The central bank's liquidity injection did help the real economy, particularly the capital-intensive new economy sectors, an economist said while responding to accusations of possible ties of China's market frenzy with the country's recent monetary policies.

Trading into another week of strong sentiment, the three major A-share stock indexes extended the rally. As of the Monday closing, the Shanghai index rose 1.77 percent to 3443.29 points, a new high since February 2018; the Shenzhen Component Index rose by 3.50 percent to 14149.14 points and another new high since June 2015.

Responding to the skeptical view that whether the liquidity provided by the central bank just flooded the stock market instead of supporting the real economy, Qu Qiang, the assistant director of International Monetary Institute, Renmin University, said one of the important targets of China's monetary policy is to help the recovery of the economy, and that is the goal remained solid and unchanged, and the hot sectors that attracted amounts of money are also among vital industries.

"We've noticed that the money goes into the high tech, Internet, pharmaceutical companies, and R&D sectors. These are only the capital intensive areas we're talking about. China is actually taking advantage of the situation, trying to restructure its financing structures and channel the money directly into the real economy," Qu added.

Governor of the People's Bank of China (PBOC), Yi Gang, hinted last month that the central bank may consider withdrawing support at some point as the economy improves. Now, as some institutions have raised their projections for China's economic performance for the second quarter, many market watchers are wondering whether there will be a turnaround in policy stance in the second half of the year.

And the PBOC reiterated last Friday that it will withdraw its special-time monetary policy after fulfilling the objectives amid the COVID-19 outbreak, but this does not mean a shift in the overall direction of monetary policy or a weakening of support for the economy. The policy outlook will remain prudent and flexible by focusing on providing appropriate funding to support economic growth in the second half of the year.

Qu adopts a natural stance, "I'm not seeing a further dump or the liquidities flooding the market. This is not gonna happen as well. So we're seeing a more balanced monetary policy stance, but the more helping and targeted approach towards the recovery of the economy."

Last Friday, the PBOC announced the country's financial performance during the first half-year, with both new bank lending and total social financing hitting a record high. China's new yuan-denominated loans expanded to 12.09 trillion yuan in the first six months of the year, which is up 2.42 trillion yuan year-on-year and beats a previous peak in 2019. 

The PBOC official believed all these numbers sustained a proper growth, "The money supply and demand is in a balance, and there's no reason for long-term high inflation or deflation. For the second half of the year, we will continue to safeguard jobs and help companies," said Ruan Jianhong, the Director of Statistics of PBOC.

Despite the rosy economic outlook for the second half of the year, the PBOC also said there could be an uptick in the market's financial leverage as the economy could use more credit support to recover.

"The leverage ratio in China's economy is likely to go up for certain periods, as more credit supply is needed to support the real economy. But this is necessary to pursue a healthier growth so that the leverage ratio will come back to normal in the future," Ruan added.

Talking about the recently large inflow of foreign capital inflow to the Chinese stock market, another PBOC official also expressed firm confidence, "China has the ability and enough foreign reserves to counter too much hot money inflows. And the economic performance in the second half will improve, with more investments and a potentially better trade environment. The fast growth of the CPI is easing, and the drop in the PPI is narrowing," said Wang Xin, the Director of Research of PBOC.

(CGTN's Xia Cheng also contributed to the story.)

(Cover image: The People's Bank of China. /VCG)