China’s Interbank Lending Rates Soar as Confidence Erodes

Can you say Lehman Brothers?

The People’s Bank of China has so far refused to inject more liquidity into the economy, making matters even worse. According to the Financial Times, the central bank said today that it would not conduct repo business at a scheduled auction today, leading one analyst to observe:

The only explanation ios that the central bank wants to send a warning signal to commercial banks and other credit issuers that unchecked credit expansion, particularly through the shadow banking system, will not be accommodated.

The country’s new president, Xi Jinping, also has taken a hard line on easy money. He has rolled out a new campaign referred to as “mass line education” that the People’s Bank will use to attack four evils: formalism, bureaucracy, hedonism and extravagance. This is far stronger stuff than the anti-corruption campaigns run by Xi’s predecessors.

Weaning China’s banks off easy credit with an implicit guarantee that the central bank will make any problem go away reflects a sea change in the country’s banking system. This promises to be a rough ride.