HONG KONG — Chinese stock markets were volatile on Tuesday as nervous investors weighed the lingering impact of a cash crunch that Beijing hoped would rein in soaring lending growth and the financial risks that have accompanied it.
The Shanghai composite index, which had tumbled 5.3 percent on Monday, slumped more than 5 percent by early afternoon before clawing back most of those losses and closing down 0.2 percent. The index has lost nearly 20 percent since early February. The Shenzhen composite index likewise reversed sharp losses, closing 0.2 percent lower on the day, but still more than 15 percent below a high hit in late May.
“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 a 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 soared to record highs last Thursday, setting off concerns over the health of the Chinese financial system and underlining the Chinese authorities’ determination to steer lenders toward more prudent loans — even if it meant slower overall economic growth.
Interbank lending rates have retreated somewhat since Friday, and continued to do so on 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 it hit on Thursday, but still above where it had been over the past 18 months — indicating jitters over the impact on the financial system and the already cooling economy persisted on Tuesday.
“Any asset class suffers when money market rates are expensive,” Mr. Kowalczyk said. Although he believed the authorities in Beijing would step in quickly to forestall any wider turmoil in the country’s financial system by injecting cash, “the risks of maintaining the liquidity crunch for longer are not negligible,” he said.
The fact that the People’s Bank of China had allowed interbank lending rates to hit record highs has been widely interpreted as a deliberate effort to force banks to reduce risky lending.
“It is a shot across the bow for those medium-sized banks who had borrowed short to lend long in the unregulated shadow banking system,” analysts at LGT in Hong Kong wrote in a note on Tuesday. “A cash shortage should remind them to be more prudent in their lending.”
As such, many analysts have said such a stance could ultimately be positive in that it could instill more lending discipline and reduce the chances of asset price bubbles and loan defaults that have built up alongside rapid lending growth in the past few months.
Still, the central bank’s tough stance also bears risks.
“We believe the biggest risk comes from the PBOC potentially mishandling the situation,” Ting Lu, China economist at Bank of America Merrill Lynch, wrote in a research note on Tuesday, referring to the People’s Bank of China. “That being said, we believe the PBOC and Chinese policymakers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilize the economy.”
Article source: http://www.nytimes.com/2013/06/26/business/global/china-stocks-tumble-for-second-straight-day.html?partner=rss&emc=rss