No credit crisis in banking system, says central bank

There is no liquidity crisis in the mainland's banking system and short-term operations will be used to tame market volatility, the central bank said yesterday.

The People's Bank of China said it would provide liquidity support to "prudent" banks that are facing a temporary cash crunch and take action to maintain stability in the money market if financial institutions encountered liquidity problems.

The formal statement came hours after Ling Tao, a deputy director of the Shanghai branch of the PBOC, said liquidity risks were under control and seasonal forces affecting interest rates would fade.

Interbank lending rates moderated this week. The overnight repurchase rate dropped 47 basis points to 6 per cent in Shanghai yesterday after hitting a record 12.85 per cent last Thursday.

In the statement, the PBOC said banks should contain liquidity risks by avoiding excessive credit expansion. Traders and money-market players also should not provide false bids to mislead the market, it warned.

Tight liquidity in the interbank market was expected to ease from next month as policymakers struck a balance between disciplining interbank activity and safeguarding financial stability, Standard & Poor's said.

"The spike in interbank costs mainly stems from the central bank's intention to curb some banks' excessive expansion through wealth management business and the associated dependence on interbank borrowing for liquidity," said Liao Qiang, an analyst at S&P.

But the move could have unintended consequences in the longer term as it could further decelerate the economy, dent banks' profits and send bad loans soaring, said the ratings agency.

"We think the government wouldn't allow liquidity to get so tight so as to trigger systemic financial distress or derail the economy," Liao said. "The central bank can inject liquidity into the market very quickly, or even lower the statutory reserve requirements if needed."

Industrial and Commercial Bank of China said yesterday that it had been "consistently releasing liquidity into the interbank market recently to stabilise the market".