HONG KONG — The Chinese central bank reassured investors worried about a lingering credit crunch and declared that it has already been selectively supporting bank liquidity, as Chinese stock markets swung wildly again Tuesday after several days of volatility.
The People’s Bank of China, the central bank, eager to rein in soaring lending growth and financial risk, uncharacteristically refrained from intervening as bank-to-bank interest rates shot higher last week. But that decision generated intense nervousness as investors fretted that some lenders could buckle under higher interest rates and that tighter lending conditions could chill an already cooling economy.
The uncertainty 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 had tumbled 5.3 percent Monday, slumped more than 5 percent again by early afternoon, only to recover almost all of those losses later on, closing down 0.2 percent. The index’s total decline since a peak early in February has been nearly 20 percent.
The Shenzhen composite index likewise reversed earlier sharp losses Tuesday. It also finished 0.2 percent lower, but it has sagged more than 15 percent since a high hit in late May. In Hong Kong, the Hang Seng Index seesawed and ultimately eked out a gain of 0.2 percent. An index measuring volatility in the Hong Kong market has risen steeply in recent weeks to its highest level in more than a year.
In Europe, markets had gained more than 1 percent by midafternoon, and Wall Street indexes were up strongly in early trading.
After China’s stock markets closed, the People’s Bank of China issued a statement apparently intended to soothe investors’ nerves and to keep up pressure on banks deemed to be carrying too much financial risk.
“In recent days, the central bank has provided liquidity support to some financial institutions that meet the demands of macro prudence,” the central bank said in a statement on its Web site. “Some banks with ample liquidity have also begun to play a stabilizing role in circulating capital into markets.”
The central bank largely appeared to have sat on the sidelines in recent weeks, but pledged Tuesday that, going forward, 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 suffer short-term 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 how costly it is for banks to borrow money from one another, often to cover short-term obligations.
The interbank rates reached a record high last Thursday, setting off concerns about the health of China’s financial system and underlining the Chinese authorities’ determination to steer lenders toward more prudent loans, even if that came at the cost of slower overall economic growth.
Interbank lending rates, which began retreating 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 Monday and well below the record high of 13.44 percent reached Thursday.
But with rates still well above where they had been over the past 18 months, around 3 percent, jitters over the effect on the financial system and the economy persisted Tuesday.
David Jolly contributed reporting from Paris.
Article source: http://www.nytimes.com/2013/06/26/business/global/china-stocks-tumble-for-second-straight-day.html?partner=rss&emc=rss
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