China's Liquidity Crunch Not a Crisis: Mundell
Worries over a liquidity crunch have been raised as short-term interbank rates rocketed to unusually high levels during the past two weeks in China, causing thecountry's key stock index to dive more than 5 percent on Monday, the biggest daily lossin nearly four years. However, Mundell warned that if the tight credit continues for a long time, it could leadto a crisis.
The credit crunch was a result of excessive lending in the past three years, as now the banks have to curb it, he said.
He said he was not sure about the credit crunch's impact on the country's economic growth in the second half of this year, but if that crunch continues, it could "definitely lower growth." But maybe the government is willing to accept a lower growth if it gets enough debt reduced, he added, saying that a slowdown in growth is not an urgent problem forChina.Antonio Borges, former European Department director of the International Monetary Fund (IMF), expressed more optimism in China's economy, who believed that there is no particular reason to worry about a hard landing of the country's economy. The liquidity shortage is an appropriate attempt on part of the government to correct some of the problems due to the very large amount of liquidity that has been made available, the Portuguese economist told media at the same forum. Uncertainties and instabilities in the market are inevitable reactions, he said, which is"not a surprise."
China's central bank said Tuesday evening that the country is not short of liquidity andthe current cash crunch in the interbank market will gradually ease as seasonal factorsand market panic wanes, and it has boosted liquidity support to some cautious financial institutions to help stabilize the market.
The latest central bank comment came as a swift follow-up to a Monday statement, in which the bank asked the country's overstretched lenders to manage liquidity risks, signaling no intention to help ease the current squeeze.