PBOC's caution amid cash crunch will pay off in long run

The cautious attitude of China's central bank toward injecting cash into the interbank market amid the current liquidity crunch will support the country's economic restructuring and benefit the world economy.

China's short-term interbank rates rocketed to unusually high levels during the past two weeks, but the People's Bank of China (PBOC) took a tough line with the banks faced with the cash crunch until Tuesday, when it boosted liquidity support for some cautious financial institutions.

A confluence of factors has led to the current interbank liquidity shortage, including fast credit growth, the concentrated collection of business income taxes, surging cash demand during the Dragon Boat Festival holiday, changes in the foreign exchange market and banks setting aside money to meet reserve requirements.

The Financial Times newspaper said in a report the PBOC's new strategy signalled the country hoped to force lenders to stop channelling money into the informal banking sector, known as "shadow banking," which has boomed in recent years and fueled concerns about financial risks.

Moreover, it indicated China planned to boost medium- and long-term sustainable economic growth at the expense of short-term growth, the Britain-based newspaper said.

On June 19, China unveiled a set of measures designed to increase the financial sector's support for the country's economic restructuring, including optimizing resource allocation, absorbing private capital, and supporting the upgrading of the real economy.

These measures will cause volatility in the market in the short term, but will eventually bring huge benefits to both the country and the global economy.

Firstly, China, as the world's second biggest economy, has played a significant role in the international economic and financial system.

Beijing continues to adopt a prudent monetary policy, avoid monetary expansion, and effectively manage domestic inflation, which will help curb the prices of global raw materials and major commodities, and help ease negative effects brought by the U.S. quantitative easing policy.

Moreover, the Chinese government has proposed to upgrade the use of China's foreign exchange reserves and supported more Chinese companies to invest abroad.

A huge amount of Chinese capital in the overseas market will help create more job opportunities and boost the economic development in foreign countries.

Furthermore, more financial resources have been invested in the advanced manufacturing and new strategic industries, and in the upgrading of traditional industries. It contributes to a new round of international labor division and the adjustment of global industrial distribution.

Meanwhile, Beijing is supporting a growing domestic consumption, such as the consumption of major durable consumer goods, education and tourism, and speeding up low-rent housing construction.

These measures will obviously fuel a consumption boom and expand domestic demand, and thus will drive the growth of exports of foreign goods to the Chinese market.

What's more, China has generated a vast amount of valuable experience in changing its financial system to an open and market-oriented one, which will offer some references for other countries.

Reform is painful, but it also paves the way for future gains. China's economic restructuring will unavoidably cause short-term instability and volatility in the market. But it's worthwhile to do so if it is the price that has to pay to avert a possible bigger crisis and to reshape China's economy toward a more sustainable model.