Liquidity in China's banking system is sufficient and the central bank should be more cautious over liquidity management, economists Lu Feng and Liu Yuanchun said Sunday in an exclusive interview with China.org.cn.

"Banks do not lack cash", said Lu Feng, vice president of the National School of Development at Peking University, explaining that China's commercial banks have misdiagnosed the central bank's policy orientation. "[Therefore] the tight liquidity that appeared over the last few days was a short-term phenomenon, not unlike a rich man who didn't take his money with him", said Lu.

He noted that in the past when the market was afflicted by tight liquidity, the central bank would inject funds into the system. This time, however, the central bank did not step in to help the country's commercial banks, which resulted in tight liquidity in the market. Lu said that the central bank's refusal to step was intended as a warning to China's commercial banks that they should not automatically expect the central bank to step in.

To ease market fears, the central bank said on June 25 that it had provided cash to institutions facing temporary shortages to maintain overall stability. It seems that the liquidity crunch of the last month has already subsided, but meditation surrounding the risk exposure and liquidity management of commercial banks is ongoing.

"The central bank should be more cautious over the liquidity management in the market, "said Liu Yuanchun, vice president of the School of Economics at Renmin University.

He pointed out that there are two issues underlying the short-term liquidity risk in China's banking system. The first relates to the fact that the problems in China's financial sector, including the problematic structure of commercial banks' capital spending and their mode of operation; The second issue is that the central bank needs to adopt policies to ensure that liquidity in the market is controlled and managed.

"The general direction of China's macro-economic regulation and control—namely prudent monetary policies and financial regulation--is absolutely correct, but the central bank should take multiple measures and be more cautious to manage short-term liquidity so as to avoid a repeat of liquidity risk", said Liu.

Lu added that the temporary phenomenon of tight liquidity also indicated that the central bank would advance financial regulation in a bid to offset lingering macro-economic distress. He said: "Consequently, commercial banks have to adjust their behavior and examine their revenue models, capital turnover mechanisms and cash management."