How far will China's regulators go to teach the country's banks a lesson in market discipline? The answer is already showing up in the broader economy.

High money market rates point to deepening distress in China's financial system. In trading Thursday morning, the benchmark seven day repurchase rate briefly touched a nosebleed-inducing 25%. That reflects overextended loan books and deteriorating asset quality, which are forcing banks to tap the money market with increasing urgency to fund their daily operations.