Chinese banks hurting as government chokes money supply

The People's Bank of China, however, describes monetary policy as “prudent”.

Losses among China shares sped up yesterday after PBOC said liquidity in the country's financial system remains "reasonable," repeating a line from a Sunday commentary in official media.

Among the Big Four Chinese state-owned banks listed in Hong Kong, Agricultural Bank of China and Industrial and Commercial Bank of China posted the largest percentage losses at 2.9% and 2.4%, respectively.

PBOC claims the latest surge in money market rates was a result of market distortions caused by widespread speculative trading and shadow financing. It pledged to "fine tune" existing "prudent" monetary policy.

Analysts, however, now view “fine-tuning” as meaning a tightening of liquidity.

Analysts said people are quite jittery ahead of the first of two open-market operations for the week starting today. They noted that it's tough to call a bottom in this market environment.

Yesterday’s slide came despite the overnight repo rate (a key indicator of liquidity in China's interbank market) falling by 193 basis points to 7.32% on a weighted-average basis, its lowest since June 18. Among the biggest losers were smaller banks more reliant on short-term interbank funding.