China Central Bank Hits At Shadow Banking by Limiting Liquidity

China’s central bank faced down the country’s cash-hungry banks on Friday, letting interest rates again spike to extraordinary levels as it increases the pressure on the banks to rein in rampant informal lending and speculative trading.

The banks have been using cheap official funds to finance the vast “shadow banking” market, which Beijing worries is siphoning credit from industry and creating asset-price bubbles.

The People’s Bank of China (PBOC) has tried to put an end to this over the past three weeks, declining to inject significant funds into the money markets even as the interest rate for some banks to borrow short-term funds has soared to 25 percent or higher.

“They are trying to take a different approach to rein in shadow banking activity,” Charlene Chu, senior director at Fitch Ratings, told reporters on the sidelines of a conference in Sydney.

via Reuters

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