PBOC will act 'if necessary'

The Shanghai headquarters of the People's Bank of China. The central bank said on Tuesday that it has boosted liquidity support to "cautious" financial institutions, and added that the credit crunch in the country's interbank market will gradually ease. YAN DAMING / FOR CHINA DAILY

Central bank says there's no overall liquidity shortfall

China's central bank said on Tuesday that it will intervene to adjust market liquidity if necessary, following the nation's worst cash crunch in a decade.

The bank said it would act to ease short-term, abnormal fluctuations and stabilize market expectations. The People's Bank of China added that currently, there is no shortage of overall liquidity, and the recent crunch will gradually ease.

In a statement on its official website, the PBOC said it will keep the money market stable with a combination of tools, including open market operations, re-lending, rediscounting, short-term liquidity operations and standing lending facilities.

"For financial institutions that extend loans to the real economy and develop with a prudent lending pace, the central bank will provide liquidity support if they lack capital temporarily."

It said for those with liquidity management problems, it would also adopt measures to maintain the overall stability of the market.

The central bank said it has already provided funds to some institutions to ease market tensions.

China's liquidity risks are "controllable", and the central bank will keep market rates at a "reasonable" level, said Ling Tao, deputy director of the central bank's Shanghai branch on Tuesday in Shanghai.

"The monetary authorities will closely watch interest rates in the future and keep them at a reasonable level."

According to the central bank statement, as of June 21, financial institutions had total provisions of 1.5 trillion yuan ($242 billion). "Usually, provisions of 600 to 700 billion yuan could meet the needs of normal payment and settlement," it said.

The Shanghai interbank overnight rate, a gauge of interbank borrowing costs, declined for a third straight day on Tuesday to 5.736 percent, compared with an all-time high of 13.44 percent last Thursday.

The central bank's lack of intervention to curb the rise in overnight borrowing rates could hurt economic growth and particularly the asset quality and profitability of banks, said Standard & Poor's Ratings Services in a report on Monday.

It said the central bank intends to contain the aggressive growth of wealth management products, which banks have been using as an alternative channel to increase credit disbursal.

The banking sector has excessive liquidity, said the report. Cash and central bank reserves accounted for about 14.8 percent of the banks' balance sheets at the end of May.