China’s central bank sought to reassure money market traders that a spike in short-term interest rates does not signal a dramatic tightening of liquidity, sources said, in an apparent move to avoid a repeat of a credit panic that roiled markets in June.
The People’s Bank of China also warned against “excessive leverage”, or borrowing, that would leave banks overexposed to sudden spikes in demand for cash, said the sources, who attended a closed-door meeting between a PBOC official and traders from major financial institutions late last week.
China’s short-term interest rates began rising sharply last week, leaving banks stretching for funds even as the central bank repeatedly declined to inject fresh cash.
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As a result, the most commonly traded instruments jumped, with the benchmark seven-day bond repurchase contract quoted at nearly 7 percent on October 24, its highest level since June.
Asian shares fell in response on Thursday as investors feared tighter monetary conditions could weigh on China’s economic growth.
