Rumours abound as Chinese credit squeeze turns around
China's credit squeeze has eased after lending resumed among banks and financial institutions that had been desperately seeking cash through the week in the inter-bank market.
China's central government made no official announcement on the situation and it remained unclear whether policymakers had intervened, but short-term interest rates fell sharply on Friday from the day before, when they had reached some of the highest levels in a decade.
Still, rates for Chinese institutions seeking inter-bank financing on Friday were substantially higher than they had been a few weeks ago.
Financial experts said they expected the higher interest rates to persist for some time because the Chinese government appeared to have abandoned its long-standing policy of responding to any hint of an economic slowdown by expanding credit.
Analysts say the government is holding back because it is determined to rein in excess credit expansion and to avert a financial crisis that could result from years of poor lending practices and over-investment. There are also hints that a huge shadow banking operation in China could be masking more serious financial risk-taking.
The government's reluctance to increase bank liquidity is troubling investors because of concerns that China's economy is weakening much faster than expected.
Economists in China cut their growth forecasts sharply in the past week, though projections remain robust at 7 per cent. Prices of Chinese shares plunged on the Shanghai and Shenzhen stockmarkets, ending one of the worst weeks in four years.
As credit markets began to freeze up and mistrust among banks spread, rumours circulated of defaults. Late on Thursday, the Bank of China was forced to issue a statement denying reports that it had defaulted on inter-bank payments.
By late on Friday, the markets had settled. The overnight lending rate between banks had dropped to 8.49 per cent, down from a record-high of 13.44 per cent on Thursday, but still much higher than last month's levels of less than 4 per cent.
The situation remains volatile. Another benchmark rate for bank-to-bank borrowing costs, the seven-day repurchase rate, opened on Friday at 8.1 per cent, briefly soared as high as 25 per cent and closed at 5.5 per cent. New York Times