The People’s Bank of China (PBOC) said late on Tuesday it had helped some banks and was ready to act again as the lender of last resort for those caught in a short-term squeeze. However, it was also sticking to its stance of tightening market conditions as it seeks to rein in sharp growth in informal lending. The central bank wants to curtail funds flowing into China’s vast “shadow” financial system that fuels property and stock speculation and push money into more productive areas of the economy to secure more sustained growth.
But its decision to let short-term borrowing costs soar to extraordinary levels last week fanned fears that a temporary squeeze could morph into a lasting credit crunch. “Market sentiment has apparently improved somewhat, although the PBOC is still expected to stick to relatively tight liquidity policy,” said a dealer at a major state-owned bank in Shanghai. The central bank reiterated its warning to banks that they needed to manage their cash better and rely less on short-term borrowing, adding to expectations of tougher business conditions and possibly slower economic growth.
So while most Asian share markets rebounded from a four-day losing streak, taking comfort from encouraging U.S. economic data and the PBOC assurances, Chinese shares struggled to find traction. The CSI300 .CSI300 index of leading Shanghai and Shenzhen listings staged an afternoon rally to end up 0.1 percent, having been down 1.5 percent, but the financial sub-index .SSEFN on the Shanghai exchange lost 1 percent. Chinese stocks are down more than 20 pct from February peaks, and have lost about 10 percent over the past week.
Money market dealers were relieved that a full-blown market freeze seemed to have been averted, but said fund flows suggested cash would remain tight until mid-July. The benchmark seven-day repo rate opened down about a quarter of a point at around 7.20 percent on a weighted-average basis on Wednesday, before inching up to near 7.30 percent, still well above the long-run average of 3 to 4 percent.
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