China’s Lehman Moment Is Drawing Closer

China’s central bank has acknowledged its monetary tools are insufficient. The most powerful ones are proving too blunt to drill through a hardening financial system.

The country’s money markets have been shuddering since regulators took over Baoshang Bank Co. last month, despite initial assurances from the central bank and other authorities that they would maintain ample liquidity. While there has been little direct contagion, the seizure of the small commercial lender has hurt confidence. Funding costs for companies have shot up as large banks flinch from lending to some counterparties in the interbank market. For the first time in more than two decades, lenders face the prospect of defaults and haircuts on loans to other financial institutions, according to the Rhodium Group.