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Last week was a wild one for China's economy.

Interest rates on the loans that banks make to one another soared to alarming levels, and lending began to freeze up. Shanghai stocks nose-dived, taking Asian markets and the Dow, briefly, with them.

Things have calmed down, but the crisis showed how China's new leaders are trying to confront threats to the health of the world's second-largest economy.

Many here see it as the first shot in a long battle to reform a once-successful economic model that is now running out of gas.

In this particular case, the People's Bank of China — the nation's central bank — wants to cut down on rampant and risky lending. So earlier this month, in a departure from the past, it refused to pump money into the system when some banks desperately needed it.

"The central bank wants to send a message," says Oliver Rui, a finance professor at the China Europe International Business School in Shanghai. "Don't take it for granted that whenever you need the money, you can easily get it."

Rui says the government was targeting midsized, state-run banks that lend into what's known as China's "shadow banking" sector.

Risky Lending

Here is an example of how shadow banking can work and why it concerns the government: A state-owned company borrows from a state-owned bank at a government-set low interest rate, maybe 5 percent.

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