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China's Credit Crunch Signals How Serious Beijing Is About Reform

A Chinese flag flies outside the People's Bank of China headquarters in Beijing
A Chinese flag flies outside the People's Bank of China headquarters in BeijingPhotograph by Tomohiro Ohsumi/Bloomberg

So what to make of China’s June credit crunch, the worst in at least a decade, which saw interbank lending rates reach a new high? On June 20, the overnight repurchase rate set a record at 13.91 percent, before the People’s Bank of China, China’s central bank, injected funds, driving rates into their its biggest fall since 2007.

Despite spooking global markets and no doubt causing consternation among Chinese banks and borrowers, the whole episode is a positive sign for some. It shows China’s top leaders are still serious about broader economic restructuring and that they mean business when it comes to cleaning up some of the frothiness in the banking sector. It also shows Beijing is willing to hang tough even when things get a little scary.