Two Chinese women rest beside goods outside a shop in Beijing on Tuesday. Chinese shares tumbled 3.73 percent this morning, extending the previous day's hefty losses as dealers fret over a liquidity situation in the banking system that has squeezed lenders. Photo: AFP

For more, see Daily Speical(s): China’s banks weigh options amid cash squeeze


China's central bank said Tuesday night that it has provided liquidity support to "prudent" financial institutions recently, and the interest rate volatility and liquidity tension will ease gradually, in an effort to allay concerns of a credit crunch which sent Chinese stocks to their lowest point since 2009.    

Following its statement Monday, which urged banks to rein in potential liquidity risk, the People's Bank of China reiterated Tuesday that the country is not short of liquidity and stated that the money-market rate has stabilized after it provided liquidity support to some "cautious" banks.

"As the seasonal factors and market sentiment diminish, the interest rate fluctuation and liquidity tension will gradually ease," the central bank said in a statement.   

Meanwhile, Ling Tao, vice head of the Shanghai branch of the People's Bank of China, also said Tuesday at a news briefing in Shanghai that the recent volatility in the money-market rate is temporary and the liquidity risk in the banking system is controllable.

"The money-market rate have been shoring up significantly since the end of May due to expanded lending, fiscal payments and rising demand for cash before the Dragon Boat Festival holiday," Ling said.

The overnight repurchase rate, at which banks borrow from each other, dropped 47 basis points to 6 percent in Shanghai Tuesday. It jumped to a record 12.85 percent on June 20, though it is still high compared with the average level of between 2 percent and 3 percent early this year. 

"The overnight rate has continued to ease in the last two days, indicating that the cash crunch has gradually been mitigated," Zhang Liqun, a research fellow at the Development Research Center of China's State Council, told the Global Times Tuesday.

"There is no directional change in the government's monetary policies. It continues its prudent monetary policy as planned rather than tightening policies," Zhang said.

But concern over the government's credit-tightening policy has sunk the country's stock markets.

Chinese shares continued their losses on Tuesday following Monday's drastic plunge. The benchmark Shanghai Composite Index shrank 0.19 percent, or 3.73 points, to end at 1,959.51 after declining as much as 5.8 percent. The Shenzhen Component Index dropped 1.23 percent, or 93.43 points, to 7,495.10.

Tuesday's statement came after the central bank said in a statement Monday that the country's banking system is currently at a reasonable level and urged commercial banks to control risks from credit expansion.

China's short-term repurchase rates had soared last week after the central bank chose not to inject liquidity into the market in an effort analysts said was intended to curb credit, especially that channeled to underground banking. 

"Policy makers are likely trying to keep the current tight liquidity conditions for long enough to teach the banking system a lesson - to not overextend their balance sheets and limit off-balance activities," Dariusz Kowalczyk, a senior economist at Hong Kong-based Crédit Agricole CIB, said in a research note sent to the Global Times Tuesday.

"Part of the reasons that the economy is slowing down is because money is used for speculative investment and arbitrage instead of being invested into the real economy," Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times.

"The growth of the money supply still outpaces the growth of the real economy. The central bank's judgment on the market is spot-on, and so it is unlikely to ease monetary policy very soon," Tan said. 

At a meeting of the State Council, China's cabinet, last week, Premier Li Keqiang unveiled a raft of measures to speed up economic restructuring and affirmed its commitment to reducing financial risks and ensuring that credit growth supported the real economy.

"We should not over-analyze the impact of the liquidity squeeze on the real economy. The supply of money, although sufficient was not really driving real economic activities anyway in the past nine months," Chris Leung, a senior economist at DBS Bank said in a research note e-mailed to the Global Times.

"China is set to go into a structural reform phase that many of us have not seen before. A good cause however does not preclude market volatilities in the near term," Leung said.