On November 8, China surprised markets with its latest targeted stimulus in the form of a lending directive ordering large banks to issue loans to private companies to at least one-third of new corporate lending, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. The announcement sparked a new round of investor concerns about what is being unsaid about China's opaque, private enterprises, raising prospects of a fresh spike in bad assets.

Guo’s comments were the latest attempt by authorities to try to improve funding access for China’s non-state companies, which have been struggling to get bank loans in the aftermath of China's crackdown on shadow lending. More importantly, it was the first time financial regulators had given targets on private lending, confirmation that earlier efforts hadn't sparked the necessary credit activity.

According to commentators, the new policy was prompted by the need to ensure that China’s private firms, already challenged by China's state-owned behemoths, survive amid a plunging stock market, record corporate defaults and a cooling economy. At the same time, the target for small and medium-sized banks is higher, at two-thirds of new corporate loans, with Guo adding that he wants to see loans to private companies account for at least half of total new corporate loans in three years.

But most importantly, this targeted lending will increase market concern on banks’ "civic duty" with Huatai Securities predicting a new sharp spike in NPL ratio amid the accelerating economic slowdown, which would prove negative for short-term sentiment.

Sure enough, overnight the Shanghai Composite was hammered again, sliding 1.4% to the lowest level since the end of September, and back below 2,600...

... while the Shenzhen Financial index dropped alongside amid broad based weakness in China's banks.

The Friday drop followed a Thursday rout when the news was first announced which saw the major banks tumble as a result of this latest government intervention in capital allocation, with the following results: Bank of Shanghai -4%, China Merchants Bank -4%, ICBC -3.3%, Agricultural Bank of China -2.9%, Industrial Bank -2.5%, Bank of China -1.6%, Bank of Communications -1.3%