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Editorial: Policymakers Need to Tread Carefully When Tightening Policy to Avoid Liquidity Crunch

Money market rates in China have risen in recent months, fueling concerns that increasing borrowing costs may hurt the rebounding economy. Last week, the one-year Shanghai Interbank Offered Rate (Shibor), a key indicator of interbank borrowing costs, rose for days and exceeded the one-year prime loan rate, or the interest rate banks charge to their best clients. This sparked a debate on whether the government’s decision to quietly use interbank rates to discourage risky high-leverage loans, diffuse asset bubbles and tighten policy have had the side-effect of pushing up borrowing costs for businesses.

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