When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai- based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer- term and less liquid assets, such as debt and investment in loans and receivables, she added.

The PBOC has begun to take note of the stress on the financial system.

The monetary authority has injected a net 160 billion yuan through open-market operations this week, the most since the five days through May 19. The central bank-run Financial News said on June 10 that the “abnormal market swings” of June 2013 won’t happen again -- a reference to a record cash crunch four years ago.

Still, China’s seven-day repurchase rate -- the money- market benchmark -- has averaged 2.74 percent so far in 2017, compared with 2.32 percent a year ago. The gauge climbed four basis points this week to 2.95 percent, while the one-day rate rose three basis points to 2.86 percent.

“Some lenders don’t have better sources of funding to replace NCDs,” said Moody’s Wan. “Issuing such debt at such a high price will have a negative impact on their profitability.”

Eoin Treacy's view

There is a lot happening in the Chinese financial sector right now. First off there is an official drive to contain speculation. The question is why now? Leverage, speculation and infrastructure development, all backed by government support, have been part and parcel of China’s economic growth model for decades. The question now is why is it such a problem today? I can think of two answers. 

The first is simple enough. Leverage has become so great with debt to GDP ratios expanding that the monetary authorities have little choice but to intervene lest the issue become too large for even the state’s significant financial resources to contain. 

The second is that Wang Qishan is supposed to step down at the Party Congress in October/November and the rules would need to be bent for him to serve another term. His guangxi (network) is focused on the financial sector so if he is stepping down that leaves quite a significant power vacuum. Guo Wengui, the billionaire Chinese exile spouting invective from his Manhattan penthouse, today released the names and US passport numbers of Wang’s many illegitimate children. It is rather beside the point whether the revelations are true. The broader question is why now?  

Since Wang’s network would have been among the greatest beneficiaries of the financial sector’s largesse, the current tightening could serve the dual purpose of bringing that group to heel. This week’s deposing of Anbang Financial’s CEO is a signal that a changing of the guard may be underway in the financial sector as Xi Jinping extends his reach. 

The FTSE/Xinhua A600 Banks Index pulled back this week from the upper side of an almost two-year range and will need to hold the 12,000 area if the ranging environment evident since the 2015 collapse is to be sustained.