China’s financial system suffered a cash crunch last week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt, according to the Financial Times. Analysts have warned of rising risks from banks’ increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5% on Tuesday, versus an average of below 3% since the beginning of 2014. Local media reported that several small rural lenders had defaulted on money market loans on Tuesday, prompting the central bank to offer them emergency funding.
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