China Pledges to Boost Financial Support After Cash Crunch

China’s State Council, headed by Premier Li Keqiang, pledged to improve the effectiveness of financial support for the economy after a cash crunch last month sent interbank borrowing rates to the highest on record.

Misallocation of capital is hampering the restructuring of the economy and the financial sector must play a better role in helping the overhaul, the cabinet said in a seven-page statement released in Beijing today. The State Council said it will maintain its “prudent” monetary-policy stance while ensuring a reasonably supply of money and credit.

Policy makers in the world’s second-biggest economy are trying to reassure investors after turmoil in the country’s money markets roiled global stocks last month. The cash crunch, instigated by the government to clamp down on excessive short-term and speculative lending, may exacerbate a growth slowdown that puts the government at risk of missing its expansion target for the first time since 1998.

“It shows that the State Council led by Li is urging ministries to carry out what’s already been decided -- to make better use of existing credit resources,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “At the same time, it shows the government so far has no intention of boosting overall credit.”

China’s economic growth is stable although there are still “prominent” structural problems, the State Council said in its statement that was released before a briefing in Beijing by officials from the People’s Bank of China and China Banking Regulatory Commission to discuss the document.

Bad Debts

The State Council reiterated the need to improve financial support for small companies, agriculture-related businesses, growth industries including information technology and environmental protection, and industrial upgrading.

Banks should be prepared to write off the bad debts of companies with outdated capacity, and help wind them down and exit the market, it said. At the same time, financial institutions should “pro-actively support key infrastructure projects such as railways,” it said.

Chinese banks can still lend to players in industries with over-capacity problems, Yang Jiacai, an assistant chairman at the CBRC, said at today’s briefing. He cited Wuhan Iron & Steel Co. as a company that should be supported as its cold-rolled steel products are competitive.

Growth Threat

China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s biggest shipyard outside state control, said today it is seeking financial support from the government after orders plunged. Its shares slumped 16 percent in Hong Kong trading after it warned of a first-half loss and said it was “gradually” reducing production.

Rongsheng’s problems underscore the threat to China’s economic growth. The pace of expansion probably slowed to 7.5 percent from a year earlier in the second quarter, according to the median estimate in a Bloomberg News survey, down from 7.7 percent in the first three months of the year. The data are due July 15.

Goldman Sachs Group Inc., China International Capital Corp., Barclays Plc and HSBC Holdings Plc last month pared their growth projections for the full year to 7.4 percent, below the government’s 7.5 percent goal and the slowest pace since 1990.

The State Council pledged to gradually resolve the debt risks of local government financing vehicles and strictly control the risks in property financing.

‘High Alert’

At a separate briefing today, Vice Finance Minister Zhu Guangyao warned the nation must be on “high alert” to the dangers of rising debt in companies set up by local authorities to fund investment projects. The government is still trying to gauge the exact amount of such borrowings, he said, adding that the figure is probably higher than the end-2010 figure of 10.7 trillion yuan ($1.74 trillion) given by the National Audit Office in June 2011.

Liquidity in the financial system is “sufficient,” Zhu said. Some individual financial institutions experienced cash shortages “because they had some problems in their management that needed attention” and the central bank had to give a warning, he said.

Xie Duo, the director-general of the financial markets department at the PBOC, said at a briefing today that China’s financial markets are currently stable and market fluctuations are normal.

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