PBOC: China has reasonable liquidity

China's recent interbank liquidity squeeze has the markets all roiled up. At one point last week, overnight lending costs between banks touched a staggering 30 percent. But today, China's central bank for the first time publicly commented on the situation by posting a statement on its website, reassuring that liquidity in China's banking system is at a "reasonable" level.

A clear message: On Monday, the People's Bank of China calmed nervous investors saying that there no need to panic, and that there is sufficient liquidity in the market.

It also urged financial institutions in the world's number 2 economy, especially large banks, to work with the central bank in stabilizing the market.

"The PBOC has adopted relatively tight measures to contain credit growth. The basic idea is preventing monetary supply from growing too fast, and preventing commercial banks from over expanding credit," Wang Songqi, Deputy Director of CASS Institute of Finance & Economics, said.

The central bank's announcement comes after its assessment that China's liquidity is within a reasonable level. But why do banks have to pay more to borrow from each other?

"Most of the capital has gone to local governments' financing vehicles and the property sector, and are used for long term investments. That's the reason for the lack of the money shortage", Wang said.

On Sunday, at its monetary policy committee meeting for the second quarter in Beijing, the PBOC said it wouldn't rule out the idea of loosening credit going forward. According to a statement, the bank may "fine-tune" its policy when the right time comes.