Markets on Edge as China Moves to Curb Risky Lending

The central bank in China allowed rates late last week and early this week to soar to unsustainable levels.

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HONG KONG — China’s financial system is in danger of becoming too big to bail out.

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Tinkering by Beijing

Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy. The even bigger problem, however, appears to come from the rise of a shadow banking system that has allowed a number of companies and individuals, often with political connections, to borrow from state-controlled banks at low interest rates and relend the money at much higher rates to private businesses desperate for credit at almost any price.

Now, in an effort to wean the banks and the economy off their addiction to such risky practices, Beijing has pledged to deliver what amounts to the country’s most sweeping financial overhaul in decades. Markets will play the “decisive” role in directing the economy, policy makers promised last month after a key plenum meeting of the Communist Party leadership. Interest rates are to be liberalized, cross-border investment will be welcomed and regional and bureaucratic protectionism will be curtailed, they declared.