Liquidity squeeze bleeds equities

Central bank says lenders must solve their own credit problems

The central bank hinted on Monday it won't shore up liquidity to address the credit crunch, a move analysts said reflects top policymakers' increasing tolerance for slower growth.

The central bank said on Monday in a circular that the liquidity level of the financial system was "reasonable" and urged lenders to strengthen their control of credit expansion.

The announcement took a heavy toll on the stock market.

The benchmark Shanghai Composite Index plummeted 5.3 percent on Monday to close at 1963.23, its biggest daily loss in nearly four years.

Bank shares led the losses, with investors concerned over the cash squeeze that has seen banks put the brakes on new lending, which has in turn been a drag on the economy.

Analysts said the bank sent a clear signal that the worst phase of the liquidity squeeze in the past several weeks is over.

Interbank rates have been hitting highs since the middle of the month.

"Seasonal liquidity pressure is not expected to ease significantly until early July after the reporting period," said Wang Lei, a bank analyst at Aijian Securities.

"We have studied the central bank's circular carefully and find the message it delivers is that banks must rely on what they have now to resolve their liquidity problems," said a senior manager with a Shanghai-based bank. "We believe that policymakers have made it explicit that banks must find ways to sort out their own problems."

Jason Yue, senior analyst with an investment company in Shanghai, said the market was expecting an injection of liquidity by the central bank.

Yue said it appears authorities want to maintain a prudent position and reduce leveraged operations.

Premier Li Keqiang said at a State Council meeting last week that banks must make better use of existing credit, and step up efforts to contain financial risks.