China's central bank has been treading carefully to manage a policy dilemma of deleveraging while avoiding a liquidity crunch.
On one hand, the People's Bank of China (PBOC) needs enough liquidity to maintain financial stability and support the rebounding economy; on the other, it cannot loosen the credit floodgates too much, or the deleveraging process will falter.
The PBOC vowed last month to strike a balance between the two competing goals. Yet the balancing act was complicated by a credit strain due to seasonal factors such as quarter-end regulatory reviews and tax payments.
The credit strain has pushed up money market rates in recent weeks, fueling concerns about a repeat of the market turbulence in June 2013, when a credit crunch pushed the interbank interest rates to double digits.
The one-year Shanghai Interbank Offered Rate (Shibor), a key indicator of interbank borrowing costs, has been rising since April 14. On Monday, the rate reached a more-than-two-year-high of 4.4172 percent, surpassing the benchmark one-year lending rate.
Shibor for one-month loans rose 4.19 basis points to 4.6273 percent, also the highest level in more than two years.
Despite the strain, officials and analysts believed the chance of a credit crunch is quite slim.
The Financial News, a central bank-affiliated newspaper, ran an editorial Saturday, saying a credit crunch is highly unlikely as the overall liquidity condition in the banking system remained stable.
Authorities have already made moves ahead of the expected Fed rate increase, while the MPA, a formal evaluation covering loans and other assets, together with the ongoing financial scrutiny, will actually help stem financial risk, said the newspaper. "There is no need to exaggerate the liquidity risk."
To soften the impact of the liquidity strain, the PBOC injected a massive 498 billion yuan (73.3 billion U.S. dollars) into the financial system via medium-term lending facility (MLF) on June 6, which is described by the newspaper as "a clear signal" of keeping liquidity "basically stable."
Although the tightening trend is unlikely to change, "we expect constant policy tweaking to avoid triggering a major credit event or surge in market rates, especially in June," said UBS economist Wang Tao.
As China shifted to a prudent and neutral monetary policy this year, the central bank has left the benchmark interest rates on hold and used diversified monetary policy tools to manage liquidity.
Despite emerging downward pressure, the Chinese economy has remained stable this year, creating room for the central bank to implement the prudent and neutral monetary policy, said Huang Wentao, an analyst with China Securities.
To contain financial leverage and risks without destabilizing growth, Wang Tao expected the government to constantly adjust the pace and magnitude of its supervisory tightening to strike a delicate balance.
China's GDP expanded 6.9 percent in the first quarter this year, up from the 6.8-percent growth in the previous quarter and 6.7 percent for 2016. The government targets annual growth of around 6.5 percent for 2017.