"Tightening financial conditions pose a risk to growth at a time when the economy is already weaker," Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Singapore, wrote in a note yesterday. "The market is well aware of potential stresses in the Chinese financial sector and, if there are weak points, tightening financial conditions are more likely to weed these out."

China's non-financial companies have a record 2.6 trillion yuan of interest and principal repayments to make next year, and the official China Securities Journal said in a Nov. 26 editorial that higher interest costs may cause a "partial debt crisis to explode."

Eoin Treacy's view

Among Asia recovery candidates both Japan and India have been notable for their outperformance. However, despite a low P/E for the overall market China remains an underperformer. The more disciplined approach adopted by the PBOC and its new found respect for market set rates has had a particular impact on the banking sector. 

The FTSE Xinhua Banks Index has returned to test the lows for the year near 8000 and while today¡¯s downward dynamic has a climactic look to it, not least as the PBOC is now re-engaging with the market, a clear upward dynamic will be required to signal short covering.