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 liquidity squeeze gave them a good lesson without triggering a real crisis
After letting short-term borrowing costs spike to record highs to drive home a message that banks could no longer count on cheap cash to fund riskier operations, the central bank said policy would support 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,” Zhou Xiaochuan, the central bank governor, said in his first public remarks since the cash crunch last week.
Without making direct references to the turmoil, when short-term rates spiked as high as 28 per cent, Zhou said that 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 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 economy.
They said 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 in banks.
Zhao Huan, a vice-president at China Construction Bank, said the market volatility had “exerted a positive impact on market players”.
“The liquidity squeeze gave them a good lesson without triggering a real crisis,” the vice-president said.
The central bank had 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 $100 billion in money market transactions to other lenders to help them cope with 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.