Central bank eases fears over credit

China's central bank attempted to quell fears of a credit crisis yesterday by promising to support banks that face cash shortfalls.

It said it would adjust "liquidity management" in the banking system at an appropriate time to tame short-term abnormal fluctuations, stabilize market expectations, and keep the money market stable.

The People's Bank of China had provided money to some financial institutions in recent days, while some banks with sufficient liquidity also began to lend money in the interbank market, according to a statement on its website.

A shortage of money in credit markets caused the interest rate that banks must pay to borrow from each other to spike last week. That caused stock markets to plunge on Monday on fears the economy might be facing a credit crisis.

The bank appeared to soften Monday's tougher line, when it said markets had adequate liquidity and blamed the credit crunch on mismanagement by banks.

"The bank will provide liquidity support if an institution faces a temporary gap in funding arrangements," the statement said.

"The central bank will take appropriate measures to maintain the overall stability of the money market," it added.

The bank said financing markets were already recovering yesterday.

It noted that the interest rate banks must pay each other for overnight loans fell to 5.83 percent, down from a record high of over 13 percent last week.

"We view this as a positive move by the central bank to communicate to the market," ANZ said.

"It is clear that the central bank has fine-tuned its tone to ease the liquidity tightness. In this case, the market interest rates are likely to decline significantly in the remaining week, which will help stabilize the market and the real economy."

The central bank said financial conditions are steady given abundant deposits that the commercial banks had saved in their central bank accounts.

The commercial banks held 1.5 trillion yuan (US$242 billion) of excess reserves as of June 21.

Under normal circumstances, 600-700 billion yuan of excess reserves are enough for regular payment and settlement needs.

Singapore-based DBS yesterday cut its forecast on China's economic growth to 7.5 percent in 2013 from a previous 8 percent.

The cut announced by DBS echoed the views taken by other banks, including HSBC, Standard Chartered, JPMorgan Chase and Barclays.