Key short-term interbank lending rates in China have eased further from record highs as analysts interpreted the central bank's calls to "appropriately fine-tune" monetary policy as a sign it would tackle the liquidity crunch sweeping its banking sector.
But the focus is rapidly turning to how China's financial system will cope with several short-term debt milestones in coming weeks, and whether the government's desire to clamp down on unrestrained lending would see economic growth slow significantly more than expected.
"Persistently high short-term rates will further dampen China's already sluggish real economic activities," said ANZ chief China economist Liu Ligang. "While the new government appears to be able to tolerate low growth, it will have to honour its growth target of 7.5 per cent set this year. Otherwise, it runs the risk of losing its credibility."
In a statement released after a routine quarterly board meeting chaired by governor Zhou Xiaochuan on Sunday, the bank made no direct reference to the surge in borrowing costs for banks, but instead repeated commitments to maintaining a prudent monetary policy.
But the addition of the subtle phrasing of "fine-tuning" for the first time since September was interpreted by most as a positive signal.
Overnight interbank rates spiked alarmingly to a record 12.9 per cent last week, sparking fears of a credit crunch similar to the one that led to the global financial crisis. By Monday, the overnight rate had eased to 6.5 per cent, while the benchmark one-week rate was at 7.3 per cent.
"The worst of the liquidity crunch may now be behind us, but we believe interbank rates will stay at elevated levels until at least the second week of July," said Stephen Green, an analyst at Standard Chartered.
Despite reports of direct intervention from the central bank, it remains unclear what, if anything, the PBOC has done to bring interbank rates down. "The government is managing these demands as best it can, but there could be surprises," said Anne Stevenson-Yang, research director at J Capital Research, who said WMPs were essentially derivatives that in many cases cranked high-risk debt into short-term securities at high interest rates.
Underlying the products are property and infrastructure projects that would not produce a return for many years, yet WMP maturities are invariably short-term.
"What makes the current crisis particularly dangerous is that it's not a liquidity crisis: it's a debt crisis. The WMPs have actually served to delay a crisis," she said.
But Mr Green said he believed the central bank remained firmly in control, and events of the past month had been a deliberate policy to rectify a banking system flooded with cheap credit. "Comparisons with the Lehman-related freezing of interbank liquidity in the US in 2008 are unhelpful - this is not a run on liquidity caused by a credit event," he said. "Instead, we believe it is a deliberate policy meant to de-risk the interbank system."