'No systemic risk' from ongoing liquidity crunch

Louis Kuijs, chief China economist at the Royal Bank of Scotland, said: "In our view it remains highly unlikely that pressures stemming from financial risks would become systemic enough to threaten China's financial stability or the overall economy."

He said containing non-bank lending and the associated risks is likely to have been a key consideration in the firming up of the monetary stance.

"We do not think the financial risks emanating from the non-bank financial system are large and systemic enough to overwhelm macroeconomic and financial stability in China."

Since June 13, interbank market interest rates have soared as liquidity conditions tightened.

The seven-day repurchase rate, an indicator of interbank funding availability, rose 270 basis points to 10.77 percent in Shanghai on Thursday, the highest level since March 2003, while the one-day rate increased by 527 basis points to a record high of 12.85 percent.

Analysts have said several specific factors contributed to the tightness, including misunderstanding between the markets and the PBOC about the central bank's policy stance and implementation, a change in the timing of corporate tax payments, strong liquidity demand around a national holiday and the impact of measures taken in May to clamp down on capital inflows.

Turbulence in international capital markets after indications of a possible tapering off of a third round of quantitative easing in the US added uncertainty.

At the end of last week, the authorities took some steps to ease the problems. Media reported some emergency financing was arranged to one or two individual banks to ensure they could honor their contracts and the PBOC injected some modest amount of liquidity into the market.

Interbank market rates became a little less volatile last Friday afternoon and moved lower. The overnight rate ended the day at 8.7 percent, sharply off the highs.