Concerns are growing that China's export-oriented manufacturers are facing a credit squeeze that puts an already flagging economic recovery at risk of further decline.
A spike in interbank lending costs threatens to spill over into real financing costs for businesses, analysts say, putting fresh pressure on profits of already struggling private sector manufacturers.
"If this situation carries on for two or three more months then there could be significant consequences for the real economy," Zhang Zhiwei, chief China economist at Nomura in Hong Kong, told the Post.
Mainland manufacturers ran production lines in June at their slowest pace in nine months, according to a so-called flash, or preliminary reading from the HSBC Purchasing Managers Index (PMI) yesterday. The survey tracks mainly small and medium-sized firms in the private sector. They are typically exporters and have suffered a prolonged downturn in demand.
China's export growth in May sank to a 10-month low of just 1 per cent, versus analyst expectations of 7.4 per cent.
Order book growth shrank in June as borrowing costs surged. Interbank rates - the wholesale rate at which banks lend - have risen sharply in recent weeks. The three-month Shanghai Interbank Offered Rate has leapt to 5.8 per cent from around 3.9 per cent in just two weeks.
Private sector firms borrow well above that rate.
China's external sector supports an estimated 200 million mainland jobs, making a downturn in exports a major risk for the leadership in Beijing, which is acutely sensitive to the risk of social instability arising from a rise in unemployment.
This is especially true as Premier Li Keqiang readies a series of structural economic reforms that could fuel inflation and hurt job prospects in the near term and requires relative tightness in monetary policy to be maintained.
RBS China economist Louis Kuijs said the fall in export orders revealed in the PMI was particularly pronounced, suggesting that a test of the government's reformist resolve could be looming.