Chinas central bank on Tuesday said it will not turn the screws too hard on banks in its drive to curb easy credit,seeking to allay fears of a banking crisis that had driven shares to their lowest in nearly 4-1/2 years on Tuesday. The Peoples Bank of China (PBOC) wants to curtail the diversion of funds to a vast informal loan market as it seeks to shore up growth in the worlds second-largest economy,but its tough stance has raised fears of a lasting credit crunch. Currently,the liquidity risk in the banking system is under control, said Ling Tao,vice governor of the Shanghai branch of the Peoples Bank of China told a media conference. We will stabilise market expectations and guide market interest rates to reasonable levels. Ling spoke after local financial markets had closed. Anticipation of what he would say had earlier helped spark a remarkable turnaround in the stock market as rattled investors hoped for some respite from the central bank. The CSI300 of the leading Shanghai and Shenzhen listings ended down just 0.3 per cent,having fallen as much as 6 per cent to its lowest since January 2009 during the day. The market had fallen 6.3 per cent on Monday. Reports of outages at cash machines of some banks added to the nervousness of a panicky market,with the index of financial stocks on the Shanghai exchange falling 7 per cent at one point before recovering to close down a mere 0.1 per cent. It was not immediately clear whether Lings comments would be enough to keep markets calm on Wednesday,but money traders welcomed a more accommodating tone. The PBOC appears to soften its position slightly by saying that it will adjust liquidity in line with market conditions and by suspending bill issuance today, one money trader at a Chinese commercial bank in Shanghai said. It appears the peak of the market squeeze is over. Money market rates soared last week after authorities allowed cash market conditions to tighten,and even though short-term rates have come down this week,bank stocks had tumbled on concerns tight funding would hurt earnings and the economy.
