China's liquidity crunch not a crisis: Mundell

The current liquidity crunch in the Chinese financial market is not a crisis, but it is still a problem that could hamper economic growth, Nobel Prize-winning economist Robert Mundell said here Tuesday.

Mundell made the remarks when commenting on China's macro- economy on the sidelines of a forum held by the Universal Credit Rating Group (UCRG), a new credit rating firm jointly established by agencies from China, Russia and the United States.

Worries over a liquidity crunch have been raised as short-term interbank rates rocketed to unusually high levels during the past two weeks in China, causing the country's key stock index to dive more than 5 percent on Monday, the biggest daily loss in nearly four years.

However, Mundell warned that if the tight credit continues for a long time, it could lead to a crisis.

The credit crunch was a result of excessive lending in the past three years, as now the banks have to curb it, he said.

He said he was not sure about the credit crunch's impact on the country's economic growth in the second half of this year, but if that crunch continues, it could "definitely lower growth."

But maybe the government is willing to accept a lower growth if it gets enough debt reduced, he added, saying that a slowdown in growth is not an urgent problem for China.

Antonio Borges, former European Department director of the International Monetary Fund (IMF), expressed more optimism in China's economy, who believed that there is no particular reason to worry about a hard landing of the country's economy.

The liquidity shortage is an appropriate attempt on part of the government to correct some of the problems due to the very large amount of liquidity that has been made available, the Portuguese economist told media at the same forum.

Uncertainties and instabilities in the market are inevitable reactions, he said, which is "not a surprise."

China's central bank said Tuesday evening that the country is not short of liquidity and the current cash crunch in the interbank market will gradually ease as seasonal factors and market panic wanes, and it has boosted liquidity support to some cautious financial institutions to help stabilize the market.

The latest central bank comment came as a swift follow-up to a Monday statement, in which the bank asked the country's overstretched lenders to manage liquidity risks, signaling no intention to help ease the current squeeze.