China calls for stabilising 'market expectations'

China said Wednesday that authorities must "stabilise market expectations", after sharp plunges in the country's key stock market spooked investors.

The State Council, or cabinet, described China's economic situation in 2013 as "steady overall" in a statement released after a meeting chaired by Premier Li Keqiang.

"We must maintain policy continuity and stability and stabilise market expectations," the statement continued, though did not specifically mention this week's sharp stock market declines brought about by fears of a liquidity crisis.

China's benchmark Shanghai Composite Index fell a further 0.41 percent Wednesday to 1,951.50, its lowest close in nearly four-and-a-half years, following steep falls the previous two days.

The index closed 5.3 percent lower Monday and then fell another 5.79 percent in intraday trading Tuesday before paring losses to finish marginally lower on the day.

The frantic selling was prompted by investor panic that China's economy could become engulfed in a credit crunch.

For more than two weeks, funds have been in short supply on China's interbank market and the interest rates banks charge to lend to each other have surged to record highs.

But instead of pumping money into the system, the central People's Bank of China (PBoC), had stood by, as recently as Monday ruling out providing fresh cash and ordering banks to put their financial houses in order.

After financial markets closed Tuesday, however, the bank sought to calm nerves, saying in a statement that the situation would "gradually" improve.

It added it had already offered funds to financial institutions and would continue to do so, but gave no details.

Zhang Zhiwei, an economist at Nomura International in Hong Kong, said the State Council's mention of stabilising market expectations was unlikely to herald a shift toward looser government monetary policy.

"We think he (Li) may be referring to better communications with financial markets through press releases such as the one the People's Bank of China issued last night," Zhang wrote in a commentary.

The statement also said that authorities would continue pursuing reforms and "promote the realisation of expected full-year economic and social development targets."

The government in March kept its economic growth target for this year at 7.5 percent, the same as last year, as it seeks to make domestic demand the driver of economic growth over traditional engines such as investment and exports.

China's economy, the world's second largest, grew 7.8 percent in 2012, its slowest annual pace in 13 years.