Credit squeeze structural? And what about growth?

For Chinese banks, this sweltering June seems more like a difficult exam than a joyous time to celebrate the upcoming soccer World Cup.

What's stressing the bankers in June is liquidity. It is now that regulators review each lender's operational health in terms such as deposit-to-loan ratio.

Chinese banks were spooked - a little more than spooked actually - by overnight interbank borrowing rates shooting as high as 13 percent in June last year. The question of the day today is: Will that happen again?

Probably not, but banks won't get as much money as they want either. The credit shortage is "structural", according to economists.

"Chinese enterprises have no easy access to credit in the current financing system," said Lian Ping, chief economist at Bank of Communications, China's fifth largest.

The banks might have learned from last year's liquidity drought and relocated their lending resources more reasonably but the sharp decline in deposits will limit their lending.

Deposits fell by 655 billion yuan (about 106 billion U.S. dollars) in April, as households withdrew 1.23 trillion yuan from banks to invest in money market funds and off-balance sheet wealth management products, according to latest data by the People's Bank of China (PBOC).

A reduction of yuan funds available for foreign exchange, created by the central bank's purchase of foreign currencies from banks, also caused liquidity to dry up.

Compared with 198 billion yuan in March, the new yuan funds outstanding for foreign exchange reached only 117 billion yuan in April, the lowest level in eight months, according to the PBOC.

Chinese companies, large or small, rely on indirect financing (bank loans) for growth rather than raising money directly through stocks or bond issues, Lian notes.

This causes structural liquidity shortages every now and then, particularly in the real estate sector and local government, which depend heavily on bank loans but are subject to tight regulations. When the property market cools, banks are reluctant to lend to house developers and home buyers.

"Such a structure makes it natural for banks to shun small companies and grant most loans to state-owned enterprises (SOEs) or large companies," Lian said,

These so-called "zombie enterprises" can't make a profit, but take a huge slurp from the precious well of credit with the support of local governments and slowing growth get slower still.

"Some precious credit flows into industries already bedeviled by overcapacity," said Liu Yuhui, an economist at the Chinese Academy of Social Sciences, warning the "too big to fail" zombies do no good for economic growth.

While SOEs greedily slake their credit thirst, others are left gasping.

Over the past few years, private enterprises have on average paid interest 225 basis points higher than their state-owned peers, the All-China Federation of Industry & Commerce has found.

About 42 percent of small and micro firms find it "difficult" to get loans from banks, according to the China Association of Small & Medium Commercial Enterprise.

To inject liquidity into the market, the central bank can cut interest rates or lower the reserve requirement ratio, but such monetary loosening is not without risks or objections, especially at a time when China has the world's largest broad money supply (M2) - cash in circulation and all deposits.

China's M2 amounted to nearly 117 trillion yuan by the end of April, or 1.5 times the amount in the United States and about twice the size of the entire Chinese economy.

Some economists argue that the rapid growth of China's M2 is closely linked to high saving rates and the dominant status of indirect financing activities.

It is this tidal wave of M2 growth that is widely blamed for surging inflation and asset price bubbles. Current M2 is almost ten times the 13 trillion yuan of 2000 and more than twice the amount of 2008.

To support the real economy, the financing structure must change and costs for social financing must fall, according to Guo Tianyong, a researcher at the Central University of Finance and Economics.

"We really do need a remedy to these problem," Guo added.