China stocks hit by credit crunch fears

Chinese stocks touched a four-and-a-half-year low on Tuesday amid persistent concerns over the government's credit-tightening policy.

The Shanghai Composite SSE index fell as much as 5.8% at one point, before a late rally meant it ended down 0.3%.

The rebound came after China's central bank said that it would guide market rates down to "reasonable" levels.

Last week, the bank indicated that the era of cheap credit was over, helping to trigger falls on global markets.


Controlling credit

After the global financial crisis in 2008-09, China unleashed a huge monetary stimulus in an attempt to boost economic growth.

While the credit boom helped cushion the impact of the crisis on its economy, it led to concern that too much cheap cash had flooded its financial system.

There have been calls for China to contain this credit boom and also to reduce its reliance on credit and investment-led growth. 

Shanghai Composite Index  LAST UPDATED AT 25 JUN 2013, 07:50 GMT
valuechange%1959.51 -
-3.73 -
-0.19


In recent days the PBOC temporarily turned off the flow of cheap money in an attempt to impose more discipline on its banks and reduce their reliance on credit.

That resulted in China's banks - mostly state-owned - charging each other some of the highest lending rates ever - over 25% in some cases - triggering fears of a credit crunch.

There were fears that the money markets could freeze up completely and put smaller lenders out of business as a result of the central bank's drastic move.

But inter-bank lending rates eased on Monday as PBOC made it clear big commercial banks should do a better job of managing their cash reserves and keep lending to smaller players


BBC