2009-06-30

Bank Loans Still Pouring into Mainland Stocks

China Bank Lending Funneled Into Stocks, News Says
Chinese new bank loans worth about an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year, China Business News reported, citing a government economist.

That’s 20 percent of the 5.8 trillion yuan loans banks extended in the period, the Shanghai-based newspaper said, citing Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.

Wei’s assistant said the economist is traveling and can’t be reached. She declined to give her name. Calls to the press offices of the China Banking Regulatory Commission and the China Securities Regulatory Commission weren’t answered.

China’s Shanghai Composite Index has rallied 61 percent this year, the world’s third-best performer, after plunging a record 65 percent in 2008. The nation’s property sales jumped 45.3 percent to 1 trillion yuan in the first five months, the statistics bureau said June 11, compared with a 19.5 percent decline for all of 2008.
Then check out Michael Pettis' Chinese loan table:

New loans

2008

2009

January

804

1,600

February

243

1,100

March

286

1,900

April

464

591

May

319

665

June

332

1,200

Half year

2,448

7,056

July

382

August

272

September

378

October

182

November

478

December

772

Total

4,912




Pettis, in a long post worth reading in its entirety, goes on to say:
It seems that few things are more dangerous than the belief that governments can eliminate or sharply reduce the risk of financial crisis. The idea that a country’s financial system can act as crazily as it likes as long as the government is willing to protect it from its folly runs not only into the problem of undermining government credibility as bad debts surge, but the very belief almost guarantees that the financial system will act in a crazy way.
Judging from the commentary I come across, many investors believe China's fundamentals are strong enough to plow through the bad loans via high growth (assuming they aren't ignoring the loans entirely). Several Chinese economists are worried about inflation, however, and the loan growth shows their worries are justified. As we've seen in the U.S., however, asset inflation can be "sterilized" by way of asset deflation. Risk is increasing as loan growth remains high and the equity markets rally, but how that risk manifests itself (other than bad loans) determines the investment strategy. At this point, I'm not convinced of inflation or deflation, though I lean towards inflation because of the government's desire for growth.

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