Liquidity squeeze bleeds equities

Central bank says lenders must solve their own credit problems

The central bank hinted on Monday it won't shore up liquidity to address the credit crunch, a move analysts said reflects top policymakers' increasing tolerance for slower growth.

The central bank said on Monday in a circular that the liquidity level of the financial system was "reasonable" and urged lenders to strengthen their control of credit expansion.

The announcement took a heavy toll on the stock market.

The benchmark Shanghai Composite Index plummeted 5.3 percent on Monday to close at 1963.23, its biggest daily loss in nearly four years.

Bank shares led the losses, with investors concerned over the cash squeeze that has seen banks put the brakes on new lending, which has in turn been a drag on the economy.

Analysts said the bank sent a clear signal that the worst phase of the liquidity squeeze in the past several weeks is over.

Interbank rates have been hitting highs since the middle of the month.

"Seasonal liquidity pressure is not expected to ease significantly until early July after the reporting period," said Wang Lei, a bank analyst at Aijian Securities.

"We have studied the central bank's circular carefully and find the message it delivers is that banks must rely on what they have now to resolve their liquidity problems," said a senior manager with a Shanghai-based bank. "We believe that policymakers have made it explicit that banks must find ways to sort out their own problems."

Jason Yue, senior analyst with an investment company in Shanghai, said the market was expecting an injection of liquidity by the central bank.

Yue said it appears authorities want to maintain a prudent position and reduce leveraged operations.

Premier Li Keqiang said at a State Council meeting last week that banks must make better use of existing credit, and step up efforts to contain financial risks.

Rating agency Moody's Investors Service said in a report on Monday that the government was doing the right thing.

"We think it is prudent for China to curb its credit growth to more sustainable levels to prevent a buildup of excessive leverage. Therefore, we regard China's latest moves as credit positive for the health of the Chinese banking system overall," said the report.

But it said banks hold significant amounts of assets that theoretically could be used to obtain liquidity from the People's Bank of China.

"We think it is unlikely that the PBOC would allow systematically important banks to get into serious and sustained liquidity problems," said the report.

"Small and medium-sized banks are likely to aim to strengthen their liquidity buffers by competing more aggressively for deposits to reduce dependence on the interbank market, which will reduce net interest margins and curtail lending growth."

Share prices of several banks dived on Monday. Ping An Bank plunged to the daily loss limit of 10 percent, hitting 10.15 yuan ($1.65) per share before trading was suspended. Industrial Bank also lost 10 percent on Monday to 13.89 yuan per share.

China Minsheng Banking Corp Ltd lost 8 percent to 7.22 yuan per share.

The country's new cabinet may tolerate a lower growth rate for the rest of 2013 while it prepares to launch new programs, economists said.

"As the medium-term view for China's potential growth has dropped to 7-8 percent and the new leaders are increasingly aware of this, we think Premier Li's 'bottom line' for growth has fallen to 7 percent from 7.5 percent," said Chang Jian, a senior economist with Barclays Bank.

GDP grew 7.7 percent in the first quarter, slowing from 7.9 percent in the last quarter of 2012.

In the last few weeks, many investment institutions have cut growth forecasts for China.

HSBC and Barclays lowered their predictions for China's 2013 GDP growth to 7.4 percent, below the government's target of 7.5 percent.

Three months ago, most international investors were confident in seeing 8 percent growth.

Zhang Zhiwei, chief economist in China with Nomura Securities, said there was even a 30 percent possibility of quarterly growth falling below 7 percent later this year.

The National Bureau of Statistics will release second-quarter GDP numbers on July 15.