China’s new rulers, by initiating the tightest credit squeeze in more than a decade, have signalled to banks and other financial players that they need to improve their lending practices and better safeguard their assets. The decision by China’s central bank to ignore a jump in the cash rate that was sparked by rumours that a small bank was in trouble has consequences for the country’s economic growth.
On June 20, China’s three-month-old government failed to inject enough liquidity into the money market and
short-term borrowing costs climbed. The one-day repurchase rate, one barometer of interbank lending, spiked to a record 12.9%, compared with an average of 2.51% in the first five months of the year. (The more-alarmist reports led with the interbank-lending or cash rate reaching 30% on June 20.). Analysts surmised that the inaction was a warning to banks to rein in the explosion of lending and investment that Beijing kicked off in 2009 to protect China’s economy from the global financial crisis.
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