China's central bank rarely explains its actions in public and keeps markets guessing on policy, but the angst created by its stand off with banks in the money markets is prompting calls for it to change tack.
The People's Bank of China (PBOC) let short-term interest rates spike to extraordinary levels this past week as it refused to inject funds into money markets.
Some observers saw it as an attempt to force banks to stop channelling money into the informal banking sector, known as "shadow banking", which authorities worry is creating significant credit risks.
For years, the central bank has made stability its watchword, which for the money markets meant it would always provide liquidity when cash conditions tightened. As the central bank is now standing back while banks scramble for cash, markets are left uncertain as to whether there has been a fundamental change in policy.
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In effect, there seems to be a competing policy objective, said Fitch Ratings Senior Director Charlene Chu.
"The real uncertainty in the market comes down to people not really knowing which of those is more important at which point in time," she said on the sidelines of a conference in Sydney.
Traders blame the absence of a clear and public signal from the central bank for panic at some smaller banks, as the cost of borrowing overnight funds spiked to as high as 25 percent for some institutions.
Those jitters spread more broadly late last week, as rumours - passed on by Chinese media outlets - that two major banks had received emergency funds from the PBOC circulated in financial markets in London and New York on Thursday.
The lenders denied the rumours, after which money markets calmed somewhat on Friday.
The panic in the otherwise arcane marketplace even sparked a flurry of activity on social media as the Twitter-like service Weibo lit up with comments from Chinese worried that a financial crisis was unfolding.
Throughout, the central bank has remained silent. Several telephone calls from Reuters to the PBOC for comment went unanswered.
To many market players, the episode highlights that it is time for the PBOC to shift away from its penchant for opacity in conducting its business. In the past that has included carrying out special market operations behind the scenes and announcing changes in policy interest rates out of the blue and with a minimum of explanation - often at odd hours of the day and at weekends.
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"There should be a lesson to be drawn from this," said Zhao Qingming, an economist at China Construction Bank.
The information asymmetry between the central bank and market participants led to confusion and exacerbated the cash crunch, traders said. Some banks dared not lend out money to other banks even though they had cash at hand due to the uncertainty, Zhao said.
"I think the central bank should improve its communication with the market. At least, it should tell the market clearly what its intention is at the very beginning," he said.
Several money market traders reached by Reuters also expressed a similar wish for greater clarity from the PBOC.