China to tame shadow banking using more policy tools

A liquidity squeeze is only one of these tools.

The People's Bank of China, the central bank, said it will use a mix of policy tools to adjust banking liquidity to ensure steady credit growth and calm rattled markets distraught about tighter monetary conditions.

This decision came after data published late last week showed the total social financing aggregate, a broad measure of liquidity conditions that includes bank loans and bond sales, dropped to US$213.7 billion in June.

PBOC said it will ". . . use a mix of price and quantitative policy tools to adjust liquidity in the banking system, and guide steady and appropriate growth in money, credit and social financing."

It allowed short-term interbank borrowing costs to spike to close to 30% on June 20, a painful warning to debt-ridden banks that they must bring risky lending under control. The engineered cash crunch helped squeeze speculative lending and rein in prominent shadow banking risks.

PBOC noted that overall, liquidity in the banking system remains ample and that the slower M2 growth in June was in line with the expected outcome of macro-economic adjustments and prudent monetary policy and was closer to the full-year target of 13%.