On Monday, the interest rate charged on 7-day 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:
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 the rates they had to pay for loans. In response, the central bank injected extra money into the market 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.
THE CURRENT STATUS
On Tuesday, the rate banks pay each other for an overnight loan 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. Tuesday's easing came after the People's Bank of China injected 29 billion yuan ($4.8 billion) into Chinese banks.
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 spikes in June provided another jolt to investors, who were already fretting over waning growth in China. 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