25 Jun 2013

Credit tightening policy to continue in China

9:57 am on 25 June 2013

The People's Bank of China has indicated its credit tightening policy would continue.

Traders reacted negatively. The Shanghai Composite SSE index fell 5.3% to 1,963.24 points. In Hong Kong, the Hang Seng index closed down 2.22%.

Recently, China's banks have been been charging each other some of the highest lending rates ever - over 25% in some cases - enforcing a kind of state-sponsored credit crunch.

This is because PBOC temporarily turned off the flow of cheap money in an attempt to impose more discipline on its banks and reduce their reliance on credit.

But the BBC reports inter-bank lending rates eased on Monday as PBOC made it clear that big commercial banks should do a better job of managing their cash reserves and keep lending to smaller players.

Last week, data suggested Chinese manufacturing activity for June had fallen to a nine-month low and markets expected the government to apply economic stimulus measures again.

But the BBC reports Monday's statement from the central bank has temporarily scotched such expectations.