Amid China market stand off, calls for a more transparent central bank

Sun Jun 23, 2013 5:10am EDT
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By Jason Subler

BEIJING (Reuters) - China's central bank rarely explains its actions in public and keeps markets guessing on policy, but the angst created by its stand off with banks in the money markets is prompting calls for it to change tack.

The People's Bank of China (PBOC) let short-term interest rates spike to extraordinary levels this past week as it refused to inject funds into money markets.

Some observers saw it as an attempt to force banks to stop channelling money into the informal banking sector, known as "shadow banking", which authorities worry is creating significant credit risks.

For years, the central bank has made stability its watchword, which for the money markets meant it would always provide liquidity when cash conditions tightened. As the central bank is now standing back while banks scramble for cash, markets are left uncertain as to whether there has been a fundamental change in policy.

In effect, there seems to be a competing policy objective, said Fitch Ratings Senior Director Charlene Chu.

"The real uncertainty in the market comes down to people not really knowing which of those is more important at which point in time," she said on the sidelines of a conference in Sydney.

Traders blame the absence of a clear and public signal from the central bank for panic at some smaller banks, as the cost of borrowing overnight funds spiked to as high as 25 percent for some institutions.

Those jitters spread more broadly late last week, as rumours - passed on by Chinese media outlets - that two major banks had received emergency funds from the PBOC circulated in financial markets in London and New York on Thursday.   Continued...

The headquarters of China's central bank, the People's Bank of China, is pictured behind an iron chain in Beijing, June 21, 2013. REUTERS/Jason Lee