China’s stock markets scored their biggest gains in two months on Friday in a sign of growing confidence that credit conditions were improving as cash rates extended their fall from peaks reached during last week’s credit crunch.
The central bank, which had let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said it would ensure policy supported a slowing economy.
“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,” People’s Bank of China (PBOC) Governor Zhou Xiaochuan told a financial forum.
Without making direct references to the cash crunch, which saw rates spike as high as 28 per cent, Zhou said 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.
Weighing in, the nation’s securities regulator said that financial markets were stabilising and the effects of recent shocks fading.
Commercial bankers have also described as exaggerated fears that they would turn off the taps on new lending after the cash crunch scare and reduce the flow of funds to the already slowing economy.
They say the crackdown on the practice of funding riskier activities in the so-called shadow banking system with short-term cash would have little bearing on regular lending, which is determined by the amount of deposits banks attract.
Earlier this week, the central bank moved to allay fears that the crunch could escalate into a financial crisis, with assurances that it would ensure adequate funds, bringing some calm to markets after days of turbulence.
As the PBOC reiterated that message on Friday, one of the nation’s three policy lenders, the Agricultural Development Bank of China, issued a statement saying that since late May it had supplied US$100 billion in money market transactions to other lenders to help them cope with fund shortages.
Friday’s bounce showed some investors had shrugged off their pessimism and were increasingly seeing their glass as half full, at least for now.
The index of the largest Shanghai and Shenzhen stocks closed up 1.85 per cent, their biggest daily rise since April 24, buoyed by a 4 per cent jump in property stocks and rebounds in smaller banks, which were hardest hit by the recent sharp sell-off.
Still, the index fell 5 per cent over the week and lost 15.6 per cent in June. Analysts say overall sentiment remains fragile given concerns about funding conditions ahead and China’s longer-term economic outlook.
“The problems, such as excessive credit growth, shadow banking activities and local debt remain and will not go away overnight,” said Ben Kwong, KSI Asia’s chief operating officer in Hong Kong.
Alex Wong, director of asset management at Ample Finance in Hong Kong, said the central bank’s actions and words convinced investors that Beijing even appeared ready to risk missing its 7.5 per cent growth target – a two-decade low – to curb worrisome expansion of unregulated credit.
“The authorities sent a message to the market, and people will probably be very cautious in lending and even borrowing.”
China Vice President Li Yuanchao seemed to underline the message that the government is willing to tolerate a lower growth rate, saying on Friday that China could maintain growth of 7 per cent in the future.
Money traders also said the market was not quite out of the woods yet, even as fears of a prolonged crunch faded.
The weighted average for the benchmark seven-day repo rate was down around 60 points to 6.16 per cent almost half of last Thursday’s record 11.62 percent, but still well above its usual range of 3 to 4 per cent.
The overnight rate fell about half a percentage point to 4.96 per cent.
“There will still be lots of cash demand in the first half of July, including the need to set aside reserves based on end-June deposits and to pay cash dividends to stock investors,” said a dealer at a Chinese commercial bank in Shanghai. “Overall market sentiment remains very cautious.”