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 trading partners.
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 industry.
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". 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, 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.