China Signals No Relief on Cash Squeeze

By TOM ORLIK

BEIJING—China's government signaled little respite from the cash crunch that has afflicted its financial system since the beginning of June, suggesting tight conditions could continue to strain markets in the week ahead.

A commentary published Sunday by the official Xinhua news agency said there was no shortage of funds in China's financial system. Rather, it said, a combination of speculation and nonbank forms of lending often called shadow finance were contributing to the surge in short-term lending rates.

"It's not that there's no money, it's that the money is not in the right places," the commentary said.

In a separate statement on Sunday, the People's Bank of China's Monetary Policy Committee made no direct reference to the surge in borrowing costs for banks and repeated commitments to maintaining a prudent monetary policy. Its repetition of boilerplate language on improving liquidity management and maintaining "steady and appropriate growth" of credit suggests China's monetary-policy makers see little urgency in easing the current stress in the financial system. The statement followed the committee's second-quarter meeting.

China's interbank market—where banks lend each other money to meet their daily needs—has seen a surge in borrowing costs over the past two weeks. The benchmark seven-day repo rate closed at 11.6% Thursday before edging down on Friday. Surging rates have raised concerns about an overstretched financial sector and a growing mismatch between short-term liabilities and long-term assets in the banks.

The People's Bank of China has ample means at its disposal to ease funding conditions. Its failure to do so has been interpreted by economists and market watchers as an attempt to shore up long-term financial stability by imposing market discipline on reckless lenders, even if that comes at the expense of short-term pain for the banks.

The PBOC's inaction so far shows that the leadership "is determined to deflate the credit bubble led by runaway shadow-financing activities," said a senior executive at one of China's top four state-controlled banks. "On the other hand, the central bank will continue guiding the big four banks to lend to smaller banks to prevent any small banks from failing because of a lack of liquidity," the executive added.

Such covert moves to ease liquidity conditions might not be enough to bring rates down in the week ahead.

Fitch Ratings estimates 1.5 trillion yuan ($245 billion) worth of retail investment vehicles known as wealth-management products will come due before the end of the month, placing more pressure on the banks to tap the money market for funds to repay investors. That—combined with a smaller volume of bills and repos maturing than in previous weeks and high demand for funds ahead of the end of the second quarter—could mean pressure for rates to stay high.

"We expect conditions on the interbank market to remain tight and possibly nervous in the coming weeks," said Louis Kuijs, China economist at RBS, in a note.

The cash crunch comes as concerns mount about China's growth outlook. Signs of further weakness in June, with the HSBC HSBA.LN -0.44% flash Purchasing Managers' Index falling to a nine-month low, added to fears that growth in the second quarter would fall below the first quarter's 7.7% year-on-year rate.

—Yajun Zhang and Lingling Wei contributed to this article.