Banks' liquidity set to remain ample: PBOC

The central bank reiterated on Wednesday that banking liquidity is ample and will remain so in the near future, indicating it will not easily pour money into the banking system despite a cash squeeze earlier this year that caused market turmoil.

The People's Bank of China said in a statement on its website that banking liquidity "rose sharply" recently on the back of the country's wide trade surplus and the United States Federal Reserve's decision to delay tapering of its quantitative easing program, which caused an inflow of funds into China.

For instance, M2 - the broader measure of money supply - rose 14.2 percent in September, 1.2 percentage points higher than the full-year target of 13 percent.

"China's banking system liquidity is still ample in general," the statement said, adding that it believes it will remain at a reasonable level in the near future.

Many financial sector observers are speculating that the PBOC will be more lenient when it comes to liquidity injections in the future after the credit crunch in June pushed China's money market rate to a staggering 30 percent.

At the time, the central bank refused to douse the rate with money in the belief that liquidity was generally adequate and that the rate hike was caused by portfolio mismanagement by some banks. It's widely believed that the PBOC let the crisis unfold as a punishment to some lenders thought to have speculated too heavily, but the move also caused market panic and, at some point, speculation on the solvency status of some lenders.

A senior executive at one of China's "Big Four" lenders said in August that "both commercial banks and the PBOC have to take lessons from the crisis", although he refused to specify what exactly had the central bank done wrong.

"Clearly, the PBOC has decided to stand firmly behind its 'no-easy-money' policy," said Wang Jianhui, chief economist at Southwest Securities Co Ltd.

In September, the inter-bank lending rate and the bond repurchase rate dropped to normal levels of 3.47 percent and 3.49 percent, respectively, with minimal fluctuation. The PBOC said that one of its main motivations in subduing the rate was to urge lenders to restructure their balance sheets and rebalance their debt structures.

Chinese lenders expanded their balance sheets rapidly in September, providing 787 billion yuan ($127 billion) in new loans, much higher than the consensus estimate of 675 billion yuan.

CCB International Securities Ltd said in a research note that the growth was driven by corporate demand for short-term loans. Medium- to long-term loans also saw strong activity, benefiting from the "mini-stimulus" policies to encourage infrastructure development and stabilize economic growth.

The total social financing aggregate - a broad measure of liquidity in the economy - retreated in September but was still at a high level of 1.4 trillion yuan. CCB International said that the decrease was a result of a pro-growth monetary stance, which led to active off-balance sheet lending.

The PBOC added in its statement that it will stick to its prudent monetary policy, with some fine-tuning, to keep banking system liquidity at appropriate levels.