BEIJING, Jan. 21 (Xinhua) -- The Chinese central bank pumped 255 billion yuan (42 billion U.S. dollars) into the money market on Tuesday, easing concerns over financial risks in the world's second-largest economy.
The liquidity injection came after the Shanghai Composite Index fell below the much-watched 2,000 points level on Monday and to its lowest in six months. A credit crunch in June pounded market sentiment and plunged the benchmark index downward by more than 5 percent in one trading day.
The reversed repo purchase, which had stopped for four weeks, brought down rates for the seven-day repo and the Shanghai Interbank Offered Rate that surged on Monday. The stock market rebounded 0.86 percent on Tuesday.
"The recent news of a potential trust default and the fact that the Shanghai stock index dropped below 2,000 suggest market confidence is weak, which may also have put pressure on the government to take action and restore confidence," said Zhang Zhiwei, chief China economist at Nomura.
The Industrial & Commercial Bank of China, China's largest bank, and China Credit Trust, a shadow lender, have been embroiled in a possible wealth management product default, according to media reports.
It is feared that the potential three-billion-yuan default could trigger a ripple effect in China's shadow banking, which has rapidly increased its lending to real estate developers, industries beset by overcapacity and local government financial vehicles during the last two years.
Analysts believe the cash crunches in June and December fortified the central bank's intention to maintain liquidity and avoid sharp money rate rises.
The People's Bank of China said the move was designed to stabilize the money market and meet surging cash demand ahead of China's seven-day Spring Festival holiday, which starts on January 31. The central bank also asked financial institutions to enhance liquidity and debt management.
"We don't think the monetary policy stance has turned toward loosening, because the current GDP growth rate is still acceptable to the government," Zhang said.
Curtailing shadow banking and local government debt were listed as key tasks this year at a December conference setting the tones for economic polices, highlighting Chinese leadership's resolve to de-leverage the economy.
"Unless the activity growth rate were to surprise on the downside, we would expect top leaders' focus to remain on long-term structural reforms and the threshold of policy easing to remain high," Helen Qiao, chief Greater China economist at Morgan Stanley, wrote in a report last week.
Morgan Stanley said policy makers would likely push forward reforms and strike a balance between partial de-leveraging and service sector liberalization to stabilize growth.
Meanwhile, some economists expect China to see more liquidity volatility in 2014 as regulators may further liberalize interest rates and the financial market.
UBS said in a report that such processes usually led to higher and more volatile interest rates.
"The government is attempting to achieve a tightening bias to slow credit growth; and the rapid development of China's shadow banking activities has made the system more sensitive to both a credit event in the shadow credit market and regulatory tightening," according to UBS.