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China central bank soothes after stock plunge

Last Updated: Tuesday, June 25, 2013 - 19:18

Shanghai: China's central bank said on Tuesday it saw an end to a liquidity crisis and offered to support banks, after stocks closed at a level unseen since the global financial crisis in 2009.

For more than two weeks, funds have been in short supply on China's interbank market and the interest rates banks charge to lend to each other have surged to record highs.

Instead of pumping money into the system, the central People's Bank of China (PBoC) had stood by, as recently as yesterday ruling out providing fresh cash and ordering banks to put their financial houses in order.

After China's financial markets closed today, the central bank sought to ease the worries of domestic and international investors.

"Interest rate fluctuations and the situation of tight liquidity will gradually ease," the bank said in a statement.

It added it had already offered funds to financial institutions and would continue to do so, but gave no details.

Analysts have warned the liquidity squeeze was raising the risk of a hard landing for the world's second largest economy.

"If prolonged, this may lead to a credit crunch to the real economy, risking a hard landing scenario in China," ANZ Banking Group said in a research report today.

The liquidity tightness could persist to mid-July, analysts said.

"The longer this goes on, there's a risk that it could feed into the price of credit going into the real economy," said Paul Gruenwald, chief economist for the Asia-Pacific region for ratings agency Standard & Poor's.

"But for now, we don't see a measurable macro (economic) impact," he told a conference call with financial analysts and journalists.

Analysts said the policy of the central bank stemmed from worries over financial risk from loosely regulated wealth management products and the vast "shadow banking" system.

China's stock investors have responded poorly to the moves.

The benchmark Shanghai Composite Index ended down 0.19 percent today at the lowest closing level since January, 2009.

The index tumbled as much as 5.79 percent in afternoon trading before rebounding on bargain-hunting. The market closed down 5.30 percent yesterday.

"The situation with tight liquidity conditions has not improved," Zhang Yanbing, an analyst at Zheshang Securities said.

"The market is still anxiously waiting for authorities to improve liquidity conditions and stabilise the stock market," he said.


First Published: Tuesday, June 25, 2013 - 19:18
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