June 28, 2013 / 3:07 AM / in 5 years

China central bank to ensure reasonable lending, liquidity

SHANGHAI (Reuters) - China’s central bank sought to quell fears that a credit crunch could hobble activity, saying on Friday that authorities would ensure reasonable lending growth and stable markets as the world’s second-largest economy adjusts to slower growth rates.

In his first public remarks since a cash crunch last week saw interest rates spike to record highs, Governor Zhou Xiaochuan said the People’s Bank of China would adjust liquidity in the banking system to keep financial markets stable.

Without making direct references to the cash crunch, Zhou said monetary policy settings were appropriate and the PBOC would balance the need to reform China’s economy with the need to keep growth on an even keel.

“China’s economic growth has slowed but is still within a reasonable range,” Zhou told a financial forum in Shanghai.

“China’s current economic and financial operations and consumer prices are generally stable, all of which show prudent monetary policy is appropriate and producing good results.”

Rates at which banks lend to one another shot as high as 28 percent last week after central bank allowed the supply of cash in the money market to tighten significantly.

Analysts said the central bank played hardball to force banks to pull back from risky lending in a booming informal loans market, and to slow credit growth.

Although that stance would benefit China in the long run by reducing risks in its financial sector, economists said in the near term it could further pressure an economy which is on track for its slowest growth in more than 20 years.

Indeed, a growing group of analysts believe China could fall short of its 7.5 percent growth target this year.

Zhou said Beijing would balance the competing demands.

“On one hand, we will guide financial institutions to keep reasonable credits growth while arranging their debts and maturity structures properly to support the structural adjustment and upgrading of real economy,” he said.

“On the other hand, we will also give a full play to a variety of tools to adjust market liquidity at appropriate time to keep markets generally stable, creating good monetary conditions for stable financial market and economic development.”

The central bank has made it clear this week that cash conditions were being tightened and lenders should improve money management and lending practices, though stressed it was ready to prevent a full-blown credit market crisis.

Many economists believe that China’s cash squeeze would result in a de facto policy tightening by raising borrowing costs, although banks say that has yet to happen and they have not cut back lending as a result of the crunch.

Reporting by Samuel Shen, John Ruwitch and Ruby Lian in SHANGHAI and Shao Xiaoyi in BEIJING; Writing by Kazunori Takada in SHANGHAI and Koh Gui Qing in BEIJING; Editing by Kim Coghill and John Mair

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