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HONG KONG — The Chinese central bank reassured investors worried about a lingering credit crunch and declared that it has already been selectively supporting bank liquidity, as Chinese stock markets swung wildly again Tuesday after several days of volatility.
HONG KONG — The Chinese central bank reassured investors worried about a lingering credit squeeze and declared that it had already been selectively supporting bank liquidity, as Chinese stock markets swung wildly again Tuesday after several days of volatility.
The People’s Bank of China, the central bank, eager to rein in soaring lending growth and financial risk, uncharacteristically refrained from intervening as bank-to-bank interest rates shot higher last week. But that decision generated intense nervousness as investors fretted that some lenders could buckle under higher interest rates and that tighter lending conditions could chill an already cooling economy.
The central bank, People’s Bank of China, eager to rein in soaring lending growth and financial risk, initially refrained from intervening as bank-to-bank interest rates soared last week, but then apparently released more money for lenders. Uncertainty over the central bank’s position produced wide trading swings Tuesday, with the main Chinese stock indexes dropping to their lowest levels since early 2009 before recovering most of the day’s losses near the end of trading.
The uncertainty produced wide trading swings Tuesday, with the main Chinese stock indexes dropping to their lowest levels since early 2009 before recovering most of the day’s losses near the end of trading. The Shanghai composite index, which had tumbled 5.3 percent Monday, slumped more than 5 percent again by early afternoon, only to recover almost all of those losses later on, closing down 0.2 percent. The index’s total decline since a peak early in February has been nearly 20 percent.
The Shanghai composite index, which tumbled 5.3 percent Monday, slumped more than 5 percent again by early afternoon Tuesday. It recovered almost all of those losses to close down 0.2 percent. The index’s total decline since a peak in early February has been nearly 20 percent.
The Shenzhen composite index likewise reversed earlier sharp losses Tuesday. It also finished 0.2 percent lower, but it has sagged more than 15 percent since a high hit in late May. In Hong Kong, the Hang Seng Index seesawed and ultimately eked out a gain of 0.2 percent. An index measuring volatility in the Hong Kong market has risen steeply in recent weeks to its highest level in more than a year.
After China’s stock markets closed, the People’s Bank of China issued a statement apparently meant to soothe investors’ nerves and maintain pressure on banks deemed to be carrying too much risk.
In Europe, markets had gained more than 1 percent by midafternoon, and Wall Street indexes were up strongly in early trading.
“In recent days, the central bank has provided liquidity support to some financial institutions that meet the demands of macro prudence,” the bank said on its Web site. “Some banks with ample liquidity have also begun to play a stabilizing role in circulating capital into markets.”
After China’s stock markets closed, the People’s Bank of China issued a statement apparently intended to soothe investors’ nerves and to keep up pressure on banks deemed to be carrying too much financial risk.
On Tuesday the bank pledged that it would apply open market operations — buying or selling securities to manage liquidity and rates — and other methods to offset “short-term abnormal volatility, stabilize market expectations and maintain stability in monetary markets.”
“In recent days, the central bank has provided liquidity support to some financial institutions that meet the demands of macro prudence,” the central bank said in a statement on its Web site. “Some banks with ample liquidity have also begun to play a stabilizing role in circulating capital into markets.”
The reassurances were accompanied by a warning to commercial banks to contain risk and to report promptly any “sudden major problems.” Chinese banks that follow government policies in lending practices and risk controls can expect support from the central bank if they have brief capital shortfalls, the bank said. But wayward banks can expect tougher treatment, it suggested.
The central bank largely appeared to have sat on the sidelines in recent weeks, but pledged Tuesday that, going forward, it would apply open market operations — buying or selling securities to manage liquidity and rates — and other methods to offset “short-term abnormal volatility, stabilize market expectations and maintain stability in monetary markets.”
The reassurances were accompanied by a warning to commercial banks to contain risk and to report promptly any “sudden major problems.” Chinese banks that follow government policies in lending practices and risk controls can expect support from the central bank if they suffer short-term capital shortfalls, the bank said. But wayward banks can expect tougher treatment, it suggested.
“For institutions that have problems in their liquidity management, corresponding measures will be taken on a case-by-case basis, while maintaining the overall stability of money markets,” it said.
“For institutions that have problems in their liquidity management, corresponding measures will be taken on a case-by-case basis, while maintaining the overall stability of money markets,” it said.
“The stock markets are continuing to react to the very elevated funding costs,” said Dariusz Kowalczyk, a senior economist and strategist at Crédit Agricole in Hong Kong, referring to the recent surge in interbank lending rates. Those rates determine how costly it is for banks to borrow money from one another, often to cover short-term obligations.
