China - more specifically its short and mid-term future - has been the theme of the week, with much hype and speculation about coming meltdowns or rampant inflation. The truth, as the true experts conclude, is probably somewhere in between.
The week began with a report in the FT about how Chinese regulators had ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where, they warned, fresh asset bubbles are forming.
In a development that has convinced investors that Chinese banks may cut off lending, regulators have signalled concern that too much money is being lent by the state-controlled banks - a trend that they fear could, while helping a tentative economic rebound, undermine the stability of the financial system.
Further fuelling concern was Shanghai’s big market fall on Wednesday, when stocks dropped nearly 8 per cent before ending down just over 5 per cent, as investors snapped up two newly-listed mainland construction groups while selling down the rest of the market after reports that China’s central bank might rein in bank lending.
On Wednesday, shares in China State Construction Engineering rose by a stunning 90 per cent on their debut before closing 56 per cent stronger in Shanghai. Just a few days before, China’s largest housebuilder had raised Rmb50.2bn ($7.34bn) in the world’s biggest IPO since Visa raised $19bn in March 2008.
Clearly, there is still big speculative investment money sloshing around in China. The appetite for new shares is overwhelming, as the FT noted, with a record number of 566,937 new trading accounts opened last week, the most since January 2008. The question is, where that money goes and what impact it might have.
The surge of funds into the market, explained the FT, has reignited fears of a new bubble forming in both the property and share markets. The Shanghai Composite index has doubled since it hit bottom late last year, beating all comparable indices around the world.
Kicking along the debate have been various bearish views put out by commentators busily capitalising on the surge of interest, or at very least covering their earlier more bullish forecasts.
Among the big names to weigh in are Stephen Roach, chairman of Morgan Stanley Asia, who wrote in this week’s FT: “I’ve been an optimist on China but I’m starting to worry”.
Taking it further, uber-investor Jim Rogers rang the alarm bells this week, warning that Chinese stock prices had run up too far, too fast and that China “could collapse”. (See key parts of Rogers’ video interview with Bloomberg on YouTube here, and the whole interview on Bloomberg here).
The truth, however, is probably more in line with the tempered, intelligent assessment given by China expert Michael Pettis, professor at Peking University and an associate at the Carnegie Endowment, on Friday’s FT opinion page , entitled: “Brace for a decade of lower Chinese growth”.
For now, argues Pettis, an “extraordinary but inefficient expansion in new bank lending has powered the Chinese economy into growth rates that many thought unlikely even six months ago”. But, he warns, rapidly rising bank lending, especially if misallocated in a similar fashion to the previous loan surges, cannot be a long-term solution for slowing Chinese growth. He concludes, probably quite rightly:
Over the next five years or more Chinese economic growth is going to be constrained by growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.
In another thoughtful assessment, the FT’s John Authers concluded in his Short View column on Thursday that Shanghai’s Wednesday sell-down was because the market was overextended and due for a correction.
The debut of a large IPO was an obvious catalyst, he added. With $7.9bn of issuance so far this quarter, this is already the busiest quarter for IPO issuance since the bubble peaked, according to Dealogic. According to Authers:
There were press reports that the biggest Chinese banks were about to shut down lending for the year. As loans by Chinese financial institutions are up a stunning 34.4 per cent over the past year, overheating must be a concern.. The word “bubble” can be overused. If this is another share bubble, it is not yet as big as the one that preceded it. But the two have enough in common to warrant extremely close attention.
This entry was posted by Gwen Robinson on Friday, July 31st, 2009 at 8:43 and is filed under Capital markets, People, Commodities. Tagged with china.
