China markets stabilised on Monday as policymakers offered reassurance that there is ample liquidity in the financial system, bringing to a close June's record credit squeeze which raised fears that China's years of relying on debt to finance massive projects are coming to an end.

China markets continued its rebound on Monday in a sign of growing confidence that credit conditions were improving as cash rates extended their decline from peaks reached during June's credit crunch.

Last month, the People's Bank of China, China's central bank, allowed short-term borrowing costs to spike to record levels on June 20, sending a blunt but effective message to overstretched lenders that it was determined to bring risky credit growth under control.

Financial markets have calmed down substantially since the middle of last week when the PBoC vowed that it would backstop cash-strapped banks with direct injections of money. The stock market too has clawed back some of its losses and interbank rates have eased from their unprecedented peaks, though they remain higher than their normal range before the turmoil.

"The recent instability reflects some of the risks with interest rate liberalisation that proceeds too rapidly, or more precisely relying excessively on interest rates to achieve objectives," Yukon Huang, former World Bank country director for China and senior associate at the Carnegie Endowment for International Peace, told Reuters.

Making a similar point, PBoC governor Zhou Xiaochuan told the China Business News on Monday that the cash crunch was caused by rapid loan expansion at some banks and came as a firm reminder to lenders that they need to adjust their "asset businesses".

Chinese policymakers are concerned that large borrowers who have been living off "cheap credit" in China will begin defaulting as the economy slows, which could in turn have a "cascading effect" within the local financial system, explained Eswar Prasad, professor of economics at Cornell University.

The financial drama renewed fears of a hard landing for the Chinese economy, even as Chinese officials insist that policymakers need to focus more on the quality of life rather than economic growth.

President Xi Jinping on Saturday vowed not to evaluate the performance of Communist Party officials solely based on economic figures, but by their ability to improve the quality of life. "We should never judge a cadre simply by the growth of gross domestic product," he said.

Chinese leaders face a delicate balancing act as they attempt to reform the world's second largest economy. A central goal is to shift the country's traditional engine of growth from investment and exports to domestic consumption - a goal that is likely to lead to slower growth in the short term.

After years of double-digit growth rates, projections for this year are hovering around 7.5 - 7.75 percent.

Economy Watch