Stress Test for Banks Inflicting Collateral Damage: China Credit

China’s decision to tolerate the worst cash crunch on record is evolving from a stress test of banks into a threat to the ability of companies to raise funds.

As their overnight borrowing costs neared 13 percent, banks switched focus toward shoring up their own finances and slashed investments in the bond market they dominate. The one-year yield on AAA corporate debt jumped a record 121 basis points this month to 5.15 percent, ChinaBond indexes show. Bond sales slumped to 160.2 billion yuan ($26 billion) in June, the least in 17 months and down 56 percent from May, data compiled by Bloomberg show.