By Lu Jianxin and Kazunori Takada
SHANGHAI (Reuters) - China's one-week cash rate fell to its lowest since before last week's sharp credit squeeze and stocks rose as much as 2 percent on Friday morning, with banks having little trouble securing funds to meet their end-of-quarter requirements.
The central bank allowed short-term borrowing costs spike up to record highs last week to send a message to banks that they could no longer count on cheap cash to fund riskier operations.
Earlier this week it moved to allay fears the crunch could escalate into a financial crisis, bringing a measure of calm to markets after days of turbulence and heavy stock market losses.
"Banks have nearly all finished attracting new deposits for the end of this quarter, so we expect money rates should have relatively big room to fall today," said a trader at a state-owned bank in Beijing.
"But overall market liquidity is expected to remain relatively tight over the next two weeks, partly because it takes time for the market to digest the aftermath of the recent acute squeeze."
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The improvement in short-term funding conditions propped up stocks, which have trailed its Asian peers so far this week, weighed down by concerns that even after the crunch blows over funding conditions would remain tougher than before.
The CSI300 index of the largest Shanghai and Shenzhen stocks rose as much as 2 percent, after falling 0.35 percent on Thursday. It is still down sharply since the middle of last week.
VIDEO: A tough new line from China's central bank: https://bsmedia.business-standard.comlink.reuters.com/wer29t
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The weighted average for the benchmark seven-day repo rate fell 61 basis points to 6.13 percent in early trade, still above its usual range of 3-4 percent. The overnight rate fell by 52 basis points to 4.92 percent.
The weighted-average seven-day rate hit a record 11.62 percent last Thursday, though some trades were seen as high as 28 percent, as the central bank allowed conditions to tighten and panic grew in the market about a potential credit crunch.
This week, the People's Bank of China pledged to provide emergency liquidity to any bank short of cash, and revealed that it had already done so for some institutions.
(Additional reporting by Yimou Lee; Writing by Tomasz Janowski; Editing by John Mair)