China's c.bank inflicts pain on banks to rein in credit

The Chinese central bank's determination to rein in rapid credit growth has sent interbank interest rates to record highs, creating panic and rumours of possible default as some banks scramble to secure short-term funds.

China's overnight repo rate - the interest rate for interbank lending that keeps markets liquid - climbed to levels reminiscent of the global credit market freeze that preceded the collapse of Lehman Brothers in September 2008.

There has been panic in some parts of the money markets in Chinain particular among some small financial institutions that were highly indebted, traders said. But the People's Bank of China (PBOC) has been standing firm, refusing to bow to pressure to flood the interbank market with more cash.