Fear of an end to quantitative easing wasn't the only factor rattling markets Thursday. Across the Pacific, tight credit in China's banking sector has also been dragging on U.S. markets. However, there is some sign that China's cash squeeze is easing up, at least a little.
On Thursday, China's interbank and money market rates spiked, spooking banks away from lending. If lending slows dramatically, it can wreak havoc upon an economy. The nation's central bank, the People's Bank of China, tightening credit was one cause of the high rates, though there is also a widespread sense in the country that banks lent too much in recent years, the BBC reported Friday. Now, the pendulum may be swinging in the other direction.
Though China's banking sector is far removed from the lives of most Americans, its economic prospects matter to U.S. investors. As China is one of the largest U.S. trading partners and also among the largest global economies, U.S. economists and investors closely monitor the nation's economic prospects. The Thursday spike in China's lending rates troubled U.S. investors who were already uneasy about the prospects of the Federal Reserve ending its easy-money program known as quantitative easing. That stimulus policy has boosted the stock market and held yields on bonds low, helping to push interest rates down in areas such as mortgages. Though an end to easing would signal a strengthening U.S. economy, it might also signal an end to an inflated stock market.
Still, there are signs that China's credit problem is abating. Though the interbank lending rate climbed to more than 13 percent on Thursday, by midday Friday it was at 10.21 percent, as The Associated Press reported. Still, 10 percent is still an elevated level for the interest rate. Just last month, the interbank lending rate was below 4 percent.
The decline in the rate may be a sign that the Chinese central bank intervened, asking lenders to lend out more money. However, as the Wall Street Journal reported Friday, the People's Bank of China has not responded to requests for comment.