing of the cash crunch on June 21 after a gauge of interbank funding availability rose to the highest since at least 2003. Slowing growth in the world's second-largest economy, a crackdown on illegal capital inflows and efforts to rein in shadow banking have contributed to increased borrowing costs.

“You could see this as one very modest sign that perhaps the People's Bank of China doesn't want to scare the markets and market players too much,” Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, said by phone today.

Eoin Treacy's view The PBOC has been leaning on the financial sector in an effort to force banks to bring off balance sheet liabilities into the public arena where they would have to be accounted for. The problem with such a policy in a country where the government has a large shareholding is that much of the credit that has been extended has gone to state owned enterprises that have a less than stellar record of paying back their debts. Some clarity on just how large the bad loans issue is and leniency in monetary policy will be required to ease the situation.

China has long made use of every possible tool in its efforts to tailor monetary policy to provide the best possible environment to foster growth. At the current time, the strength of the Yuan is particularly conspicuous, not least as just about all of China's Asian trading partners are targeting weaker currencies. While China is likely to meet considerably more political opposition from the OECD for devaluing its currency than Japan has, we cannot rule out the possibility that China will allow the Yuan to weaken in order to support the domestic economy.

The Dollar has lost downward momentum somewhat against the Onshore Renminbi over the last month but a sustained move above the 200-day MA, held for more than a few weeks, will be required to indicate trend change. The Offshore Renminbi has a broadly similar pattern.