The acute phase of China’s cash squeeze appears to have ended, with no major casualties to mention.

But analysts say the crunch’s fallout may be felt for months to come in the form of slower Chinese growth and weaker appetite for commodities from copper to oil.

The People’s Bank of China made clear on Tuesday that it would not let banks fail, offering liquidity support to cash-strapped institutions.

The promise of a backstop helped restore calm to financial markets in China and abroad, but another message in the central bank’s statement hinted at new rules of the road in the Chinese banking industry.

“Banks must prudently control the liquidity risks that arise from excessively rapid expansion of credit,” it said.

Moreover, it added that it would only come to the assistance of banks that act in line with the government’s “macro-prudential requirements”.

It in effect amounted to an order to banks to rein in credit growth and curb their appetite for risky business practices such as shovelling deposits into off-balance-sheet ‘ shadow banking’ vehicles.

Regulators have made such warnings before, but the spike in interbank rates – until two weeks ago a reliable source of cheap wholesale funding – showed banks that this time the government was deadly serious and would force them to bear at least some of the consequences of any loans going bad.

“The recent episode is likely to have a significant impact on financial institutions’ behaviour, and the pace of growth in broad credit. In particular, shadow banking should moderate,” said Peng Wensheng, an economist with China International Capital Corp.

Stocks in Shanghai ended down just 0.4 per cent, a quiet day after stomach-churning drops and wild swings over the past week.

However, the money market, which has been at the epicentre of the recent turmoil, remained tight. Short-term liquidity and interbank borrowing rates were all about twice as high as their pre-crunch levels.

That tightness is already spilling over into what Chinese regulators are fond of referring to as the “real economy”.

Caixin, a financial magazine, reported that a series of major Chinese banks had decided to stop lending to businesses and individuals for the remainder of this month to ensure they remain below the end-of-quarter 75 per cent loan-to-deposit ceiling mandated by regulators.

“Until recently there was quite a bit of speculation that the government might be more accommodative because of the weak economic data,” said Louis Kuijs, an economist with Royal Bank of Scotland. “Now it seems that the government wants to be seen as not going for that stimulus, and that does create some downside risks for growth.”

The Chinese economy slowed to 7.7 growth year-on-year in the first quarter from 7.9 per cent growth at the end of last year. Slowdowns in investment and industrial output in April and May already pointed to a weaker second quarter. With a tighter monetary environment likely to weigh on credit issuance, analysts have been racing to revise down their outlooks for the remainder of the year and into next year.

Goldman Sachs, Barclays and HSBC have all cut their China growth forecasts to 7.4 per cent for this year, less than the government’s target of 7.5 per cent. It would be the first time that China has missed its annual growth target since the Asian financial crisis 15 years ago.

An optimistic interpretation of the cash squeeze is that it shows China’s new leaders have an appetite for necessary but painful reforms to change the country’s economic structure and put it on a path of more sustainable, if slower, growth.

“That’s reading a lot into what’s happened in the past 10 days,” Mr Kuijs said. “I’m not sure if it’s given us solid ground for forming a definitive view about the reform orientation of the government.”

Clearer announcements about everything from fiscal policy to urbanisation plans will be needed to get a real measure of Beijing’s reform agenda, he said.

China is likely to experience short-term pain as its economy slows, but it is far from certain that this will ultimately translate into the long-term gain of a sounder growth model.

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