The Chinese credit squeeze had been building since late May – worsening in mid-June – as a result of a number of factors, among them a drop in foreign currency inflows, regulatory requirements at the end of the second quarter and a mismatch between banks’ long-term lending and short-term funding.
China‘s short-term interbank rates rocketed to unusually high levels during the past two weeks, but the People’s Bank of China (PBOC) took a tough line with the banks faced with the cash crunch until Tuesday, when it boosted liquidity support for some cautious financial institutions.
China‘s financial markets calmed down on Wednesday after days of turmoil thanks to the central bank’s pledge to prevent the credit crunch, but stocks struggled as investors braced for tougher conditions in the world’s second-largest economy.
The People’s Bank of China (PBOC) said late on Tuesday it had helped some banks and was ready to act again as the lender of last resort for those caught in a short-term squeeze. However, it was also sticking to its stance of tightening market conditions as it seeks to rein in sharp growth in informal lending.
China shares edged lower in volatile trade on Thursday, limiting gains in Hong Kong markets as sentiment remained fragile despite signs that a cash crunch in the banking sector was easing.
Chinese markets surrendered early gains with the key benchmark index slipping to end at fresh four-and-a-half year lows as investors opted to take profits after recent gains.
The central bank intended the cash crunch to serve as a warning to overextended banks, analysts say, but it has also fed fears that a miscalculation could create a full-blown crisis.
In an interview with The Wall Street Journal, Mark Cutifani, the new chief executive of Anglo American, said the fallout from Beijing squeezing the Chinese financial system as a warning to overenthusiastic lenders was a concern, but felt policymakers needed to act swiftly to prevent a credit bubble growing.
Commodity markets slumped this week when the scale of the cash crunch in China became apparent, with traders fearing banks would significantly rein in lending to the private sector. On Monday, copper prices fell to their lowest levels since July 2010, while nickel also tumbled to four year lows.