China central bank boss vows to maintain stability after credit squeeze

Zhou Xiaochuan says central bank will use policy to regulate liquidity, after cash squeeze

PUBLISHED : Friday, 28 June, 2013, 11:23am
UPDATED : Saturday, 29 June, 2013, 1:41am

In an attempt to allay concerns about a cash crunch in the mainland banking system, central bank governor Zhou Xiaochuan pledged yesterday to maintain market stability, saying appropriate policies would be used to fine-tune liquidity.

"The central bank will make comprehensive use of policy tools and administrative measures to adjust liquidity to ensure overall market stability," Zhou told a financial forum in Shanghai. "The monetary policies are aimed at smooth operation of the financial markets and healthy economic growth."

The comments were the first public remarks about liquidity by the head of the People's Bank of China (PBOC) after a cash squeeze last week sent interbank interest rates to record highs.

The mainland leadership is determined to deleverage an economy facing increased financial risk following a multi-year lending spree and rampant issuance of wealth-management products in the so-called shadow banking system.

Zhou reiterated that authorities were comfortable with slowing economic growth and credited "prudent" monetary policies with helping to control inflation.

He said he was bullish about the country's economic growth prospects in the long term.

His statement on financial market stability echoed the PBOC's earlier announcement that it would provide liquidity support to "prudent" banks that face temporary cash squeezes.

Standard & Poor's chief Asia-Pacific economist Paul Gruenwald said Zhou's remarks showed the central bank would resort to "pre-emptive tools" to adjust liquidity while keeping the financial markets stable by sticking to "prudent" monetary policies.

The new cabinet, led by Premier Li Keqiang, appears to be resolute about containing financial risk and is forcing banks to curb lending and issuance of controversial wealth management products.

Concerns have mounted that defaults in the interbank market could trigger a crisis in the mainland's financial sector and cause social chaos across the country.

The overnight Shanghai Interbank Offered Rate surged to 13.44 percent on June 20. The Shanghai Composite Index rose 1.5 per cent yesterday to close at 1,979.21, following sharp falls in the previous two weeks.