It had the flavour of panic: Chinese financial institutions scrambled for short-term interbank loans last week before the People’s Bank of China released liquidity into the market. The episode highlights China’s conundrum in managing a financial system that has racked up debts too liberally yet remains in need of further liberalisation.

Interest rates on weekly interbank loans had approached 11 per cent on Thursday – up from only 3 per cent last month. Such rates, if sustained, could be lethal for many banks with businesses based on off-balance-sheet “wealth management products”. These offer short-term placements in opaque structures invested in projects, typically real estate, that are often illiquid and sometimes questionable. They are behind much of the recent 20-plus per cent growth rate in credit. Total credit outstanding is 200 per cent of China’s annual output, up from 120 per cent five years ago.

This problem simultaneously reflects the indomitable nature of financial capitalism and the unintended effects of central planning. Savers, frustrated with official interest rates artificially kept low by government policy, create huge demand for alternative savings products that financial companies have been all too happy to provide. At the same time, centrally mandated growth targets (and opportunities for graft) give local officials incentives to secure funds for construction by any means possible.