A squeeze on credit in China that is rattling world markets appeared to ease Friday as a key interbank interest rate fell slightly, prompting speculation the country's central bank may have intervened to calm ravaged nerves.
But analysts say the spike in the rates that banks charge each other for short-term borrowing is part of a deliberate, belated effort to trim off-balance-sheet lending that could threaten the financial stability of the world's second largest economy.
Coming at a time when uncertainty over China's economy has sharpened as growth has slowed, the credit crunch is having an outsized impact on markets far beyond the Chinese mainland that already are jittery over U.S. plans for "tapering," or scaling back massive monetary easing as conditions in the U.S. improve.
But interbank lending rates play a less important role in China, where the one-year deposit benchmark rate is the key policy tool, than in the U.S. and Europe, says Yi Xianrong, an economist at the China Academy of Social Sciences.
"If this same thing happened in Europe and America, the problem would be bigger but in China it's not really a problem," Yi said.
The shift to a new generation of Chinese leaders appears to have freshened Beijing's resolve to tackle intractable hazards such as looming debts that are not reported on bank balance sheets but lurk throughout the country's murky, still developing financial system.
In a recent analysis, Moody's Investors Service noted that China's central government finances remain strong, but that rapid credit growth and liabilities at the local level pose a threat to growth.
The People's Bank of China generally does not comment on its market activities. The interbank lending rate fell from 11.65 percent to about 10.21 percent by midday Friday, according to the National Interbank Funding Center in Shanghai.
The rate spiked at over 13 percent on Thursday, while charts showing other interbank short-term rates show an abrupt, nearly 90 degree rise in recent days, from below 5 percent.
"It's not just a short-term thing. It's an intentional policy to try to crack down on the high amount of leverage in the economy," said Rob Subbaraman, chief Asia economist for Nomura, in Hong Kong.
The worries over China have accentuated volatility already prevailing in the markets.
Share prices fell overnight in the U.S. and Europe and were mostly lower Friday in Asia, while the mainland's main benchmark, the Shanghai Composite Index fell 1 percent to 2,063.77.
But the global economy and even China's big, cash-rich state banks are unlikely to be much affected by the squeeze on liquidity.
China's growth is still likely to remain in the 7 percent to 8 percent realm, robust by most standards, though global markets are still adjusting to that reality, says Daniel Martin, an economist with Capital Economics.
"We don't believe in the China crash story," he said.
Still, the lack of cash is a problem for smaller Chinese banks and trust companies, private businesses and even smaller state-owned enterprises that may have built up significant debt in the easy money years since recession-fighting stimulus was unleashed into the economy in 2009.
The closing of the credit spigot could have a domino effect, warns Zhou Dewen, chairman of the Wenzhou SME Development Association, which represents private businesses in Wenzhou, a bastion of entrepreneurship in southeastern China.
"The rate of bad loans has kept rising and liquidity is getting even tighter. This capital chain reaction could break some companies, and it will get even worse in the second half of the year," Zhou said in a phone interview.
But other experts see the move to crack down on excess leverage as an overdue and necessary effort to address structural problems in China's state-dominated economy.
Since China's big, state-owned banks are unwilling to lend to any but their biggest, most influential clients, the vast majority of smaller businesses must rely on so-called shadow banking, which in China includes underground banking, trust products and wealth management products, among other activities.
"Recently, shadow banking has been difficult to deal with," said Yi of the Chinese Academy of Social Sciences, explaining that the central bank mainly is working to curb speculative dealings.
"The central bank does not really need to do anything," he said. "If I were the central bank, I would more heavily punish the rampant shadow banking activity among small and medium banks. In the short term, there is no need to make too large a move."
Researchers Fu Ting in Shanghai and Zhao Liang and Flora Ji in Beijing contributed to this report. Kurtenbach reported from Tokyo.