China's central bank cautioned against large-scale monetary easing after recent data pointed to a slowdown in bank lending, signaling that it is unlikely to lower policy rates any time soon as its priority remains on stabilizing the yuan.

Officials from the People's Bank of China continued to strike a cautious tone on injecting big amounts of liquidity into the economy, saying it's not a case of "the more, the better." They pledged to make better use of existing loans and prevent funds from sitting idly in banks, according to an article published in the Chinese Communist Party's flagship newspaper, People's Daily.

More funds will be allocated to highly-efficient companies that need more credit support, Zou Lan, head of the PBOC's monetary policy department, told reporters on Thursday. He vowed that the PBOC would prioritize enhancing credit quality and efficiency over size.

There was no mention of purchasing treasury bonds, a rarely used tool in the central bank's toolkit. A recent book about policy speeches by President Xi Jinping had sparked some speculation about whether the central bank might look to tap treasury bonds in open-market operations as a way to deliver an aggressive liquidity boost. But many economists view that as unlikely as China still has room to ease monetary policy via more traditional means.

Recent weakness in the yuan also complicates matters. While lowered rates could aid the economy, they could also add to yuan pressure.

The yuan's exchange rate should be determined mainly by market forces, but China is ready to act to ensure the stability of its currency and correct one-sided moves, the PBOC reiterated Thursday.

"China's goal and determination to maintain the basic stability of the exchange rate will not change, " said Zhu Hexin, deputy governor at the PBOC and a top foreign-exchange regulator for China.

The yuan has been fluctuating against the dollar amid zigzagging expectations for rate cuts by the Federal Reserve and intensified volatility in international financial markets, but has appreciated on a stable basis against a basket of currencies, Zhu told reporters.

The Chinese economy's strong start to the year should help support the yuan, Zhu said, adding that the PBOC will keep a close eye on the forex market.

Economists say that despite strong first-quarter growth, continued weakness in key areas of the economy continue to signal that more stimulus is needed to get the recovery going. Focus is on what shape such stimulus will take.

The central bank earlier this week kept key policy rates steady and drained liquidity from the banking sector. Eyes will now be on the upcoming loan prime rate decision next week.

"Fiscal policy will do the heavy lifting, while monetary policy will remain supportive, mainly through its relending facilities to support targeted sectors," Commerzbank senior economist Christopher Wu said in a recent comment. Lowering policy rates further is unlikely to stimulate lending, given weak credit demand.

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(END) Dow Jones Newswires

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