Recent changes and developments in China's financial market have drawn worldwide attention. International financial analysts and media outlets have maintained a mostly positive attitude toward China's financial system, saying financial reforms will pay off in the medium and long term. While there is no liquidity crisis or credit crunch in China, the country should strengthen liquidity management to divert more funds to the real economy, they added.

A correct judgment

Tommy Xie, an economic analyst with Singapore's OCBC Bank, told People's Daily that the People's Bank of China (PBC), China's central bank, was correct in its assertion that liquidity in the country is generally abundant. In his view, recent interest rate hikes in the money market have sounded the alarm for commercial banks to manage liquidity more effectively. As a market regulator, the central bank delivered a clear message that commercial banks should deleverage and pump funds into the real economy. Xie added that China's financial reforms will generate mid- and long-term benefits.

Yosuke Tsuyuguchi, a senior advisory officer with Japan's Shinkin Central Bank, echoed Xie in saying there are no liquidity problems in China. While maintaining its current financial policy, China needs to adopt restrictive microeconomic measures to rein in bubbles such as shadow banking, he added.

Zhang Zhiwei, an economist with the Nomura Securities, noted in an analysis report that the PBC stated on June 25 that liquidity is abundant in the Chinese economy. The central bank added that it would provide liquidity support to financial institutions that conform to the government's industrial policies and principle of macroeconomic prudence, help support the real economy and are stable and healthy if they suffer temporary cash shortages–a pledge that Zhang believed showed the PBC would not adopt a laissez-faire attitude toward possible bank shutdowns.

U.S.-based CNBC TV quoted Jim O'Neill, former GoldmanSachs Chief Economist known for coining the term "BRIC"(the acronym that stands for Brazil, Russia, India and China), as saying China is not undergoing a credit crunch. He said at the International Capital Conference in Paris that it is wrong to assume that China has tightened its monetary policy.

A blogger of German newspaper Handelsblatt commented that China's current financial conditions look quite stable, with problematic loans taking only a small fraction of bank lending. There is therefore no reason for panic given the country's steady economic growth, adequate funds and low inflation rate.

Macroeconomic regulation

As part of China's regular financial market consolidation program, the PBC will curb massive capital flows in the underground lending market with regulatory measures to ensure the world's second largest economy functions properly, said Mervin Rodriguez, a professor with the Central University of Venezuela. China's financial system will remain sound because Chinese authorities are capable of carrying out macroeconomic regulation and the central bank is expected to increase liquidity as appropriate in the short term, he added.

Yasuo Sone, a professor with the Nihon University College of Economics, said he believed China's financial authorities are able to keep the financial market under control. The latest policy highlighted their determination to implement financial reforms, he said.

In an editorial published on June 25, Canadian newspaper Globe and Mail cautiously recognized the need for the PBC to tighten the money supply. The Chinese Government's new financial policy aimed to eliminate dangerous financial bubbles to make China's economic structure more balanced and reasonable. If it persists with a tight credit policy, China will send a bold signal that it will squeeze credit bubbles, lessen dependence on exports and tolerate less rapid economic growth for sometime in a bid to establish a sustainable economic growth model.

Russian newspaper Rossiyskaya Gazeta said the PBC would take measures to adjust the interbank lending rate to a reasonable level and help restore confidence in the plummeting stock market. With a prudent monetary policy, the government seeks to curb runaway bank lending and ensure the stability of the financial market.

Reuters pointed out the central bank taught a lesson of risk management to small and medium-sized banks. The news agency noted the PBC did not immediately inject liquidity into the market, showing that it wants commercial banks to focus on attracting stable and guaranteed deposits with which to finance their lending.

Confidence about China

Marcelo Munoz, Dean of Spanish Entrepreneurs in China, said liquidity in the Chinese market is ensured. Recent interest rate rises and fluctuations in the money market have much to do with cyclic factors and the overall situation of the international financial market. He said Chinese economic and financial regulators are fully aware of the country's economic and financial conditions. The Chinese Government is continuing to promote economic restructuring by implementing a prudent monetary policy. He said he is confident about the future of the Chinese economy.

Chung Ki Yong, President of the Samsung Economic Research Institute, is also optimistic. He said at a meeting on June 26 that China is promoting the shift to consumption-driven growth. Although the shift cannot be realized overnight, it is playing a positive role in freeing China's economy from the risk of a dramatic decline in the second half of the year.

Andrei Ostrovsky, Deputy Director of the Far East Institute of the Russian Academy of Sciences, said China's real economy has maintained its growth momentum, which lays the foundation for the healthy development of the country's financial market. Neither fluctuations in stock market indexes nor problems in the banking system portend economic woes.

Bangkok Post quoted Prasarn Trairatvorakul, Governor of the Bank of Thailand, as saying China's "credit crunch" is attributed to tightening by the PBC to cinch up credit, enhance fiscal discipline and control non-financial institutional lenders. The move is not likely to cause any spillover effect to financial markets in Southeast Asia, he added.