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TheStreet Open House

China's Central Bank Shuts the Spigot

TAIPEI ( TheStreet) -- First, China's monetary authority took a rare whack at its commercial banks by withholding money for interbank lending.

Then, its official news agency rubbed in the salt, calling the lack of first aid an "essential move to discipline unchecked lenders."

Then, Chinese stocks went to the ICU.

The long-term prognosis: This move points to the seriousness of Chinese officials to reform their economy by breaking asset bubbles and to put the world's second-largest economy on a more normal track.

But wait -- this is China, land of double-talk and unpredictability. The symptom might just go away on its own.

Over the past two weeks, the pain has been real. The withholding of relief that commercial banks have grown used to over the decades knocked back the share prices of big lenders including the Bank of China (BACHY) and the Industrial and Commercial Bank of China (IDCBY), though in the end China's notoriously high savings rate should leave them plenty of funds to carry on normal business.

Property and infrastructure developers keen on loans may be stunned momentarily, as well, though probably market-wise enough to avoid going on the drip.

Among those scrambling would be China HGS Real Estate (HGSH), which faced dangerously low minimum bid prices last year and saw share prices fall sharply in June. Hong Kong-listed Franshion Properties, a builder of energy-efficient homes in mainland China, watched shares plunge in June, though they've bounced back.

Chinese stock markets have slid since the government made it known last week that it would not ease the latest liquidity crunch, which sent interbank interest rates past 6%, up more than two percentage points over May. Hong Kong's H Share index of mainland Chinese firms hit its lowest level last week since October 2011, while the Shanghai Composite Index went to its worst since the global crisis in late 2008.

Falling Chinese shares generally do little service to Wall Street.

"The decision of the People's Bank not to intervene was a surprise to market participants," says Mark Williams, chief Asia economist with Capital Economics in London.

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