Updated: 06/25/2013 20:06 | By Agence France-Presse

China central bank soothes after stock plunge

China's central bank said Tuesday it saw an end to a liquidity crisis and offered to support banks, after stocks closed at a level unseen since the global financial crisis in 2009.

China central bank soothes after stock plunge

A man gestures as he watches stock activity at a stock exchange in Huaibei, north China's Anhui province on June 24, 2013. China's central bank has predicted an end to a liquidity crisis and offered to support banks, after stocks closed at a level unseen since the global financial crisis in 2009.

For more than two weeks, funds have been in short supply on China's interbank market and the interest rates banks charge to lend to each other have surged to record highs.

Instead of pumping money into the system, the central People's Bank of China (PBoC) had stood by, as recently as Monday ruling out providing fresh cash and ordering banks to put their financial houses in order.

After China's financial markets closed on Tuesday, the central bank sought to ease the worries of domestic and international investors.

"Interest rate fluctuations and the situation of tight liquidity will gradually ease," the bank said in a statement.

It added it had already offered funds to financial institutions and would continue to do so, but gave no details.

Analysts have warned the liquidity squeeze was raising the risk of a hard landing for the world's second largest economy.

"If prolonged, this may lead to a credit crunch to the real economy, risking a hard landing scenario in China," ANZ Banking Group said in a research report on Tuesday.

The liquidity tightness could persist to mid-July, analysts said.

 "The longer this goes on, there's a risk that it could feed into the price of credit going into the real economy," said Paul Gruenwald, chief economist for the Asia-Pacific region for ratings agency Standard & Poor's.

"But for now, we don't see a measurable macro (economic) impact," he told a conference call with financial analysts and journalists.

Analysts said the policy of the central bank stemmed from worries over financial risk from loosely regulated wealth management products and the vast "shadow banking" system.

China's stock investors have responded poorly to the moves.

The benchmark Shanghai Composite Index ended down 0.19 percent on Tuesday at the lowest closing level since January, 2009.

The index tumbled as much as 5.79 percent in afternoon trading before rebounding on bargain-hunting. The market closed down 5.30 percent on Monday.

"The situation with tight liquidity conditions has not improved," Zhang Yanbing, an analyst at Zheshang Securities, told AFP.

"The market is still anxiously waiting for authorities to improve liquidity conditions and stabilise the stock market," he said.

But in a stern warning for China's 170 million stock investors, the mouthpiece of the ruling Communist Party, the People's Daily, warned the government would not play "wet nurse".

"The securities regulatory commission is not the stock market's 'wet nurse' nor is the central bank," the influential newspaper said in a commentary.

"So-called market-saving and market-boosting acts will not help the stock market, rather they will harm the market," it said.

The handling of the liquidity squeeze has put the credibility of China's new leaders on the line as they try to control financial risks while at the same time keeping economic growth on track.

"The liquidity squeeze is the first real economic test for China's new leaders to prove their willingness to overcome tough economic issues not with words, but by their actions," said Zhang Zhiwei, a Hong Kong-based economist for Nomura Securities.

"If the new leaders maintain their current approach... it will add downside risk to growth in 2013," he said in a research report, though he added it would help make growth more sustainable in the long term.

China has set its annual economic growth target at 7.5 percent for all of this year.

The country's economy, a crucial driver of global growth, expanded 7.8 percent in 2012, its worst performance in 13 years.

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