“The stock markets are continuing to react to the very elevated funding costs,” said Dariusz Kowalczyk, a senior economist and strategist at Crédit Agricole in Hong Kong, referring to the recent surge in interbank lending rates. Those rates determine what banks pay to borrow from each other, often to cover short-term obligations.
The interbank rates reached a record high last Thursday, setting off concerns about the health of China’s financial system and underlining the Chinese authorities’ determination to steer lenders toward more prudent loans, even if that came at the cost of slower overall economic growth.
Interbank lending rates, which began to decline last Friday, continued to do so Tuesday. The benchmark overnight lending rate, a gauge of liquidity in the financial market, stood at 5.736 percent. That was down from 6.489 percent on Monday and well below the record high of 13.44 percent reached last Thursday.
Interbank lending rates, which began retreating Friday, continued to do so Tuesday. The benchmark overnight lending rate, a gauge of liquidity in the financial market, stood at 5.736 percent. That was down from 6.489 percent Monday and well below the record high of 13.44 percent reached Thursday.
But with rates still well above where they were in the last 18 months, around 3 percent, anxiety over the effect on the financial system and the economy persisted Tuesday.
But with rates still well above where they had been over the past 18 months, around 3 percent, jitters over the effect on the financial system and the economy persisted Tuesday.
The central bank’s stance could help economic conditions in China, many analysts have said, by instilling more lending discipline and reducing the chances of asset price bubbles and loan defaults that have increased with rapid lending growth in the last few months.
“Any asset class suffers when money market rates are expensive,” Mr. Kowalczyk said. Although he said he believed the authorities in Beijing would step in quickly to forestall any wider turmoil in the country’s financial system by injecting cash, “the risks of maintaining the liquidity crunch for longer are not negligible.”
The central bank’s allowing interbank lending rates to hit such highs has been widely interpreted as a deliberate effort to push banks to reduce risky lending. The bank signaled as much in a statement published Monday in which it called on commercial lenders to step up their risk controls and improve cash management.
“It is a shot across the bow for those medium-sized banks who had borrowed short to lend long in the unregulated shadow banking system,” analysts at LGT in Hong Kong said Tuesday. “A cash shortage should remind them to be more prudent in their lending.”
The central bank’s stance could help economic conditions in China, many analysts have said, by instilling more lending discipline and reducing the chances of asset price bubbles and loan defaults that have built up alongside rapid lending growth in the past few months.
In its latest statement Tuesday, the central bank urged commercial banks to “prudently control the excessively rapid expansion of credit and assets that may lead to liquidity risks.”
In its latest statement Tuesday, the central bank urged commercial banks to “prudently control the excessively rapid expansion of credit and assets that may lead to liquidity risks.”
Still, many analysts believe that the central bank’s tough stance also has risks. “We believe the biggest risk comes from the P.B.O.C. potentially mishandling the situation,” Ting Lu, China economist at Bank of America Merrill Lynch, said Tuesday, referring to the People’s Bank of China. “That being said, we believe the P.B.O.C. and Chinese policy makers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilize the economy.”
Still, many analysts contend that the central bank’s tough stance has risks.
In the rest of the Asia-Pacific region, the prospect of slower economic growth in China has weighed on markets for months. Indications that the Federal Reserve in the United States plans to scale back the bond-buying that has supported markets in the aftermath of the global financial crisis have also pushed down Asian markets since late May. Several have slipped more than 10 percent — among them the Philippine stock exchange, until recently one of the best performers in the world. On Tuesday, the main stock index in Manila sagged into bear market territory.
“We believe the biggest risk comes from the P.B.O.C. potentially mishandling the situation,” Ting Lu, China economist at Bank of America Merrill Lynch, said Tuesday, referring to the People’s Bank of China. “That being said, we believe the P.B.O.C. and Chinese policy makers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilize the economy.”
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said European concerns had moved to the back burner for investors. Everyone knew that the Chinese central bank and the Federal Reserve would eventually have to act to address their domestic issues, he said, “but now you have the two issues coinciding. That’s spooking the markets.”
“Greece will probably be back on the plate after the German elections” in September, Mr. Gijsels added, “but for now, there are two main concerns, China and Bernanke,” referring to Ben S. Bernanke, the Fed chairman.
Mr. Gijsels said that with investors fleeing emerging markets and with bond markets tumbling in the developed world, investors were buying American and European equities “by default.”
