China’s central bank pushes for control on informal lending

China's central bank took on the country's cash-hungry banks today letting interest rates again spike to extraordinary levels as it increased the pressure on the banks to bring  rampant informal lending and speculative trading under control.

The banks had been advancing cheap official funds to finance the vast "shadow banking" market, which has Beijing worried over siphoning credit from industry and creating asset-price bubbles.

The People's Bank of China (PBOC) has been trying to end this over the past three weeks, declining to inject significant funds into the money markets even as the interest rate for some banks to borrow short-term funds soared to 25 per cent or higher.

"They are trying to take a different approach to rein in shadow banking activity," Charlene Chu, senior director at Fitch Ratings, told reporters on the sidelines of a conference in Sydney.

"This new approach, where you are trying to tighten the funding in the system available for that type of credit, is much more effective, but it is also taking the market by surprise."

For at least the smaller banks, cash remained expensive, though the weighted average overnight bond repurchase  rate, a measure of the cost of funds was down to around 9 per cent by midday from yesterday's close of 11.62 per cent.

There was concern in some quarters that the PBOC's hardline approach could be a risky strategy, resulting in potential for defaults and gridlock in the money markets of the world's second-largest economy, as happened in the west following the collapse of Lehman Brothers in 2008.

A measure of calm returned today following quelling of rumors about certain major banks requiring emergency funding. There was also market buzz about the central bank having  guided the biggest state lenders to provide more short-term funds to smaller banks.

The central bank has thus far issued no official statements on the episode, though according to sources cited by Reuters, at a meeting earlier this week, the PBOC told banks it was not changing its prudent stance and they should not expect plentiful liquidity conditions forever.

Reuters cited a source who saw internal minutes of the meeting, as saying that some banks were blindly optimistic on the loose liquidity conditions.

Meanwhile, bankers and entrepreneurs' confidence in the Chinese economy declined in the second quarter of 2013, according to central bank survey results released today, Xinhua reports.

According to the index produced by the PBOC survey of 3,100 banking institutions, banker confidence was down 8.1 percentage points to 64.1 per cent from the first quarter.

According to a separte survey of 5,000 entrepreneurs, the index measuring their confidence in the national economy was down 4.2 percentage points from the previous quarter to 63.8 per cent.

The percentage of bankers surveyed that believed the macro-economy was operating at a "normal" level was 61.5 per cent and the figure was 7.4 percentage points lower as against the first quarter. Around 34.1 per cent of them said the macro-economic operation was "relatively cool," up 8.8 percentage points from the first quarter.

Meanwhile, the index reflecting companies' profits was up 2.8 percentage points to 55.6 per cent, 3 percentage points higher than the same period of last year, according to the PBOC said.

According to a separate survey of 20,000 depositors, the index reflecting employment outlook in the second quarter was 48.2 per cent 3.8 percentage points lower than the previous quarter while it was 0.7 percentage points lower compared with one year earlier.