HONG KONG (CNNMoney)
China's marquee index is now in bear market territory after losing 5.3% of its value Monday, the latest in a series of dismal performances. As of midday on Tuesday, the struggling index was down 16.7% from the start of the year and approaching levels not seen since early 2009.
The sell-off comes after short-term borrowing costs skyrocketed last week in China, leading to a credit crunch.
The rate at which Chinese banks lend to each other overnight hit a record high above 13% last week. Another key measure of cash in the banking system -- the 7-day "repo rate" -- peaked at 25%.
Rates have since eased somewhat, but remain above recent norms. Tight credit conditions have unnerved investors and heightened concerns over the country's banks.
The sustained spike in rates has led analysts to question why the central bank's leaders did not quickly intervene, and why the bank's intentions were not communicated to investors as rates continued to rise.
Related story: Is China's debt a crisis in the making?
Official state media unraveled some of the mystery over the weekend, reporting that the China's shadow banking system was the central bank's target. "It's not that there's no money," a Xinhua commentary said. "It's that the money is not in the right places."
Some analysts worry that China's credit boom has saddled unworthy businesses with large loans, fueled the country's shadow banking system and put local governments on the hook for billions.
A credit squeeze by the central bank would discourage risky loans, and help China's economy complete a rebalancing that most experts say is required to secure long-term growth.
Related story: Don't worry! It's not 2008
The central bank suggested Monday that its tough medicine is likely to continue.
"Commercial banks must pay close attention to the liquidity situation in the market and must strengthen their analysis and forecasts of factors affecting liquidity," the central bank said in a note posted Monday but dated June 17.
First Published: June 25, 2013: 12:37 AM ET
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