(Yicai Global) June 19 -- China's monetary policy should not be relaxed or otherwise the efforts to reduce fiscal institutions' and corporations' debt will go down the drain, a key scholar from the country's central bank said today.

The deleveraging campaign has caused a tighter financing climate and begun to affect the real economy, Sheng Songcheng, a counselor of the People's Bank of China told the Financial Times.

Deleveraging has dwindled the number of funds that flow into non-banking sectors, which prevents risks and has made capital spending more transparent. However, it also leads to a decline of financing channels, which will particularly affect small- and medium-enterprises, Sheng said.

Despite tighter regulations, this year's money supply M2 growth rate will be higher than last year's, Sheng predicted, adding that the scale of social financing and M2 growth will gradually be aligned. M2 includes cash and checking deposits but also 'near money' such as savings deposits, money market securities, and mutual funds. Social financing refers to the volume of funds provided by China's domestic financial system to the private sector of the real economy.

The M2 balance in May remained at CNY174.31 trillion from a month before, however, proving an 8.3-percent surge from a year before, PBOC's data shows. The scale of social financing was at CNY182.14 trillion, which signaled a 0.2-percentage point decrease from the previous month, still up 10.3 percent from a year before.

Sheng reminded that if needing to provide more liquidity, PBOC can always roll out its tools for structural adjustments such as fix the targeted reserve requirement ratio and medium-term lending facility. Last April, the central bank cut the RRR so that banks could pay back loans obtained via the MLF, which improved the liquidity structure of the financial system.

Editor: Emmi Laine