China central bank urges lenders to manage liquidity

China's central bank has urged lenders in the country to strengthen liquidity management, according to an official note published Monday, in a sign Beijing does not intend to loosen policy despite a recent credit crunch. "Currently, overall liquidity in the domestic banking system is at a reasonable level," said the statement dated June 17 that was issued to banks across the country. It was the first public comment by the People's Bank of China since interbank borrowing costs spiked to record highs in recent weeks, raising concerns over a potential cash crisis amid an already slowing Chinese economy. Chinese shares slumped 5.30 percent on Monday in response to the publication of the statement. Policy makers had refrained from injecting more liquidity -- owing to fears about a growth of bad debt -- which has in turn weighed on the economy. In the statement, the central bank repeated Premier Li Keqiang's previous calls to "make active use of existing funds" to support the economy.It asked lenders to "prudently manage liquidity risks that may result from overly fast credit asset expansion". "All financial institutions should... maintain credit growth at a stable and moderate level," it added. It also urged large commercial lenders to "cooperate with the central bank to stabilise the market". The rates banks charge to borrow from each other eased on Friday after jumping into double figures on Thursday amid rumours the central bank had pressured lenders to release funds. Liquidity conditions further alleviated on Monday, with the seven-day repurchase agreement rate -- a benchmark for interbank borrowing costs - falling to 7.58 percent on a weighted-average basis, from 9.25 percent at Friday's close, according to Dow Jones Newswires."The worries (over liquidity) have now escalated to worries over a potential Chinese financial crisis," Shen Jun, a Shanghai-based analyst with BOC International, told AFP. But he stressed that the central bank statement indicates authorities will likely stay on the sidelines and let banks deal with the issue on their own. "The central bank's stance of sitting it out in fact shows that it is taking the initiative to squeeze out bubbles (from the financial system)," he said. China's economy, a crucial driver of global growth, expanded 7.8 percent in 2012 -- its slowest pace in 13 years -- and recorded a surprisingly weak 7.7 percent expansion in the first quarter this year, well below forecasts. Goldman Sachs on Monday revised down its forecast for China's economic growth to 7.4 percent from the previous 7.8 percent for 2013, citing tight liquidity in the banking system. The government has set a growth target for 2013 of 7.5 percent, the same as last year's, as it looks to retool its economic model from exports to domestic consumption. Zhang Zhiwei, a Hong Kong-based economist with Nomura International, said the central bank's announcement suggested authorities would tolerate slowing economic growth and would not loosen credit policy. "We believe these statements suggest that the central bank's policy stance remains tight," he said.