China promises banks help with cash shortfalls to calm markets after credit crisis fears

BEIJING, China – China’s central bank tried Tuesday to quell fears the country faces a credit crisis by promising to support banks that face cash shortfalls.

The central bank promised “liquidity support” if needed after a shortage of money in credit markets caused the interest rate that banks must pay to borrow from each other to spike last week. That caused Chinese stock markets to plunge Monday on fears the world’s second-largest economy might face a credit crisis.

The bank appeared to soften its tougher line of Monday, when it said markets had adequate liquidity and blamed the credit crunch on mismanagement by banks.

“The bank will provide liquidity support if an institution faces a temporary gap in funding arrangements,” a central bank statement said. “The central bank will take appropriate measures to maintain the overall stability of the money market.”

It said money already has been provided to some institutions, though it gave no details.

The bank said financing markets already were recovering Tuesday. It noted that the interest rate banks must pay each other for overnight loans fell to 5.83 per cent, down from a record high of over 13 per cent last week.

The statement blamed the credit crunch on technical factors including higher demand for money to meet regulatory requirements at the end of the financial quarter.

Some analysts have said the central bank was partly to blame by failing to make clear its stance on such borrowing following a surge in commercial bank lending this year.

The Communist government is trying to rein in a credit boom but analysts said commercial bankers expected the central bank to inject extra money into the interbank market. But the bank withheld such support earlier, leaving banks with access to too little money to replenish their resources.