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The People’s Bank of China will continue, according to an official statement issued through their press agency Xinhua News, to act prudently in the coming months regarding liquidity deposits in Chinese banks. However, they have also tried to calm things down in terms of volatility on the Shanghai Composite by stating that they will use every tool necessary in order to ensure that the economy does not worsen.

This is a hint that if the worst comes to the worst, they will provide bail-outs for banks.

Until recently the People’s bank of China was very much set against using any form of bailing out of Chinese banks since the objective was to try to get rid of shadow banking in the economy which was undermining it. Shadow banks are detrimental to the traditional banking sector since they firstly take business away from it (by providing better rates of return on investment, through taking greater risks) and secondly because they cannot be controlled in the same way as the banking sector.

This has led to an increase in loans in the past. However, it has taken large sums of money away from traditional banks. The Chinese economy has seen some major banks being strapped for cash recently as a consequence.

The statement from the People’s Bank of China, despite remaining very unclear as to the actions that might be taken, has had the benefit of stabilizing the Shanghai Composite today.

This is a summary of the article originally published on  ToTheTick. Continue reading it there.