China pulled back from the brink of a severe cash crunch on Friday, with money rates falling after reports that the People's Bank of China, the central bank, had acted to alleviate market stresses.
Nevertheless, interbank conditions remained tight and analysts said the PBoC would continue its hard line of recent days to compel financial institutions to pare back their leverage.
Local media reported that the central bank had provided targeted cash injections to the country's biggest banks after the interbank market almost froze on Thursday, though there was no official announcement of any special provisions.
One bond trader told the Financial Times that the PBoC had given verbal instructions to major banks to resume lending to each other, in order to get the interbank market working again.
The seven-day bond repurchase rate, a key measure of liquidity, fell 227 basis points to 8.5 per cent, indicating that the threat of an acute financial crisis had significantly receded.
But short-term lending rates remained roughly double their normal level - high enough to cause serious pain for over-leveraged financial institutions. The central bank has steadfastly refused to conduct any large-scale, system-wide cash injections over the past week despite calls for help from lenders.
The Shanghai Composite Index, the country's main stock index, fell nearly 1 per cent in the morning trading session, adding to its 7 per cent tumble over the past two weeks.
"We maintain our view that the monetary policy stance will remain tight, at least until the second-quarter GDP release on July 15," said Zhang Zhiwei, an economist with Nomura Securities.
"We believe that recent action by the PBoC reflects the government's determination to take aggressive action to contain financial risks," he added.
Overall credit has grown by about 22-23 per cent in China this year, up from 20 per cent in 2012, after a surge in "shadow" lending by trust companies and banks through off-balance-sheet vehicles.
That has added to an already-rapid accumulation of leverage in the economy. The overall credit-to-gross domestic product ratio has jumped from roughly 120 per cent five years ago to closer to 200 per cent today.
"We believe that the PBoC is acting in line with the government's efforts to deleverage, rebalance and position the economy towards a path for sustainable growth," analysts with Barclays said in a note.
"Though we believe that the PBoC is likely to stabilize the interbank market in the near term, short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions."