(Bloomberg) -- The People’s Bank of China warned that the escalating trade war could destabilize the global economy, and vowed to continue with its targeted stimulus policy at home.

“Trade friction and uncertainties in global policy could impact the global economy negatively” by driving up inflation, damaging household and corporate confidence and causing financial market turbulence, the PBOC said in its quarterly monetary policy report published late Friday

Key Insights

  • “The Chinese economy has some deep-seated problems,” as some traditional sectors are in adjustment, manufacturing and private investment growth have both slowed and economic growth has relied heavily on property and infrastructure investment, the bank said in the report
  • The world’s second largest economy slowed more than expected in April on sluggish consumption and worsening industrial output, potentially undermining its ability to deal with the escalating trade war with the U.S.
  • The bank will make “good use” of targeted monetary tools, such as cuts to the amount of money banks lock up and targeted medium-term lending facility, to channel credit to specific sectors, according to the report
  • The PBOC will keep a balance between easing and tightening, it said
  • It also repeated similar language from the last quarterly report released in February that the trade spat could impact the global supply chain and affect corporate investment decisions

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  • While reiterating that credit growth should be appropriate, the bank stressed the need to improve credit structure, meaning it would want to enhance its ability to direct credit to the needy parts of the economy
  • It said China’s current pace of economic expansion is close to its potential growth rate, skirting the need for imminent interest rate cuts
  • The bank will “push forward structural deleveraging” in an orderly way, adding back a phrase it had dropped in the last quarterly report, signifying renewed focus on reducing debt-related risks in China as growth moderates

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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