China's cash squeeze caused by shadow banking: Xinhua

SHANGHAI (REUTERS) - There is ample liquidity in China and the latest spike in money market rates was a result of market distortions caused by widespread speculative trading and shadow financing, state news agency Xinhua said in a commentary on Sunday.

China's central bank faced down the country's cash-hungry banks on Friday, letting interest rates again spike to extraordinary levels of some 25 percent for some banks, as it steps up the pressure to rein in rampant informal lending.

Comments from Xinhua, seen as a government mouthpiece, confirm analysts' suspicions that the central bank's funding squeeze was aimed at reducing non-bank lending, or shadow banking, which has boomed in recent years.

The cash crunch engineered by the central bank was intended as a warning to overextended banks, but it has also fed fears that a miscalculation could trigger a full-blown crisis.

Xinhua said there was sufficient liquidity in the market, with data showing broad M2 money supply rose 15.8 percent in May from a year earlier, and the total social financing aggregate, a broad measure of liquidity in the economy, was more than 1 trillion yuan.

"The banks are short on cash, the stock market and small- and medium-sized enterprises are short on cash, but there is ample money supply in the market," it said in the commentary.

"Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread." These factors showed that the liquidity crunch was not caused by a shortage of funds but by structural issues that kept money from reaching the real economy, it added.

Overall financing in the Chinese economy increased 52 percent in the first five months of 2013 from the corresponding period last year, which analysts say was led by a surge in shadow banking activity and wealth management products that promised investors high returns.

The central bank's refusal to inject cash into the system, despite a spike in short-term lending rates, suggests its monetary policy has begun to shift from one focusing on quantity to quality of market liquidity, Xinhua said.

China's cabinet has vowed to ensure credit growth supports the real economy and to control the flow of new money into industries struggling with overcapacity.