BEIJING China's central bank rarely explains its actions in public and keeps markets guessing on policy, but the angst created by its stand off with banks in the money markets is prompting calls for it to change tack.
The People's Bank of China (PBOC) let short-term interest rates spike to extraordinary levels this past week as it refused to inject funds into money markets.
Some observers saw it as an attempt to force banks to stop channelling money into the informal banking sector, known as "shadow banking", which authorities worry is creating significant credit risks.
For years, the central bank has made stability its watchword, which for the money markets meant it would always provide liquidity when cash conditions tightened. As the central bank is now standing back while banks scramble for cash, markets are left uncertain as to whether there has been a fundamental change in policy.
In effect, there seems to be a competing policy objective, said Fitch Ratings Senior Director Charlene Chu.
"The real uncertainty in the market comes down to people not really knowing which of those is more important at which point in time," she said on the sidelines of a conference in Sydney.
Traders blame the absence of a clear and public signal from the central bank for panic at some smaller banks, as the cost of borrowing overnight funds spiked to as high as 25 percent for some institutions.
Those jitters spread more broadly late last week, as rumours - passed on by Chinese media outlets - that two major banks had received emergency funds from the PBOC circulated in financial markets in London and New York on Thursday.
The lenders denied the rumours, after which money markets calmed somewhat on Friday.
The panic in the otherwise arcane marketplace even sparked a flurry of activity on social media as the Twitter-like service Weibo lit up with comments from Chinese worried that a financial crisis was unfolding.
Throughout, the central bank has remained silent. Several telephone calls from Reuters to the PBOC for comment went unanswered.
To many market players, the episode highlights that it is time for the PBOC to shift away from its penchant for opacity in conducting its business. In the past that has included carrying out special market operations behind the scenes and announcing changes in policy interest rates out of the blue and with a minimum of explanation - often at odd hours of the day and at weekends.
"There should be a lesson to be drawn from this," said Zhao Qingming, an economist at China Construction Bank.
The information asymmetry between the central bank and market participants led to confusion and exacerbated the cash crunch, traders said. Some banks dared not lend out money to other banks even though they had cash at hand due to the uncertainty, Zhao said.
"I think the central bank should improve its communication with the market. At least, it should tell the market clearly what its intention is at the very beginning," he said.
Several money market traders reached by Reuters also expressed a similar wish for greater clarity from the PBOC.
Unlike the central banks of most major economies, such as the U.S. Federal Reserve or the European Central Bank, the PBOC does not hold regular interest rate-setting meetings or release detailed minutes of meetings.
The heads of the Fed and the ECB hold question and answer sessions with the media immediately following their policy meetings to further explain the thinking behind decisions and to try to avoid the potential for markets misreading their intentions.
However, unlike many central banks of other leading economies, the PBOC is not independent of the government. Major decisions on policy need the approval of the cabinet.
Banking sources told Reuters on Friday that the PBOC did hold a meeting earlier in the week in which it told senior bankers not to expect liquidity to be as plentiful as it had been and that they would have to manage their own affairs better. But that message did not necessarily make it to the trading floor, at least not by Friday.
"We don't know what the central bank thinks. Maybe some senior officials of our bank know, but we are trading blind," said a trader at a state-owned bank, who declined to be identified in the absence of authorization to speak to the media.
Fitch Ratings said in a statement on Friday that the PBOC's efforts to constrain the cash available to banks for "shadow banking" activities could be more effective than the other steps it has taken in the past.
But it also raised the potential for "a policy misstep and/or unintended consequences", it said.
Fitch did not single out the PBOC's communication strategy, but a flurry of worried comments on Weibo suggested the central bank might need to think not only about the response of the market, but to the public more broadly.
"The central bank's open market operations are so opaque and the entire banking system is not transparent! Nobody knows what is going on, which has been the major reason behind the market panic," said one Weibo user.
(Additional reporting by Aileen Wang in BEIJING and Lu Jianxin in SHANGHAI; Editing by Neil Fullick)