OREANDA-NEWS. July 12, 2013. The State Council, China's cabinet, reiterated that it will maintain a prudent monetary policy and a reasonable money and credit scale to support economic restructuring after a cash crunch sent interbank borrowing rates to record highs last month.
 
The State Council said in a guideline issued for the financial sector that China will strike a balance between stabilizing economic growth, adjusting the economic structure, stemming consumer inflation and guarding against financial risks.
 
According to the guideline, the government will use quantitative and pricing monetary policy tools to increase the money velocity and ensure that funds are used more efficiently.
 
"The country's economic operation is generally stable but has outstanding structural problems," it said, adding that a misallocation of capital is challenging the country's financial system, which is "generally sound."
 
The guideline was the latest sign that the country's policy-makers are determined to bring debt-fueled economic expansion under control, despite mounting evidence that points to a slowdown in the world's second-largest economy.
 
The central bank's continuous monetary tightening and a confluence of coincidental factors, such as increasing cash demand ahead of a traditional Chinese holiday and banks' setting aside money to meet reserve requirements, caused interbank borrowing rates to spike last month and sent the key Shanghai stock index to its lowest level in nearly four years.
 
According to Friday's guideline, the central bank will help financial institutions ensure that credit is available for small enterprises, the agricultural, advanced manufacturing and information technology sectors, as well as labor-intensive industries. However, credit will be curbed in sectors struggling with overcapacity.
 
It said China will strictly control financial risks, especially those associated with local government debt and property financing. Financial system stress tests will be conducted "at an appropriate time."
 
The guideline also made other pledges, including private capital flows into the financial sector will be encouraged, market-determined interest rates will be established and credit supplies to key infrastructure projects will be guaranteed.