Chinese Stocks, Bubbles & Bears
Kurt Brouwer September 2nd, 2009
Chinese stocks soared this year after diving off the cliff in 2008. However, since hitting the high point, Chinese stocks are now down about 20% in the past month or so. Prior to this recent drop, Chinese stocks had had a very good run in 2009.
Now, we may be getting some inkling of what drove the performance and the answer is Chinese government stimulus. This report, based on analysis at the Bank of China suggests that massive amounts of cash from stimulus loans may have gone into buying stocks rather than equipment [emphasis added]:
Mis-Directed ‘Stimulus’ Was Huge Part of China Market Action (Business Insider, September 2, 2009, Vincent Fernando)
Shanghai stocks have cratered over 20% from their August highs, despite Premier Wen Jiabao’s continued jawboning.
Most people realize by now that speculative inflows, resulting from easy domestic lending, have fueled the rally year to date. What hasn’t been so clear, until now, was the exact size of these inflows.
It turns out that as much as 1.2 trillion yuan ($175 billion) of stimulus-related money, intended for fixed asset investment, may have accidentally flowed into Chinese stocks and property as per Bank of China analyst Shi Lei.
Such a massive quantity amounts to 26% of the entire Shanghai and Shenzen stock market turnover for the first half of the year. It also equates to 76% of real estate turnover over the same period…
This is interesting, but not terribly surprising I suppose. The Chinese government engaged in massive financial stimulus and, not surprisingly, a lot of that money was put into financial assets rather than long-term business equipment, factories and so on.
Assuming that flow of co-opted cash has slowed, it’s no wonder the Chinese stock market action has cooled off. Question is, is this a short-term phenomenon?
This report from China Stakes give details on borrowers using cheap government-backed loans to speculate in stocks.
As Bank Credit Ebbs, Is the Stock Bull Market Doomed? (ChinaStakes.com, August 28, 2009)
…21st Century Business Herald reports an anecdotal case. At the end of February, just after Spring Festival (the Chinese New Year), a loan officer from a large state-owned bank offered loans with a nice interest rate discount to Wu Hua, owner of a textile company in Hangzhou. Private enterprises, especially private enterprises in the textile industry, seldom enjoy such preferential treatment, but the loose monetary policy this year allows banks to relax lending standards, and banks have been busy looking for potential clients. Wu took the money.
In March, Wu received the first loan of 20 to 30 million yuan. (He has refused to disclose the total amount he has received.) How to spend the money was a problem. Because of shrinking export orders and an inadequate rate of operations, purchasing equipment would merely have resulted in greater losses. Wu took 30% of the loan to invest in stocks. “I dared not invest it all. If the loss reached 10%, I would withdraw immediately to ensure repayment to the bank.”
On July 29, the Shanghai market dropped 5%, surprising Wu. He saw sharp adjustment and increasing risk in the market. He also received a call from the bank officer, asking about the progress of the loan. On August 7, he withdrew all the money from the market. In less than five months, he had earned about 30% on his borrowed investment.
His loan period is one year at a rate of 4.779%, the floor limit required by the central bank. Suppose Wu borrowed 30 million yuan. The one-year interest is 1.4337 million yuan. Suppose he invested about nine million yuan in the stock market, and earned 2.7 million yuan. After repayment of interest, he would still have earned 1.26 million yuan…
By way of background, one yuan equals more than 14 cents in U.S. dollar terms. So, this businessman speculated and netted a fast $180,000 or more using government loans. Of course, it could have gone the other way too. Wouldn’t want to be in his shoes if it had.
It may be that the release of this report from the Bank of China is a warning to Chinese businesses not to get carried away in this type of speculation.
See also:
China’s Big Banks to Curtail Lending
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