In June, rates in the Chinese interbank market peaked at more than 13 per cent. The bond market suddenly closed to new issuances, while the ATMs of one of the big four banks ceased paying out cash – although this was reportedly due to a software upgrade rather than insufficient available funds. China’s financial drama, we are told, marked a deliberate attempt by the authorities to restrict excessive credit growth and to establish sound banking practices. Once Beijing has gotten its way, the liquidity spigots will reopen and economic growth will resume. Yet credit crunches often mark the turning point in the financial cycle.

China’s financial system has long been careening out of control. Total credit had expanded by more than 30 per cent of gross domestic product every year since the global financial crisis. During April total credit issuance was up an extraordinary 59 per cent on the previous year. Li Keqiang, the new premier, has said that cheap credit should no longer be used to fund speculations. Banking regulators have been ordered to purge the financial system of dodgy practices.

Much recent credit growth has happened outside the bank system. Bank loans have been sold in the interbank market with covert guarantees against losses. Other bank assets have been packaged into trust loans or corporate bonds. These loans in turn are acquired by bank-controlled investment pools, known as wealth management products (WMPs). Many of these WMPs are kept off the balance sheets of the banks although it is widely understood that banks will make good any losses to investors. Such practices allow banks to keep below the mandated loan-to-deposit ceiling and avoid regulatory restrictions on bank leverage.