China’s central bank signalled that volatility in money-market interest rates will persist and borrowing costs will rise, underscoring the risk of defaults that could weigh on confidence and drag down growth.
“When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that,” the People’s Bank of China said in Feb. 8 report. “The market needs to tolerate reasonable rate changes so that rates can be effective in allocating resources and modifying the behavior of market players.”
The near-default of a shadow banking product last month and two cash crunches last year highlight the challenge for policy makers pursuing twin goals of deregulating interest rates and reining in an unprecedented credit boom. Higher and more volatile interbank borrowing costs may squeeze speculative and wasteful lending even as it leaves some banks and debt providers with funding difficulties.
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