China said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief for a cash squeeze that risks exacerbating an economic slowdown.
“At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher,” the People’s Bank of China said in a statement dated June 17 and published on its website today in Beijing.
Chinese stocks tumbled as the government’s most explicit comments on this month’s cash crunch added to signs that Premier Li Keqiang is committed to stamping out speculation funded by cheap money. Slowing growth, a crackdown on illegal capital inflows and efforts to rein in shadow banking have contributed to increased borrowing costs.
“The central bank is trying to give a clearer message to the market that it won’t inject funds” by publishing a week-old statement, said Li Miaoxian, a Beijing-based economist at Bocom International Holdings Co., the investment-bank unit of Bank of Communications Co.
The notice was originally sent to regional PBOC offices and China’s major banks. The PBOC didn’t give a reason for the lag time in releasing the statement.
The benchmark Shanghai Composite Index (SHCOMP) was down 3 percent at the 11:30 a.m. local-time break, headed for the biggest drop in three months. It’s down 17 percent from its high this year on Feb. 6.
At the same time, China’s benchmark money-market rates fell today for a second day, extending a retreat from record highs, on signs targeted injections of funds are being used to ease the cash crunch.
Today’s PBOC statement adds to a commentary yesterday by the state-run Xinhua News Agency that said China isn’t suffering from a cash shortage and that money isn’t showing up in the right places. Banks, stock markets and small businesses are in need of funds, while investment in wealth-management products and shadow banking show money supply is plentiful, Xinhua said.
The central bank suggested in a separate statement yesterday that it wouldn’t rule out the idea of loosening credit. The nation should “appropriately fine-tune” its policies, according to a statement that summarized the monetary policy committee’s second-quarter meeting in Beijing. It was the first time since September that the panel, led by Governor Zhou Xiaochuan, has used the “fine-tune” phrase.
The PBOC, which didn’t elaborate on the fine-tuning or reference this month’s developments yesterday, reiterated that it will implement a “prudent” monetary policy, a label in place since 2010. The meeting was held “recently,” the central bank said without giving a date.
The notice released today said commercial banks “should closely watch the market liquidity situation and strengthen analysis and predictions of factors that can affect liquidity.” Banks should also “prudently control liquidity risks stemming from too-rapid expansion of credit assets,” the PBOC said.
The PBOC said that financial institutions, especially large banks, should “work with the central bank in stabilizing the market.”
“We believe this is another sign that the PBOC is not willing to loosen policies or inject liquidity to bring down interest rates,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note today. “The decision to put this note on its website suggests the PBOC wants to reiterate its policy stance.”
Goldman Sachs Group Inc. economists led by Cui Li in Hong Kong said in a report earlier today that the liquidity tightening is another indication that the government’s priority is to tackle “structural problems” in the economy.
While tighter funding conditions will have a “relatively modest” impact on growth in the near term, “investment deceleration is likely to be more visible next year as the tighter credit conditions set in,” Goldman Sachs said.
Goldman Sachs today cut its 2013 expansion forecast to 7.4 percent from 7.8 percent, while China International Capital Corp. said it lowered its projection to 7.4 percent from 7.7 percent.
“For the new leadership, it’s important to lay a foundation for future sustainable growth in the early days,” Bocom’s Li said. “The central bank is implementing that strategy by requiring banks to reduce risks in the financial system.”
--Zhou Xin. Editors: Scott Lanman, James Mayger
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