SHANGHAI (REUTERS) - The recent cash squeeze in China's interbank market was caused by rapid loan expansion at some banks and is a timely reminder that they need to adjust their businesses, China's central bank governor Zhou Xiaochuan said in an interview with China Business News.

The market volatility was the result of rapid loan growth in the first week of June, with excessive expansion in commercial paper business at some banks, reflecting lenders' strong impulse to expand credit towards the end of June, Mr Zhou was quoted by the newspaper as saying.

The central bank refused to inject liquidity into the market despite a surge in interbank rates because it wanted the banks to adjust their practices, and the message has been correctly understood by the market, Mr Zhou said.

Me Zhou said banks had already scaled back their balance sheets since mid-June, and that as the lender of last resort, the central bank would definitely help institutions with acute liquidity shortages to maintain financial stability, the newspaper said.

Mr Zhou added that the central bank would guide financial institutions to maintain reasonable credit levels to support the growth of the real economy, the paper said.

Mr Zhou reiterated that China's current economic situation was smooth and inflation stable, and that a prudent monetary policy was appropriate.

China's chief banking regulator said on Saturday that liquidity in the banking system was sufficient and pledged to control risks from local government debt, real estate and shadow banking.