Higher borrowing costs batter China’s banks

Financial risks rising to critical levels.

China said its financial system must better support the economy after a surge in credit failed to ignite growth even as interbank borrowing costs spiked to a two-year high.

The State Council said it will boost credit support for strategic and labor-intensive industries. It said China must more firmly guard against financial risks.

The comments follow a jump in the seven-day repurchase rate to the highest level since June 2011. The repo rate is an indicator of interbank funding availability.

Slowing economic growth plus a crackdown on illegal capital inflows; a campaign to curb shadow banking and moves to dampen home prices have led to much higher borrowing costs.

The People’s Bank of China, the central bank, has refrained from using reverse-repurchase agreements to inject funds into the interbank market since Feb. 7.

The government’s broadest measure of credit rose 58% to a record US$1 trillion in the first quarter, when GDP grew just 7.7%, compared with 8.1% year-on-year.