CHINA'S central bank staged a dramatic turn from nanny to "tiger mom" in the past two weeks, presiding over what probably the nation's worst liquidity squeeze in a decade.

By not injecting money into the system for the usual end-of-quarter cash crunch, the People's Bank of China orchestrated a mini-credit crisis that sent money rates soaring and the stock market crashing to a four-year low. It later relented and injected some liquidity to ease the panic.

Banks normally need extra money at the end of the quarter to meet regulatory requirements on deposits and "window dress" their financial statements. The extra cash usually comes from central bank liquidity operations that can either loosen or tighten credit in the interbank market.

Premier Li Keqiang's comments on June 19 that banks are not short of money and should make better use of the money on hand was the first signal that something had changed.

The central bank's message in withholding liquidity was clear to banks that they need to operate more efficiently, gear their lending to productive economic works, control risk and ensure that their balances sheets can handle emergencies.

At the same time, the central bank was signaling its displeasure with the "shadow banking" market - a gray area estimated at between 20 to 40 trillion yuan (US$3.2 to 6.5 trillion), where unregulated lending is aimed at making profit, not creating productivity.

In a statement on Tuesday, the central bank clarified for the first time what was happening and soothed market nerves by injecting more money into the system.

It said that it offered money for some banks in the past a few days and required large banks to stabilize the market. It said it would continue to provide cash to institutions that support the real economy.

In what might be interpreted as a veiled threat against shadow banking, the central bank said in a statement that it "will provide liquidity support to financial institutions that face temporary shortages but have been lending, at prudent amounts and pace, in line with government policy and in support of the real economy."

The central bank also said that China's banks have more than 1.5 trillion yuan in cash reserves, one-third more than is really necessary. It hinted at the belief that some banks were manipulating the Shanghai Interbank Offering Rate during the crisis and pledged take a serious look at their activities.

When markets closed on Tuesday, the overnight lending rate had halved to 5.83 percent from a record on June 20, the central bank said.

The share market staged a remarkable rebound on Tuesday, erasing nearly all the day's losses. By Wednesday, the benchmark Shanghai Composite Index was down for six consecutive days, but daily decline narrowed from Monday's 5.3 percent to 0.4 percent.

Is the crisis over? Economists and many ordinary people aren't so sure.

After the market disruption, forecasts of Chinese growth this year were downgraded. Economists said tighter credit would translate to slower growth.

DBS on Tuesday cut its forecast on China's GDP growth this year to 7.5 percent from 8 percent. The view was echoed by downgrades at Standard Chartered, JPMorgan Chase, Barclays and others.

Goldman Sachs and China International Capital Corp went so far as to speculate that the "unprecedented" moves under the leadership of Premier Li may result in China's missing its own economic growth forecast of 7.5 percent for the first time this year.

Though the central bank's dramatic moves effectively set off alarm bells at banks, they do not necessarily solve deep-seated problems besetting the financial industry.

Hu Bin, a senior analyst at Moody's Investors Services, said it would be prudent for China to curb its credit growth to more sustainable levels in order to prevent a buildup of excessive leverage, but that central bank's aggressive manner poses risks to smaller banks and to public confidence.

"The method the PBOC chose to keep the banking system short of liquidity entails risks that could have credit negative implications, particularly for small and mid-size banks that are more dependent on the interbank market," Hu said.

"While the trigger for the liquidity crunch appears to have been PBOC policy rather than banks' loss of confidence in the credit standing of other banks, rumors did circulate last week about some banks being late in making payments," he said. "Persistent money market volatility similar to what we saw last week could result in lasting damage to confidence in the interbank market."

Public unease

Rumors, however scurrilous, can deeply affect ordinary people who haven't got a clue about complicated systems within the financial industry. The lack of transparency in banks' credit systems, the lack of insurance on deposits and the usual ambiguity of monetary authorities when rumors occur are enough to cause public unease, from metro stations to office workstations.

Paramount is the fear by savers that they might lose their deposits without warning. That anxiety also spills over into decisions about buying wealth management products now popularly offered by banks and even to fears that housing prices will rise if people are more desperate for cash.

A badly timed technology glitch on Sunday that prevented people from withdrawing money from Industrial and Commercial Bank of China ATMs didn't do much to shore up public confidence.

When the stock market tumbles in a crisis, retail investors who comprise about three-quarters of trading are always the worst hit. Confidence in the stock market was thin long before the most recent crisis.

For banks, the liquidity crisis was just another shot across the bow. They are already facing lower margins as regulators deregulate the banking sector.

"Liquidity to the economy is like blood to humans," Wang Jian, a researcher at Federal Reserve Bank of Dallas, wrote on his micro-blog. "A liquidity crisis will cause market panic and hurt financial institutions. The right solution to the risks of shadow banking is interest rate liberalization rather than refusing to help."

Standard Chartered Bank economists predicted that China might soon take another step toward interest rate reform by raising the maximum on deposit rates and lowering the minimum on benchmark lending rates.