HONG KONG — The Chinese central bank reassured investors worried about a lingering credit squeeze and declared that it had already been selectively supporting bank liquidity, as Chinese stock markets swung wildly again Tuesday after several days of volatility.
The central bank, People’s Bank of China, eager to rein in soaring lending growth and financial risk, initially refrained from intervening as bank-to-bank interest rates soared last week, but then apparently released more money for lenders. Uncertainty over the central bank’s position produced wide trading swings Tuesday, with the main Chinese stock indexes dropping to their lowest levels since early 2009 before recovering most of the day’s losses near the end of trading.
The Shanghai composite index, which tumbled 5.3 percent Monday, slumped more than 5 percent again by early afternoon Tuesday. It recovered almost all of those losses to close down 0.2 percent. The index’s total decline since a peak in early February has been nearly 20 percent.
After China’s stock markets closed, the People’s Bank of China issued a statement apparently meant to soothe investors’ nerves and maintain pressure on banks deemed to be carrying too much risk.
“In recent days, the central bank has provided liquidity support to some financial institutions that meet the demands of macro prudence,” the bank said on its Web site. “Some banks with ample liquidity have also begun to play a stabilizing role in circulating capital into markets.”
On Tuesday the bank pledged that it would apply open market operations — buying or selling securities to manage liquidity and rates — and other methods to offset “short-term abnormal volatility, stabilize market expectations and maintain stability in monetary markets.”
The reassurances were accompanied by a warning to commercial banks to contain risk and to report promptly any “sudden major problems.” Chinese banks that follow government policies in lending practices and risk controls can expect support from the central bank if they have brief capital shortfalls, the bank said. But wayward banks can expect tougher treatment, it suggested.
“For institutions that have problems in their liquidity management, corresponding measures will be taken on a case-by-case basis, while maintaining the overall stability of money markets,” it said.
“The stock markets are continuing to react to the very elevated funding costs,” said Dariusz Kowalczyk, a senior economist and strategist at Crédit Agricole in Hong Kong, referring to the recent surge in interbank lending rates. Those rates determine what banks pay to borrow from each other, often to cover short-term obligations.
Interbank lending rates, which began to decline last Friday, continued to do so Tuesday. The benchmark overnight lending rate, a gauge of liquidity in the financial market, stood at 5.736 percent. That was down from 6.489 percent on Monday and well below the record high of 13.44 percent reached last Thursday.
But with rates still well above where they were in the last 18 months, around 3 percent, anxiety over the effect on the financial system and the economy persisted Tuesday.
The central bank’s stance could help economic conditions in China, many analysts have said, by instilling more lending discipline and reducing the chances of asset price bubbles and loan defaults that have increased with rapid lending growth in the last few months.
In its latest statement Tuesday, the central bank urged commercial banks to “prudently control the excessively rapid expansion of credit and assets that may lead to liquidity risks.”
Still, many analysts contend that the central bank’s tough stance has risks.
“We believe the biggest risk comes from the P.B.O.C. potentially mishandling the situation,” Ting Lu, China economist at Bank of America Merrill Lynch, said Tuesday, referring to the People’s Bank of China. “That being said, we believe the P.B.O.C. and Chinese policy makers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilize the economy.”
In the rest of the Asia-Pacific region, the prospect of slower economic growth in China has weighed on markets for months.
Article source: http://www.nytimes.com/2013/06/26/business/global/china-stocks-tumble-for-second-straight-day.html?partner=rss&emc=rss
Speak Your Mind
You must be logged in to post a comment.