UPDATE 1-China's June liquidity conditions tighten after crunch

BEIJING, July 12 Fri Jul 12, 2013 10:50am BST

BEIJING, July 12 (Reuters) - A broad measure of liquidity in the Chinese economy fell to its lowest in nearly a year in June as the central bank allowed a credit crunch to send short-term interest rates soaring in message to banks to reduce risky lending.

Data released on Friday by the People's Bank of China (PBoC) showed the total social financing aggregate, a broad measure of liquidity conditions that includes bank loans and bond sales, fell to 1.04 trillion yuan in June, from May's 1.19 trillion yuan.

The fall-off in total social financing was matched by slower growth in money supply. The broad M2 money supply rose 14 percent in June from a year ago, its slackest pace of expansion in six months, and below forecasts for a 15.2 percent gain.

"The figures show the credit crunch last month had crimped both lending growth and direct financing," said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.

"The market panic made it more difficult for companies to get funding due to surging borrowing costs."

China's short-term interest rates briefly shot as high as 30 percent in June after the central bank declined to add cash to an interbank market gripped by tight liquidity conditions, which were caused in part by a seasonal spike in demand for cash.

The central bank has said it had allowed rates to zoom higher to force banks to cut risky lending, and to drive a message home to them that easy credit conditions will not last forever.

New yuan loans issued by banks was the indicator that was surprisingly firm. It showed banks lent 860.5 billion yuan ($140.3 billion) worth of new loans in June, above forecasts for 800 billion yuan.

Foreign exchange reserves were shown to have risen to $3.5 trillion at the end of June, from $3.44 trillion at the end of March.

Bank lending is a central pillar in China's monetary policy as it is controlled by the central bank, which tells banks how much to lend, when to lend and whom to lend to.

The government has not publicly announced its 2013 lending target, but analysts widely expect lending to approach 9 trillion yuan, up from 8.2 trillion in 2012, to counter a cooldown in the world's No. 2 economy.

China is set to release its second-quarter economic growth report on Monday, and analysts polled by Reuters expect growth to have slipped to 7.5 percent between April and June, from 7.7 percent in the first three months of the year.

Some banks believe the outlook for China's economy could darken further in coming months, following comments from top Chinese leaders that suggest Beijing is comfortable with lower growth.

China's finance minister signalled overnight that Beijing may be willing to tolerate economic growth in the second-half of the year significantly below 7 percent, the most sobering comment to date from a senior policymaker.

Bank lending accounts for less than half of total social financing, while off-balance sheet financing has gained prominence after looser regulatory control over interest rates spurred growth in new financial products. (Reporting by Aileen Wang; Editing by Simon Cameron-Moore)

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