Huge cash reserves provide nation with 'a lot of firepower' to keep potential financial crisis at bay

China has the policies and cash reserves needed to keep concerns about liquidity in its banking sector from turning into a financial crisis or threatening the world's second-biggest economy, a senior Asian Development Bank official has said.

"Let's not underestimate the government's capacity to address the challenges that they face. In all of the meetings that I've had with officials in China, in the Ministry of Finance and elsewhere, they are very well aware of the challenges that the economy faces in the long run," Stephen Groff, the ADB's vice-president for Southeast/East Asia and the Pacific, told an audience at Washington's National Press Club on Tuesday.

"What we've seen over the last week has been some issues around liquidity and some questions around the non-bank lending sector, and the government trying to exercise some macro prudential policy to squeeze the non-formal lending sector," he said.

"The government has a huge amount of capacity to address these issues. They have tremendous fiscal and monetary resources at their disposal to address these challenges."

Financial markets in China and around the world had been down for several days before the People's Bank of China, the country's central bank, said on Tuesday that it was prepared to act to keep credit markets functioning, if needed.

A PBOC official told Xinhua News Agency that China's domestic financial institutions hadn't had any payment problems despite the recent credit crunch.

Some commercial banks have had difficulty managing liquidity because they misjudged conditions, the official was quoted as saying.

On Monday, the PBOC had said it would maintain "stable and appropriate" expansion of credit through so-called shadow banking - unregulated loans to businesses deprived of cash by traditional commercial banks.

By Tuesday, interest rates for short-term borrowing among Chinese banks had fallen to 5.8 percent from last week's double-digit levels, although that still exceeded average rates of between 2 percent and 3 percent that prevailed before a lending frenzy that the PBOC has warned banks about.

The PBOC's assurance on Tuesday came too late to prevent another weak performance in Asian markets, but it helped stocks rally in Europe and the US.

Investors' concerns that the Federal Reserve may begin reducing its economic-stimulus program of buying US government debt also helped drive down stocks globally last week.

"I don't think that will be the case," Groff said when asked about the possibility of a Chinese financial crisis.

"We don't have all the information, we don't always know what's happening, but there are huge reserves in the country - there's a lot of firepower that the PBOC and the Ministry of Finance have to address these challenges, and so I would think they would be able to manage them and to manage them effectively."

As China "goes through this process of more economic liberalization, and this restructuring and transition of the economy [to one less driven by exports and more by domestic consumption], there's going to be bumps and hiccups in the road," the ADB official said.

"But I think we shouldn't underestimate policymakers' ability to address these challenges."

The ADB has forecast Chinese GDP to grow by 8.2 percent in 2013 and 8.0 percent in 2014, compared with the 7.8 percent recorded last year.

For Asia overall, the lending institution expects 6.6 percent average growth this year and 6.7 percent next year, up from 6.1 percent in 2012. Inflation also is projected to rise, to 4.0 percent and 4.2 percent, respectively, compared with 3.7 percent last year.

Groff also said a dispute between the US and China over the exit from Hong Kong of surveillance-program leaker Edward Snowden is unlikely to undercut the countries' highly interdependent economic relations.

"There may be table-thumping, but at the end of the day, these things will stop well short of anything that would threaten the economic interdependence of these countries," he said.