The central bank is playing its role in trying to engineer long-term changes that will benefit the economy long-term, analysts say.
When it comes to the economy, China's policy makers have often been criticized for a heavy-handed approach, stepping in at the first signs of trouble. That makes the reluctance by the central bank to pump in cash and alleviate a credit squeeze for local lenders highly significant, analysts say.
Recent noises from Beijing's policymakers have suggested that they are willing to tolerate a slower rate of growth even as signs of weakness show up in data.
While a sharp slowdown in foreign exchange inflows and seasonal factors have dried up liquidity, the central bank has not helped by draining funds from the market and deliberately stayed away in a bid to force local lenders to rein in credit growth which has reached worrying levels.
According to research from Credit Suisse, China's credit-to-GDP ratio surged to more than 170 percent last year from just over 110 percent in 2008. Ratings agency Fitch Ratings has warned that the scale of credit in the economy was so extreme that it would find it difficult to grow its way out of the excesses.
In addition to not helping local lenders by providing more liquidity, there has been growing talk that China's central bank will allow smaller lenders to default on their loans to other banks.
"Right now China is about to experience what that adjustment process looks like and those banks that at are at the margin in terms of risk are going to be in big trouble – it might be something like bank failures or need to merge them," Joel Stern, the chairman and CEO of consulting firm Stern Stewart & Co.
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