Rumours abound as Chinese credit squeeze turns around
China's central government made no official announcement on the situation and it remained unclear whether policymakers had intervened, but short-term interest rates fell sharply on Friday from the day before, when they had reached some of the highest levels in a decade.
Still, rates for Chinese institutions seeking inter-bank financing on Friday were substantially higher than they had been a few weeks ago.
Financial experts said they expected the higher interest rates to persist for some time because the Chinese government appeared to have abandoned its long-standing policy of responding to any hint of an economic slowdown by expanding credit.
Analysts say the government is holding back because it is determined to rein in excess credit expansion and to avert a financial crisis that could result from years of poor lending practices and over-investment. There are also hints that a huge shadow banking operation in China could be masking more serious financial risk-taking.
The government's reluctance to increase bank liquidity is troubling investors because of concerns that China's economy is weakening much faster than expected.
Economists in China cut their growth forecasts sharply in the past week, though projections remain robust at 7 per cent. Prices of Chinese shares plunged on the Shanghai and Shenzhen stockmarkets, ending one of the worst weeks in four years.
As credit markets began to freeze up and mistrust among banks spread, rumours circulated of defaults. Late on Thursday, the Bank of China was forced to issue a statement denying reports that it had defaulted on inter-bank payments.
By late on Friday, the markets had settled. The overnight lending rate between banks had dropped to 8.49 per cent, down from a record-high of 13.44 per cent on Thursday, but still much higher than last month's levels of less than 4 per cent.
The situation remains volatile. Another benchmark rate for bank-to-bank borrowing costs, the seven-day repurchase rate, opened on Friday at 8.1 per cent, briefly soared as high as 25 per cent and closed at 5.5 per cent.
Frequently Asked Questions about this Article…
A weekend spike in mistrust among banks caused a credit squeeze in China’s inter‑bank market as institutions scrambled for cash. Lending picked up again later in the week and short‑term rates fell sharply on Friday, easing the immediate squeeze — although officials made no clear announcement about any policy intervention.
Short‑term rates were extremely volatile: the overnight bank lending rate jumped to a record 13.44% on Thursday, then fell to 8.49% by late Friday (still well above last month’s sub‑4% levels). A seven‑day repurchase rate opened around 8.1%, briefly spiked as high as 25%, and closed at 5.5%.
Experts say the government appears to have stepped away from its long‑standing practice of expanding credit to counter slowdowns. Officials seem determined to rein in excess credit expansion to avoid a larger financial crisis tied to years of poor lending and over‑investment, which could keep borrowing costs elevated.
Analysts warned that a huge shadow banking operation in China may be masking more serious financial risk‑taking. That hidden activity can increase uncertainty about true credit risk and contributes to investor worries about financial stability.
Chinese share prices plunged on the Shanghai and Shenzhen stockmarkets during the week, producing one of the worst weekly performances in four years as investors reacted to the liquidity stress and rising rates.
Yes — as credit markets tightened and mistrust spread, rumours of defaults circulated. The Bank of China specifically had to issue a statement denying reports that it had defaulted on inter‑bank payments.
For everyday investors, the reluctance signals that policymakers may tolerate slower growth to rein in risky lending, which raises the odds of sustained higher interest rates, market volatility and tougher conditions for companies that rely on cheap credit. Economists had already cut near‑term growth forecasts, though one projection mentioned in the article remained at about 7%.
Investors should monitor short‑term inter‑bank lending rates (overnight and seven‑day repo), official statements or policy announcements from China’s central authorities, liquidity conditions among major banks, and movements in Shanghai and Shenzhen share prices — all of which the article highlights as key signs of evolving risk and volatility.
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