PBOC's caution amid cash crunch will pay off

BEIJING -- The cautious attitude of China's central bank toward injecting cash into the interbank market amid the current liquidity crunch will support the country's economic restructuring and benefit the world economy.

China's short-term interbank rates rocketed to unusually high levels during the past two weeks, but the People's Bank of China (PBOC) took a tough line with the banks faced with the cash crunch until Tuesday, when it boosted liquidity support for some cautious financial institutions.

A confluence of factors has led to the current interbank liquidity shortage, including fast credit growth, the concentrated collection of business income taxes, surging cash demand during the Dragon Boat Festival holiday, changes in the foreign exchange market and banks setting aside money to meet reserve requirements.

The Financial Times newspaper said in a report the PBOC's new strategy signalled the country hoped to force lenders to stop channelling money into the informal banking sector, known as "shadow banking," which has boomed in recent years and fueled concerns about financial risks.

Moreover, it indicated China planned to boost medium- and long-term sustainable economic growth at the expense of short-term growth, the Britain-based newspaper said.

On June 19, China unveiled a set of measures designed to increase the financial sector's support for the country's economic restructuring, including optimizing resource allocation, absorbing private capital, and supporting the upgrading of the real economy.

These measures will cause volatility in the market in the short term, but will eventually bring huge benefits to both the country and the global economy.