China fears mount as bank stands firm amid GDP cuts

FEARS mounted yesterday that China is facing a credit crunch as Goldman Sachs cut its growth estimates for the world’s second largest economy, while the central bank sparked fears of tightening lending conditions as it continued its crackdown on shadow banking.

Economists at Goldman now expect 7.4 per cent growth in 2013 and 7.7 per cent in 2014, down from previous forecasts of 7.7 per cent and 8.4 per cent.

“The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue,” Goldman warned in a note, after the People’s Bank of China (PBOC) spoke out for the first time about the credit crisis in Chinese banks.

In its first acknowledgement of the squeeze in China’s interbank lending rate – known as Shibor – since it flared up last week, the PBOC was insistent that liquidity in the Chinese banking system was at a “reasonable level”.

The rise in Shibor indicates banks are only willing to lend to each other at unusually high rates, and is read by many as a sign of a looming crisis.

But the statement suggests the PBOC is unwilling to engage in significant easing to soothe lenders, claiming that rates are likely to remain high and less well-managed institutions could fail.

“A risk is that the PBOC’s actions will make banks more nervous about each other’s creditworthiness,” said Bin Hu, a senior analyst at Moody’s.

It comes after mounting fears China’s banks are sitting on large piles of bad loans made to local governments who may have invested badly. But despite the turmoil that hit markets after yesterday’s rout in China, sending equities plunging and yields on state bonds up, analysts do not expect a global crash.

“Less excess liquidity from the Fed and less rapacious Chinese demand for raw materials are bad news for emerging markets which gorged on rising commodity prices,” said Berenberg’s Holger Schmieding. “But most emerging markets look healthier than they did five or 10 years ago. Huge crises don’t look very likely.”