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 People's 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 .CSI300 of the leading Shanghai and Shenzhen listings ended down just 0.3%, having fallen as much as 6 percent to its lowest since January 2009 during the day. The market had fallen 6.3% 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% at one point before recovering to close down a mere 0.1%.
It was not immediately clear whether Ling's 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.