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China's key short-term lending rate on Monday fell to its lowest level since before the peak of the cash crunch last month, while stocks showed signs of stabilisation as traders shifted their focus back to the economy.
The weighted average for the benchmark seven-day repo rate fell 76 basis points to 5.41 % in early trade, its lowest since June 20, though still above its usual range of 3-4%. The overnight rate fell by 49 basis points to 4.46%.
"Market liquidity conditions have improved greatly as seasonal demand for the end of the quarter is now over," said a money trader at a Chinese bank in Shanghai.
With money market rates expected to gradually ease towards 4 % by mid-July, stock investors were focusing their attention back to the economy.
"The market will see a sustained consolidation period in the near term," said Chen Huiqin, senior stock analyst at Huitai Securities in Nanjing.
"This is because regulators appears to be determined not to usher in new economic stimulative measures. Instead, they have laid emphasis on economic structural reforms. Without major government stimulative measures, the market will not see a bull run."
The CSI300 index of the largest mainland counters was volatile, drifting in and out of negative territory to stand down 0.3% at 0235 GMT. It rose 1.9% on Friday, its best day in two months. but was down 4.5% last week and 15.6% in June.
Reinforcing worries about tepid growth in the second quarter, China's official purchasing managers' index (PMI) slipped to 50.1 in June from 50.8 in May, a survey showed on Monday.
The central bank, which had let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said on Friday it would ensure policy supported a slowing economy.
