Spike in rates on Chinese bank-to-bank lending for 2nd time this year stirs anxiety

BEIJING – 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 percent this week, well above the usual 2-3 percent. That came even after the Chinese central bank injected 300 billion yuan ($50 billion) of extra credit into the interbank market last week.

The rate spike doesn't apply directly to borrowing by companies or households. But it could have repercussions for the world's second-largest economy if the cash shortage forces banks to restrain commercial lending.

A look at China's latest credit crunch:

WHAT HAPPENED

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.

THE IMPACT

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.

THE CURRENT STATUS

On Tuesday, the rate banks pay each other for an overnight loan had eased to a still-high 4.2 percent, while that for a one-week loan was 6.2 percent, according to the National Interbank Funding Center.

WHAT HAPPENED EARLIER

In June, money markets suffered an even bigger rate spike after the central bank tried to rein in a credit boom. Interest paid by banks for an overnight loan soared to a record 13.4 percent.

Analysts said the central bank was at least partly to blame because it failed to make clear how tough its stance would be.

THE WIDER IMPACT

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 percent in the three months ending in June before rebounding to 7.8 percent the following quarter. Analysts say that recovery is likely to fade this quarter or early in 2014.

CHINA'S BANKING INDUSTRY

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.

THE LINK TO THE FED

China's financial markets are kept sealed off from global capital flows. So the U.S. Federal Reserve's decision last week to begin reducing its "quantitative easing" monetary stimulus would have no direct impact on Chinese markets.