SHANGHAI: The interest rate China's banks charge to lend money to each other fell sharply Friday, easing fears of a liquidity shortage after hitting record highs.
However, analysts said the central People's Bank of China (PBoC) would likely keep a tight grip on credit owing to worries over too much bad debt.
The seven-day repurchase rate -- a benchmark for interbank borrowing costs -- fell to 8.33 percent from Thursday's close of 11.62 percent, amid rumours the PBoC had pressured lenders to release funds.
The rate has spiked at record highs in the past two weeks as the central bank refrained from injecting more liquidity despite a slowdown in the economy.
The soaring cost of borrowing has led to a credit crunch, which has sending stocks tumbling and means banks are unable to lend.
However, Chinese media reports said Friday that the central bank had injected 40 billion yuan ($6.3 billion) into several banks to relieve the cash crisis.
Zhang Zhiwei, an economist for Nomura Securities in Hong Kong, said China's monetary policy stance had not changed despite talk of the liquidity injection.
"Recent action by the PBoC reflects the government's determination to take aggressive action to contain financial risks," he said. "The monetary policy stance will remain tight."
The Bank of China, one of the country's "Big Four" banks, denied a media report it was unable to complete transactions due to a fund shortage, the official Xinhua news agency said late Thursday.
Recent weakness reflected in economic statistics had prompted some analysts to suggest the PBoC would ease monetary policy by lowering the amount of cash lenders must keep in reserve but officials have so far not moved.
"The (PBoC) is worried by the unsustainable growth rate of credit and is sending a message that market participants should not take for granted that they will always have access to cheap interbank loans," Capital Economics said in a research report this week.
Chinese banks had already scaled back lending in May from April, official figures showed, prompting analysts to warn of threats to economic growth.
The economy, the world's second largest and a crucial driver of global growth, expanded 7.8 percent in 2012, its worst performance in 13 years.
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