SHANGHAI - Investor confidence grew that China's credit conditions were improving as interest rates extended their fall after last week's crunch, with stocks headed for their best day in two months on the back of heavy buying of property stocks on Friday.
The central bank, which let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said it would ensure policy supported a slowing economy.
"China's current economic and financial operations and consumer prices are generally stable, all of which show prudent monetary policy is appropriate and producing good results," People's Bank of China (PBOC) Governor Zhou Xiaochuan told a financial forum.
Without making direct references to the cash crunch, which saw rates spike as high as 28 per cent, Zhou said policy settings were appropriate and the PBOC would balance the need to reform China's economy with the need to keep growth on an even keel.
Bankers have also described as exaggerated fears that they would turn off the taps on new lending after the cash crunch scare and reduce the flow of funds to the already slowing economy.
They say the crackdown on the practice of funding riskier activities in the so-called shadow banking system with short-term cash would have little bearing on regular lending, which is determined by the amount of deposits banks attract.
"Banks have nearly all finished attracting new deposits for the end of this quarter, so we expect money rates should have relatively big room to fall today," said a trader at a state-owned bank in Beijing.
Earlier this week, the central bank moved to allay fears that the crunch could escalate into a financial crisis, bringing some calm to markets after days of turbulence and heavy stock market losses, and it reiterated that message on Friday.