China's monetary liquidity sufficient: PBOC

Monetary liquidity in the market has been sufficient on a large scale since the beginning of this year, China's central bank was quoted by China Central Television as saying Monday night.

The bank also said the interbank money market rates are falling, with ample cash reserves at commercial banks.

The remark came after it urged banks to rein in potential liquidity risks from rapid credit expansion.

Overall liquidity in the country's banking system is currently at a reasonable level, the People's Bank of China (PBC) said Monday, urging commercial banks to rein in potential liquidity risks from rapid credit expansion.

A number of factors have prompted changes in the financial market as the first half of the year nears its end, raising liquidity management requirements for commercial banks, the central bank, PBC said in a statement, which reiterated the necessity of implementing prudent monetary policy.

"We believe this is another sign that the PBC is not willing to loosen policies or inject liquidity to bring down interest rates," Zhang Zhiwei, Hong Kong-based chief economist at Nomura International, wrote in a research note Monday.

The benchmark Shanghai Composite Index suffered its biggest daily loss in four years on Monday with financial stocks taking a dive of more than 7 percent after the central bank's warning letter. Some medium-sized joint-stock commercial banks including the China Minsheng Banking Corporation, Industrial Bank and Ping An Bank, which have reportedly suffered the most amid the squeeze, saw their shares plummet by the daily limit of 10 percent on Monday.

The central bank's comments came as the country's money market rates skyrocketed last week fuelling market panic over a cash crunch. The overnight repurchase rate, a key gauge of funding costs in the country's money-market, touched a record high of 30 percent on Thursday.

The abrupt shortage of funds in the market is due to many factors including tightened control by policymakers on commercial banks' use of funds raised for wealth management products, and the government's curbing measures against hot money inflows that further tightened the liquidity in the money-market, Shen Minggao, chief China economist of Citigroup, told a media briefing in Beijing on Monday.

Although multiple factors led to the short-term tight liquidity, the central bank's tough stance played a key role, said Sun Peng, a Beijing-based banking analyst at BOCI China.

The liquidity shortage may ease early next month after some short-term factors that have driven up money market rates become ineffective, but liquidity will remain tight if the central bank maintains a tight grip on cash, Sun forecast.

E Yongjian, a financial analyst with the Bank of Communications in Shanghai, also said tight liquidity conditions may continue in the second half of the year, although an easing in liquidity pressure is expected next month. But market watchers pointed out that the central bank would not allow smaller players to default, which ruled out the possibility of a repeat of events like the collapse of the Lehman Brothers.

The central bank will pump money into the money-market when necessary via reverse repurchase operations targeting certain banks that are in need of cash, Sun said.

In the Monday statement, the central bank also suggested big commercial banks should make use of their strength to help stabilize the market, in a move to calm market fears.

The overnight repurchase rate has started to fall from the peak levels. On a weighted-average basis, it dropped by more than two points to 6.64 percent on Monday.