* PBOC statement calms markets but tighter conditions seen
* Money market rates edge down but remain elevated
* Shanghai shares recoup early losses, but financials weak
* China's top bank says lacked clear direction during
By Gabriel Wildau and Lu Jianxin
SHANGHAI, June 26 China's financial markets
calmed down on Wednesday after days of turmoil thanks to the
central bank's pledge to prevent a credit crunch, but stocks
struggled as investors braced for tougher conditions in the
world's second-largest economy.
The People's Bank of China (PBOC) said late on Tuesday it
had helped some banks and was ready to act again as the lender
of last resort for those caught in a short-term squeeze.
However, it was also sticking to its stance of tightening market
conditions as it seeks to rein in sharp growth in informal
The central bank wants to curtail funds flowing into China's
vast "shadow" financial system that fuels property and stock
speculation and push money into more productive areas of the
economy to secure more sustained growth.
But its decision to let short-term borrowing costs soar to
extraordinary levels last week fanned fears that a temporary
squeeze could morph into a lasting credit crunch.
"Market sentiment has apparently improved somewhat, although
the PBOC is still expected to stick to relatively tight
liquidity policy," said a dealer at a major state-owned bank in
The central bank reiterated its warning to banks that they
needed to manage their cash better and rely less on short-term
borrowing, adding to expectations of tougher business conditions
and possibly slower economic growth.
So while most Asian share markets rebounded from a four-day
losing streak, taking comfort from encouraging U.S. economic
data and the PBOC assurances, Chinese shares struggled to find
The CSI300 index of leading Shanghai and Shenzhen
listings staged an afternoon rally to end up 0.1 percent, having
been down 1.5 percent, but the financial sub-index on
the Shanghai exchange lost 1 percent.
Chinese stocks are down more than 20 pct from February
peaks, and have lost about 10 percent over the past week.
Money market dealers were relieved that a full-blown market
freeze seemed to have been averted, but said fund flows
suggested cash would remain tight until mid-July.
The benchmark seven-day repo rate opened down
about a quarter of a point at around 7.20 percent on a
weighted-average basis on Wednesday, before inching up to near
7.30 percent, still well above the long-run average of 3 to 4
END OF EASY CREDIT?
Several economists taking a longer-term view praised the
authorities, saying a bout of market turbulence and a possible
economic slowdown were risks worth taking to steer the economy
to a more balanced, sustained growth path.
For decades China's rapid ascent has been powered by exports
and heavy investment fuelled by cheap, readily available credit,
including massive spending in 2008 and 2009 at the height of the
global financial crisis.
But with China's debt levels continuing to swell and
increasing amounts of it being funneled to the shadow banking
system, the new leadership of President Xi Jinping and Premier
Li Keqiang is working harder than ever to cool down lending.
Yet while Beijing won plaudits for resisting chasing growth
at all costs, its opaque decision making and communication
frustrated and confused market players.
Speaking to Reuters about the experience of the past few
days, the top executive of China's biggest bank expressed that
frustration with rare candor.
"We hope that in future, policy expectations can be
clearer," Jiang Jianqing, Chairman of Industrial and Commercial
Bank of China Ltd (ICBC) said.
"That would help us understand the overall market situation
better and more deeply. Those few days, even for us, we were
genuinely a bit tense."
He said ICBC -- the world's largest commercial bank by
market value -- was willing to heed the central bank's calls to
lend to smaller banks, but to play that role needed a clearer
sign of where things were going.
The central bank's words and actions convinced a growing
number of analysts that while the worst-case scenario of a
credit freeze and banking crisis seemed very distant, the era of
rapid growth fuelled by cheap credit was also over.
"The policy stance will likely remain tight. The statement
indicated that the PBOC will stick to 'prudent monetary policy',
which suggests that credit growth will continue to decline in
the near term," Nomura analysts said in a note.
The revelation that the PBOC had supported unnamed
individual institutions came after outages at automatic teller
machines and point of sales terminals at two of China's largest
banks caused concern among the public.