HONG KONG — In its first direct comment about a credit crunch last week that raised concerns about the health of the Chinese financial system, China’s central bank insisted Monday that there was ample cash in the banking system but stressed that the country’s commercial banks needed to be better managed.

Bank-to-bank lending rates, which had hit record highs last week, further eased Monday. But stocks slumped sharply in a sign that markets remained intensely nervous about China’s growth prospects and the uncertainties that surround the Chinese leadership’s efforts to reshape the economy.

The Shanghai composite index, which has been under pressure for months amid mounting evidence that the Chinese economy is cooling, plunged 5.3 percent, its biggest single-day drop in nearly four years, taking its decline so far this year to more than 13 percent. The Shenzhen composite index dropped 6.1 percent, while in Hong Kong, the Hang Seng Index fell 2.2 percent, sagging below the 20,000-point mark for the first time since last September.

Markets in Europe were down almost 2 percent in afternoon trading, while Wall Street shares were down 1 percent shortly after the opening.

Numerous analysts have revised downward their growth projections — HSBC, for example, cut its forecast for this year to 7.4 percent from 8.2 percent — amid signs that Beijing’s new leaders are willing to tolerate slower growth in the short term as they pursue stability for the long term.

The interbank lending market’s benchmark overnight rate, which serves as a gauge of liquidity in the financial market, stood at 6.489 percent Monday. That was down from 8.492 percent Friday and well below the record high of 13.44 percent it hit Thursday, but still elevated compared with the level of about 3 percent of most of the past 18 months.

In a statement dated June 17 but published Monday, the Chinese central bank, the People’s Bank of China, addressed some of the concerns about the cash crunch, saying that “currently, liquidity in our country’s banking system is overall at a reasonable level.” But, in a stern sign to Chinese lenders, it called on financial institutions to improve “awareness about preventing risks” and to “strengthen their analysis and forecasting about factors affecting liquidity.”

“Follow the requirements of macro prudence in allocating assets in a sensible fashion,” the central bank’s instructions to lenders went on, “and cautiously control the risks that the excessively rapid expansion of credit and other assets may lead to liquidity risks. When there is turbulence in market liquidity, swiftly adjust the structure of assets.”

The fact that the People’s Bank of China had allowed interbank lending rates to soar last week — rather than injected money into the financial system — was widely interpreted as a deliberate effort to rein in excessive lending and force banks to focus on prudent, low-risk loans.

A buildup of debt by local governments, property developers and state-owned companies, while useful for supporting economic growth, bears substantial risk, including asset price bubbles and potentially destabilizing defaults if loans turn sour, analysts have cautioned. The rapid expansion of lending in unregulated and often opaque shadow banking activities, in particular, has worried many.

Last month, the International Monetary Fund cautioned that the growth in credit “raises concerns about the quality of investment and its impact on repayment capacity, especially since a fast-growing share of credit is flowing through less-well supervised parts of the financial system.”

Beijing has responded in recent months with efforts to address the potential risks. “Policy makers have taken measures to slow the rapid growth in credit and at the same time tightened rules about irregular and imprudent activity in the financial system, including interbank bond repo transactions,” economists at JPMorgan in Hong Kong wrote in a research note Friday, referring to bond repurchases. That “tough-line attitude,” they added, had caused the recent increase in interbank funding costs.

Although factors like a seasonal demand for liquidity and a crackdown on cash hoarding at banks also contributed to the rate increase, the JPMorgan team wrote, it seemed that the P.B.O.C. also “wants to use this as an opportunity to address” banks’ expectations that it is always there to provide backup.

Yiping Huang and Jian Chang, China economists at Barclays, said in a report that with “China’s credit-to-G.D.P. ratio at 200 percent, we believe that the P.B.O.C. is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth.” Though the central bank is likely to stabilize the interbank market in the near term, they added, “short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions.”

Louis Kuijs, an economist at Royal Bank of Scotland and former China economist at the World Bank, said conditions in the interbank market were likely to remain “tight and nervous” in the coming weeks.

“We expect conditions on the interbank market to normalize gradually after that,” Mr. Kuijs added.

Chris Buckley contributed reporting.

Article source: http://www.nytimes.com/2013/06/25/business/global/chinese-central-bank-says-liquidity-at-reasonable-level.html?partner=rss&emc=rss