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Two of China's biggest banks have stopped lending at some of their branches

Branches of Bank of China and the Industrial and Commercial Bank of China (ICBC) have stopped lending amid the country's current liquidity squeeze.

china banks 2013 26 6Enlarge
A man talks on a mobile phone at the entrance of a bank in Beijing. (WANG ZHAO/AFP/Getty Images)

Branches of Bank of China and the Industrial and Commercial Bank of China (ICBC) have stopped lending amid the country's current liquidity squeeze, according to Caixin Online. 

The two banks, are part of the country's Big Four. Bank of China was reportedly having a hard time meeting loan-to-deposit requirements before the liquidity squeeze and it plans to resume lending on July 15.

Meanwhile, ICBC's headquarters set a cap on lending, but what was unusual was that "headquarters had cut down on the quotas to make room for its own operations," according to Caixin. Other sources however said this wasn't a major problem.

Chinese interbank rates, or the rates at which banks lend to each other, began spiking before the Dragon Boat festival earlier this month.

The People's Bank of China alleviated some of the pressure by injecting liquidity into some banks and saying that it would use various tools like short-term liquidity operations to help stabilize rates.

But it's important to remember that the "PBOC promised more liquidity but not enough to support the equity markets or enough to drop rates below 4%," according to Robert Savage at FX Concepts. 

And the Chinese central bank's initial decision to let rates peak is still being interpreted as its way of punishing certain banks that had runaway credit growth. From Société Générale's Wei Yao:

The PBoC makes clear that it wants more responsible and less risky behavior from financial institutions, including the strengthening of liquidity and asset-liability management, and calls on large banks to help stabilize markets. Secondly, the PBoC calls on financial institutions to balance liquidity and profitability and other business objectives according to macroprudential requirements. Lastly, it calls on financial market participants to strengthen market discipline, particularly related to Shibor.

Jim O'Neill said China was never at risk of a genuine liquidity crunch. But there definitely are concerns of a credit bubble so we will be following these developments closely.

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