For the second time in six months, a shortage of cash in one corner of China's banking industry has stirred anxiety in financial markets.
The interest rate charged on loans from one bank to another spiked to nearly 9% this week, well above the usual 2-3%. That came even after the Chinese central bank injected 300 billion yuan ($50 billion U.S.) of extra credit into the interbank market last week.
Chinese banks that turned to money markets in recent weeks for extra cash found less than usual. That set off a bidding war that pushed up rates they had to pay for loans. The central bank injected extra money into the market last week but rates climbed further.
The reasons for the crunch are unclear. Some analysts say it might stem from banks' end-of-year need for money to balance their books. Many would be borrowing and few lending, leading to a cash shortage.
Banks might be forced to reduce lending temporarily if they cannot raise enough cash to satisfy regulatory minimum requirements, though that appears unlikely. That might affect credit to companies and households. The central bank already is taking action to prevent that.
One short-term impact: The rate spike pushed up the cost of financing stock trades. That caused China's stock markets to tumble last week.
On Tuesday, the rate banks pay each other for an overnight loan had eased to a still-high 4.2%, while that for a one-week loan was 6.2%, according to the National Interbank Funding Center.
The rate spikes jolted financial markets that were on edge about slowing Chinese economic growth. Growth tumbled to a two-decade low of 7.5% in the three months ending in June before rebounding to 7.8% the following quarter. Analysts say that recovery is likely to fade this quarter or early in 2014.
China's state-owned banking industry is the world's strongest financially. It avoided mortgage-related turmoil that battered Western institutions. The four biggest commercial lenders have total assets in excess of $10 trillion U.S.
