China vows to keep cash flowing as squeeze roils markets

China's central bank said Friday it would "adjust" tight liquidity after a weeks-long squeeze that has rattled financial markets concerned over the impact on the world's second-largest economy, which is already slowing.

The assurance from governor of the People's Bank of China (PBoC), Zhou Xiaochuan, helped support sentiment on China's stock market after a sell-off earlier this week that sent ripples worldwide.

"The PBoC will use all sorts of instruments and measures to adjust the overall liquidity level, so as to ensure the overall stability of the market," Zhou said in his first public comments on the issue.

Speaking at a financial forum in Shanghai, he added the bank would ensure the "normal operation" of the economy.

There is anxiety that tightening credit could spread into the broader economy, with some Chinese companies reportedly running short of cash to settle suppliers' bills.

A Shanghai provider of small loans said private firms consistently have trouble getting access to capital, and that the impact of the bank liquidity squeeze had yet to be fully felt.

"Recently there are more manufacturing and construction companies coming to us for loans," said Gu Yang of Shanghai Kangxin Micro-credit Co.

For three weeks, funds have been in short supply on China's interbank market, and the interest rates banks charge to lend to each other surged to record highs last week before easing again.

The PBoC was said to be worried about risk from a boom in credit, but on Tuesday the bank confirmed it had offered liquidity "support" to financial institutions and pledged to provide more if needed.

That statement marked an apparent change of course after the central bank earlier ruled out providing fresh funds and ordered banks to put their financial houses in order.

The central bank reversal came after Chinese stocks had closed at lows unseen since the global financial crisis in 2009.

Zhou's comments helped nudge Chinese stocks higher Friday with the benchmark Shanghai Composite Index up 0.70 percent in afternoon trading.

But analysts said the PBoC would have to take more radical action for the market to rise further, with the focus now shifting to the weak domestic economy.

"This is more like a kind of gesture, declaring his stance to tell everyone not to panic," said Liu Shengjun, executive deputy director of the Lujiazui Institute of International Finance.

Zhou remained confident about China's growth, though he acknowledged the economy had slowed.

"The Chinese economy, basically speaking, has maintained stable growth," the central bank chief said.

"The growth rate has slowed down a little bit, but it is still in a reasonable range," he said, although gave no specific figure.

China has set its economic growth target at 7.5 percent for 2013.

China's economy, a crucial driver of global growth, expanded 7.8 percent in 2012 -- its slowest pace in 13 years -- and recorded a surprisingly weak 7.7 percent expansion in this year's first quarter, well below forecasts.

Zhou said China would maintain its current monetary policy, although he hinted at possible tweaks ahead.

"The PBoC will continue to maintain a prudent monetary policy and fine-tune when and as appropriate," he said.

Some analysts forecast China could loosen monetary policy by lowering the level of funds that banks must hold in reserve, or even cutting interest rates if economic growth slows sharply.

Research company Capital Economics on Friday put China's economic growth for the second quarter -- due to be officially announced on July 15 -- at 7.5 percent.

"Economic activity weakened markedly in (the first quarter), and has continued to slow since then," it said.

"The extremely tight liquidity conditions over the last few weeks won't have helped confidence, although any impact will not show up in the hard data until later."

Despite the fears of a slowdown, Zhou pledged that China would push forward with economic reforms, including moving towards freeing up capital flows in and out of the country.

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