WRAPUP 1-China markets perk up as credit crunch fears fade
* Cash rate falls to lowest since before squeeze, stocks rise
* Fears of crisis subside, but conditions to stay tight
* Property shares lead rally
SHANGHAI, June 28 (Reuters) - Investor confidence grew that China's credit conditions were improving as interest rates extended their fall after last week's crunch, with stocks headed for their best day in two months on the back of heavy buying of property stocks on Friday.
The central bank, which let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said it would ensure policy supported a slowing economy.
"China's current economic and financial operations and consumer prices are generally stable, all of which show prudent monetary policy is appropriate and producing good results," People's Bank of China (PBOC) Governor Zhou Xiaochuan told a financial forum.
Without making direct references to the cash crunch, which saw rates spike as high as 28 percent, Zhou said policy settings were appropriate and the PBOC would balance the need to reform China's economy with the need to keep growth on an even keel.
Bankers have also described as exaggerated fears that they would turn off the taps on new lending after the cash crunch scare and reduce the flow of funds to the already slowing economy.
They say the crackdown on the practice of funding riskier activities in the so-called shadow banking system with short-term cash would have little bearing on regular lending, which is determined by the amount of deposits banks attract.
"Banks have nearly all finished attracting new deposits for the end of this quarter, so we expect money rates should have relatively big room to fall today," said a trader at a state-owned bank in Beijing.
Earlier this week, the central bank moved to allay fears that the crunch could escalate into a financial crisis, bringing some calm to markets after days of turbulence and heavy stock market losses, and it reiterated that message on Friday.
Friday's bounce showed some investors had shrugged off their pessimism and were increasingly seeing their glass as half full, at least for now.
The index of the largest Shanghai and Shenzhen stocks ended the morning up 1.6 percent, buoyed by financial and property stocks surging on reports that authorities had granted them permission to resume stock market fundraising.
The index is still down about 5 percent for the week, and 12 percent for the quarter. Analysts say overall sentiment remains fragile given concerns about funding conditions ahead and China's longer-term economic outlook.
"Although the situation has stabilized, the problem is that we will face a leveraging situation in China, which will impact growth later on," said Alex Wong, director of asset management at Ample Finance in Hong Kong.
"That will limit the upside of China shares and also make Hong Kong underperform other Asia markets," he said.
"The authorities sent a message to the market and people will probably be very cautious in lending and even borrowing."
Money traders also said the market was not quite out of the woods yet, even as fears of a sustained crunch faded.
The weighted average for the benchmark seven-day repo rate was down around 60 points at about 6.15 percent -- almost half of last Thursday's record 11.62 percent, but still well above its usual range of 3-4 percent.
The overnight rate fell about half a percentage point to 4.96 percent.
"There will still be lots of cash demand in the first half of July, including the need for banks to pay extra reserves based on end-June deposits and to pay cash dividends to stock investors," said a dealer at a Chinese commercial bank in Shanghai. "Overall market sentiment remains very cautious."