MONTREAL - China has now entered, or is trying to enter, a cooling phase of the
economic stimulus that, according to reliable estimates, accounted for as much
as 95% of the country's economic growth through the first nine months of 2009.
Yet according to Caixin Media, a Beijing-based media group, commercial banks
issued loans worth 600 billion yuan (US$88 billion) during the first full week
of January, and this despite instructions from banking regulators and the
People's Bank of China (PBoC) to the contrary.
That figure, reportedly a new high in years, may have been reached in
anticipation of further moves this week (or possibly even triggered them) by
the China Banking Regulatory
Commission and other banking and financial agencies. The PBoC announced on
Tuesday that, to reduce market liquidity and reduce risks, the reserve
requirement ratio for banks would be lifted by a half of a percentage point.
A Bloomberg News survey of economists had judged that Beijing would not take
this move before April. Last autumn, lending to such industries as steel and
concrete was banned, but now efforts to tighten credit more broadly are
becoming more concerted.
It is also possible that the move to increase the reserve requirement was
triggered by shorter-term considerations, in particular by the maturation of
about 1 trillion yuan of PBoC bills over the next four weeks. Increasing the
bank reserve requirement will take about one-third of that flood of liquidity
out of the financial market, according to China International Capital,
At the same time, new figures indicate a surge of both imports and exports in
December, even reaching pre-crisis mid-2008 levels, probably playing a role in
the decision. This is partly but not entirely due to low December 2008 numbers,
according to Danske Research, (Chinese statistical agencies report year-on-year
figures.) For imports, demand for raw materials also played a role
(particularly the automotive and steel sectors), while exports to developed
market economies appear to be gaining new momentum.
This last phenomenon bears close watching, as any falloff in external demand
would raise the risk of a renewed Chinese economic stimulus later in the year
in order to moderate domestic unemployment and the potential for political
unrest. Such a development could lead world prices to fall in a crisis of
overproduction and bring retaliatory protectionist measures from the country's
Yet the general credit-tightening move also betokens a fear of increasing
inflation, which itself encourages hot money to gravitate to the property and
stock markets. China terminated the stimulus for the real estate sector last
month, but these measures will not burst the housing bubble.
Less easy money might still restrain a bit of this speculation, which was
beginning to remind some observers of American excesses before the bubble burst
there, as consumers borrowed money to buy properties to "flip" them to new
owners in less than a year.
The fear of inflation will only increase as the economy seems to recover
further. The International Monetary Fund forecasts an expansion of 9% this
year, up from 8.5% last year, according to recent best estimates. Inflation is
now projected to reach into the 3%-4% range.
Paradoxically, a lack of confidence in foreign demand for goods produced in
China is signaled by press observers, raising the question as to whether the
Chinese themselves will continue to purchase automobiles manufactured in the
country, even while stimulus measures have been extended for the automotive
Given this constellation of financial forces, it should not be surprising that
the Shanghai Stock Exchange Composite (SSEC) is down over 2.5% on Wednesday, to
under 3,200. More significant, however, is that all other major Asian equity
exchanges are down too, some rather sharply, confirming that "[i]nsofar as the
Shanghai exchange is taken as a barometer of appetite for risk by international
investors ... we should expect other Asian exchanges to moderate their advances
in the near future" . (See
New Year revels continue, Asia Times Online, January 9, 2010). It will
be important whether the SSEC can recover above 3,200 or not, for this is the
upper bound of a previous trading range.
As pointed out last month (Blindfolded
on a cliff edge, Asia Times Online, December 18, 2009), the surge in
Chinese equities last summer "was entirely driven by hot money following
government spending in support of domestic consumption and production by small
and medium-sized enterprises".
The yuan has been pegged at 6.83 to the dollar since July 2008 after rising 21%
over the preceding three years. China's foreign reserves have increased on the
anticipation that the yuan will be allowed to strengthen further in 2010. Hot
money could still be a problem in 2010 if foreign investors bet heavily on
appreciation of the yuan.
Dr Robert M Cutler(http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and the University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.