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China's financial markets calmed down on Wednesday after days of turmoil thanks to the central bank's pledge to prevent a 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.
The central bank wants to curtail funds flowing into China's vast "shadow" financial system that fuels property and stock speculation and push money into more productive areas of the economy to secure more sustained growth.
But its decision to let short-term borrowing costs soar to extraordinary levels last week fanned fears that a temporary squeeze could morph into a lasting credit crunch.
"Market sentiment has apparently improved somewhat, although the PBoC is still expected to stick to relatively tight liquidity policy," said a dealer at a major state-owned bank in Shanghai.
The central bank reiterated its warning to banks that they needed to manage their cash better and rely less on short-term borrowing, adding to expectations of tougher business conditions and possibly slower economic growth.
So while most Asian share markets rebounded from a four-day losing streak, taking comfort from encouraging US economic data and the PBoC assurances, Chinese shares struggled to find traction.
The CSI300 index of leading Shanghai and Shenzhen listings staged an afternoon rally to end up 0.1 per cent, having been down 1.5 per cent, but the financial sub-index on the Shanghai exchange lost 1 per cent.
Chinese stocks are down more than 20 per cent from February peaks, and have lost about 10 per cent over the past week.
Money market dealers were relieved that a full-blown market freeze seemed to have been averted, but said fund flows suggested cash would remain tight until mid-July.
The benchmark seven-day repo rate opened down about a quarter of a point at around 7.20 per cent on a weighted-average basis on Wednesday, before inching up to near 7.30 per cent, still well above the long-run average of 3 to 4 per cent.
End of easy credit?
Several economists taking a longer-term view praised the authorities, saying a bout of market turbulence and a possible economic slowdown were risks worth taking to steer the economy to a more balanced, sustained growth path.
For decades China's rapid ascent has been powered by exports and heavy investment fuelled by cheap, readily available credit, including massive spending in 2008 and 2009 at the height of the global financial crisis.
But with China's debt levels continuing to swell and increasing amounts of it being funnelled to the shadow banking system, the new leadership of President Xi Jinping and Premier Li Keqiang is working harder than ever to cool down lending.
Yet while Beijing won plaudits for resisting chasing growth at all costs, its opaque decision making and communication frustrated and confused market players.
Speaking to Reuters about the experience of the past few days, the top executive of China's biggest bank expressed that frustration with rare candour.
"We hope that in future, policy expectations can be clearer," Jiang Jianqing, Chairman of Industrial and Commercial Bank of China Ltd (ICBC) said.
"That would help us understand the overall market situation better and more deeply. Those few days, even for us, we were genuinely a bit tense."
He said ICBC - the world's largest commercial bank by market value - was willing to heed the central bank's calls to lend to smaller banks, but to play that role needed a clearer sign of where things were going.
The central bank's words and actions convinced a growing number of analysts that while the worst-case scenario of a credit freeze and banking crisis seemed very distant, the era of rapid growth fuelled by cheap credit was also over.
"The policy stance will likely remain tight. The statement indicated that the PBoC will stick to 'prudent monetary policy', which suggests that credit growth will continue to decline in the near term," Nomura analysts said in a note.
The revelation that the PBoC had supported unnamed individual institutions came after outages at automatic teller machines and point of sales terminals at two of China's largest banks caused concern among the public.
