* Money market rates ease, lending resumes
* PBOC says funds sufficient, calls on big banks to help mkt
* Squeeze seen as attempt to curb "shadow banking"
* Smaller banks hit as funding costs stay high
By Gabriel Wildau and Lu Jianxin
SHANGHAI, June 24 China's cash crunch eased
further on Monday after the central bank moved to prevent the
money market from seizing up, but bank stocks tanked as the
authorities made clear that the days of unlimited cheap official
funds are over.
Chinese shares suffered their biggest daily loss in nearly
four years, with financial stocks dropping more than 7 percent
after the People's Bank of China (PBOC) said banks needed to do
a better job of managing their cash and lending.
Money market rates had soared last week when the central
bank, relied on as a source of cheap cash used to finance
China's vast "shadow banking" system, stood pat, letting a sharp
drop in fund inflows into China and cash hoarding by some banks
do the rest.
The sudden tightening of cash markets, which saw some banks
paying a 25 percent interest rate for cash, fanned fears that
Beijing's latest attempt to steer the world's second-biggest
economy to more balanced growth less reliant on credit-driven
investment could backfire.
Under the worst-case scenario money markets could freeze,
driving weaker lenders into default in a repeat of what happened
in the West after the Lehman Brothers collapse in 2008. That
would hit China's overall economy, its top trading partners and
the global economy at large.
On Monday, however, such a scenario appeared less likely,
after short-term rates eased for the second straight day, though
individual bank stocks fell out of favour.
In a statement published on its website on Monday, the PBOC
sought to calm fears that smaller players might get cut off, by
suggesting bigger institutions should play their part and keep
providing funding for others.
"As financial institutions, especially big commercial banks,
strengthen their own liquidity management, they should at the
same time play to their strengths and complement the central
bank in stabilising the market."
The public statement echoed points the PBOC made directly to
banks in a closed-door meeting last week, just before interbank
rates first began to fall back from their peak.
The overnight repo rate, a key measure of
funding costs in China's interbank market, fell by more than two
percentage points to 6.64 percent on a weighted-average basis on
Monday, its lowest since last Tuesday.
It had peaked near 12 percent last Thursday.
"Panic over a liquidity squeeze appears to be fading. We are
lending more money out, but I did not hear about any central
bank money injection into the market," said trader at a major
state-owned bank in Shanghai.
SMALLER BANKS HIT
The monetary authority, which drew fire for keeping the
market guessing about its intentions, also made a point of
telling banks they could do a better job at managing cash and
The central bank's rebuke sent shares of medium-sized
lenders, which rely heavily on interbank borrowing, reeling as
investors realised that costs of funding would stay elevated.
"It's much easier to borrow money today, but costs remain
high. Our business is apparently affected, but mainly on side
business, such as wealth management," said a trader at a
mid-sized commercial bank in Shanghai.
The Shanghai blue-chip CSI300 index ended down 6.3
percent. and the financial sub-index
fell 7.4 percent, its worst day since November 2008.
Beijing has long struggled to contain the growth in "shadow
banking", where banks and other institutions can bypass controls
on deposit and lending rates and other restrictions by offering
so-called wealth-management products and other investment
Several observers have said the monetary authorities "benign
neglect" could be the most effective way of curbing the dark
side of China's borrowing spree, though recent market turbulence
showed how easy it was to miscalculate its side effects.
The latest developments also prompted several economists to
reconsider their views on how fast China's economy can grow.
Both Goldman Sachs and China International Capital Corp.
(CICC) downgraded their growth forecasts for this year and next
with Goldman Sachs trimming its 2013 forecast to 7.4 percent
from 7.8 percent and 2014 to 7.7 percent from earlier 8.4
percent. CICC cut its full 2013 growth forecast to 7.4 percent
from 7.7 percent.
While the adjustments are relatively small and such a rate
of expansion remains within the long-term rates targeted by
Beijing, market players are worried about further turbulence.
"We regard China's latest moves as credit positive for the
health of the Chinese banking system overall," Moody's Investors
Service said in a report. "However, the method the PBOC chose to
keep the banking system short of liquidity entails risks that
could have credit negative implications," it said.
"Persistent money market volatility similar to that of last
week could result in lasting damage to confidence in the