Commercial lenders told to control liquidity risks

China's central bank on Monday told the country's over-extended lenders to manage liquidity risks to stabilize the monetary environment.

In a statement posted on the People's Bank of China (PBOC) website, the central bank said the country's liquidity remains at a reasonable level.

However, with multiple changing factors in the financial system, including regularly high borrowing demands toward the end of June, commercial banks should strengthen liquidity management.

The statement came amid sharp rises in short-term interbank rates over the past two weeks. Despite these rises, the PBOC has been reluctant to pump cash into the money market, a necessary move to restrain the lending binge, which has been blamed for inflating asset bubbles.

Banks should allocate positions beforehand and keep abundant reserves. Prudence is needed in arranging asset portfolios and controlling liquidity risks arising from the credit binge, the PBOC said.

Banks should also appropriately contain the pace of loans and bill financing and utilize reserves of cash and credit to support the physical economy.

"We believe this is another sign that the PBOC is not willing to loosen its policies or inject liquidity to bring down interbank interest rates." according to Zhang Zhiwei, an economist with Nomura International (HK) Limited.

The statement was released to commercial banks on June 17, according to the date published below its content, but was only circulated within the industry.

"The decision to put this note on its website suggests that the PBOC wants to reiterate its policy stance," Zhang said.

After a quarterly meeting of the PBOC's monetary policy committee on Sunday, the central bank again said that it would continue to implement a prudent monetary policy while fine-tuning it at an "appropriate" time.

It also vowed to enhance liquidity management and maintain stable and moderate growth in its credit supply as well as social financing.

Louis Kuijs, chief China economist with the Royal Bank of Scotland (RBS), said he expects conditions on the interbank market to remain tight and nervous in the coming weeks, with sizeable repayment risks.

"While we expect conditions on the interbank market to normalize gradually after that, we do think that banks will become more prudent with lending and liquidity going forward, with 'non-bank' lending activity and mid-sized banks reliant on wholesale funding likely to be especially affected," he said.

Interbank rates eased massively on Monday, falling to 6.4890 percent for overnight funds and to 7.3110 percent for seven-day funds from Friday's respective 8.7 percent and 9.25 percent.

Nomura maintained its view that China's GDP growth will drop below 7 percent in the second quarter, while RBS forecast 7.5-percent growth for 2013.