China Cash Crunch Shows Central Bank’s Difficulties

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from The Wall Street Journal,

Short-Term Interest Rates Jump Again.

A cash crunch in China pushed short-term interest rates to another recent high Monday and highlighted the difficulties faced by the central bank in managing an increasingly complex and stressed financial system.

The latest jump in rates came even after the People’s Bank of China last week made cash injections into the banking system that were aimed at cooling the upward pressure on rates.

The government has the capacity to prevent the cash squeeze from developing into a systemwide financial crisis, analysts say. Still, they are watching closely because rising borrowing costs could erode Chinese companies’ already weakening profitability and exacerbate a current economic slowdown. Reduced demand from the world’s second-largest economy would hurt global resources exporters and others that are dependent on Chinese buyers.

An announcement by the central bank Friday that it had added cash to the financial system initially triggered optimism among analysts and investors that the country would avoid a a severe cash squeeze like one in June. But they said they have become less certain after the central bank’s move failed to keep money-market rates from climbing further Monday.

The central bank has tried to rein in lending this year as part of a broader effort to reduce the economy’s dependence on credit-driven growth.

A broad squeeze in lending will likely continue into next year, analysts said, as the central bank tries to get control of short-term interbank lending while the government limits spending. China will also feel the effects of the reduction of monetary stimulus in the U.S.

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