China's central bank calms markets, but tighter policy looms

Wed Jun 26, 2013 4:54am EDT
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By Gabriel Wildau and Lu Jianxin

SHANGHAI (Reuters) - China's financial markets calmed down on Wednesday after days of turmoil thanks to the central bank's pledge to prevent a credit crunch, but stocks struggled as investors braced for tougher conditions in the world's second-largest economy.

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 on the Shanghai exchange lost 1 percent.   Continued...

A staff member walks in front of the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, June 25, 2013. REUTERS/Jason Lee