WRAPUP 2-Policymakers soothe China jitters but economy weighs
* Short-term lending rates lowest since peak of cash crunch
* Stocks edge up, but PMIs add to worries over economy
* PBOC chief say crunch was a reminder for banks
* Regulator reassures on amount of liquid in system
By Lu Jianxin and Kazunori Takada
SHANGHAI, July 1 (Reuters) - Chinese markets stabilised on Monday as investors spooked by last month's cash crunch took heart from a flurry of official reassurances that there is ample liquidity in the financial system.
But the return towards normality from the wild swings of the second half of June was tempered by further signals that China's policymakers are determined to rein in soaring credit expansion even at the cost of lower growth in an already slowing economy.
Inter-bank lending rates, while still elevated, eased to the lowest levels since the crunch peaked in late June. Stocks edged higher, but lacked momentum as the latest economic data offered further evidence of stuttering growth.
"Inter-bank rates have eased of late after the central bank injected cash and promised to keep things on a more even keel," Frederic Neumann, co-head of Asian Economics Research at HSBC, said in a note.
"What's more, short-term rates, while down, remain substantially higher than over the past year. Inevitably, this will curtail the buildup in leverage ... The key question, here, is how the housing market will react."
China's frothy property market is seen by analysts as one of the biggest financial risks to the world's second-largest economy, along with the run-up of debt by local governments and the explosive growth of the opaque "shadow banking" system.
China's central bank allowed short-term borrowing costs to spike to record levels on June 20, sending a blunt but effective message to overstretched lenders that it was determined to bring risky credit growth under control.
People's Bank of China (PBOC) Governor Zhou Xiaochuan underlined the point, saying in an interview published by the China Business News on Monday that the cash crunch was caused by rapid loan expansion at some banks.
The central bank refused to inject liquidity despite a surge in interbank rates because it wanted the banks to adjust their practices, and the message has been correctly understood by the market, Zhou said.
The risk that China's economy could miss Beijing's 7.5 percent gross domestic product growth target - itself a two-decade low - was underlined by twin purchasing managers' index surveys published on Monday that showed the vast factory sector slowed to multi-month lows in June.
The concerns over the economy helped keep equity markets subdued. The CSI300 index of large-cap shares closed up 0.6 percent, after spending the day dipping in and out of negative territory. The index rose 1.9 percent on Friday, its best day in two months, but was down 4.5 percent overall last week and shed 15.6 percent in June.
Key short-term lending rates, which began to ease last week, fell further on Monday to the lowest levels since the crunch peaked. However, they are still higher than before the market started to tighten.
The weighted average for the benchmark seven-day repo rate fell 71 basis points to 5.45 percent, still above its usual range of 3-4 percent. The overnight rate fell by 49 basis points to 4.46 percent.
The country's chief banking regulator pledged at the weekend to control risks from local government debt, real estate and shadow banking, and said that there was plenty of cash in the financial system.
"Over the last few days, due to multiple factors, the problem of tight liquidity has appeared in the market," Shang Fulin, chairman of the Chinese Banking Regulatory Commission (CBRC), said at a financial forum in Shanghai on Saturday.
"But overall, liquidity in our banking system really isn't scarce."
Shang said total excess reserves in China's banking system totalled 1.5 trillion yuan, which he said was more than double the amount necessary for normal payment and settlement needs.
After making its point, the PBOC last week moved to allay fears that the cash crunch could escalate into a financial crisis with assurances that it would ensure adequate funding.
"Investor sentiment has also been boosted by a slew of official reassurance that the market has enough money and regulators will come to the market's rescue in case of emergency, including the weekend comments by Shang Fulin," said a money trader at a Chinese bank in Shanghai.