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China’s central bank pledged to maintain loose monetary policy to support economic recovery and ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a surge in lending.

In a statement that analysts said was intended to calm skittish markets, the People’s Bank of China Vice Governor Su Ning said the central bank “will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum.”

The statement was posted on the bank’s website after Wednesday’s 5 percent fall in the Chinese stock market, its biggest daily drop in eight months, which had been sparked in part by worries that Beijing would restrict bank lending.

China has in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China’s monetary tightening in 2008 and it was subsequently blamed for contributing to the economy’s sharp slowdown in the fourth quarter.

Su’s comments appeared to rule out an imminent return to a strict, central bank-directed quota system.

“They are responding to an incorrect interpretation by the market,” Ting Lu, economist with Merrill Lynch in Hong Kong, said.

“There will not be credit quotas this year, though there could be window guidance,” Lu said, referring to more informal directions that Beijing gives banks to influence their decisions.

The benchmark Shanghai stock index clawed back some of its lost ground, closing up 1.7 percent in topsy-turvy trading business card.

Chinese banks lent a whopping 7.37 trillion yuan ($1.08 trillion) in the first six months, easily topping the full-year figure of 4.91 trillion yuan in 2008 and igniting concern that excess liquidity was leading to stock and property bubbles.

Two initial public offerings in Shanghai soared beyond expectations this week, underlining how speculative fever had returned in full force to Chinese markets.

Beijing has tamped down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured.

CREDIT QUOTAS

“We will focus on market tools, not quantitative-style control methods, flexibly using many kinds of monetary policy instruments,” Su said. In this context, market tools likely referred to central bank’s regular selling and buying of bills in the open market to influence liquidity.

“We will guide appropriate monetary and credit growth, strengthen the sustainability and do what is necessary to drive the economic recovery and to ensure stable and quite fast economic growth,” he said.

Dong Xian’an, chief macro-economist with Industrial Securities in Shanghai, said firm lending quotas were still very much on the table, because they are a direct way to manage the underdeveloped and occasionally unruly Chinese financial system. 

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