Blockbuster Chinese June Loan Growth: Is the Final Stock Surge Ahead?

It is widely accepted that a big reason for the Chinese equity rally was the massive increase in banking loans and money supply. Thus when the Financial Times reported a blockbuster June loan growth, I wondered if this would lead to a July-August surge in the stock markets, the last one. Looks like we might be getting one.

Here are two charts showing the credit and money supply surge:

An excerpt from the FT:

China’s increasingly fretful banking regulator worries that rampant credit growth “poses risks” to the financial system. The warning comes after banks advanced Rmb5,840bn ($855bn) of new loans in the first five months, almost triple the amount a year earlier. As for June’s lending, at $220bn it was a blockbuster as banks pumped up their quarterly loan numbers, just as they did in March (to $280bn).

An unknowable amount of this cash has ended up on the blackjack tables of Macao – or that other casino, the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average. But even assuming that most has gone where intended, there are still many reasons to worry.

Early this year when we had a loan surge, it led to a Chinese equity markets rally, which fed on itself, propagating to the rest of the world. (The Indian elections were of course a factor in sustaining the current emerging markets bubble.) This February Bloomberg article alleged:

Chinese companies may be using record bank lending to invest in stocks, fueling a rally. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities.

Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns.

Fast growth and sustainable growth are two DIFFERENT ideas. Growth for growth's sake might not lead to the desired outcome in the long term. The state mandated growth will lead to a huge misallocation of capital, depressing your return on invested capital. Don’t confuse this rally as a beginning of a new bull market. I would argue that what we are seeing is one final bull market gasp led by casino-China. Don’t misread the tea leaves. New lows are ahead of us.

Disclosure: No Positions

Comments

[Sober Realist:]

If loaning out more money is the only way to keep "growth" of any kind going, then it will continue for as long as possible (Summer 2010) until the CCP have some inkling that the rest of the globe is stabalizing. Unfortunately, their stimulus measures will run dry before Western consumption returns to save China's export-driven economy. China has no developed internal market to replace their old customers and is light years away from developing one. The Chinese have no plan B for an L-shaped recovery which is what we are facing. So I see next year as a very tumultuous period.

Jul 17 08:26 AM

[johnthebears:]

Total agreement with author and first comment.

Question, EEM and FXI were on the verge of rolling over... until the big rally the last few days. Will that happen this fall or deferred to next year?

Jul 17 09:47 AM

[ObjectiveFu...:]

Amen, and David Merkel agrees with you.

alephblog.com/2009/07/.../

And if you're looking for the "pride coming before a fall" angle, here's a little "stimulus" Chinese-style. Audis and Beemers for everybody! (in officialdom, that is -- everyone else can drive Geelys)

www.bloomberg.com/apps...

Jul 17 10:29 AM

[Sober Realist:]

I tried to pin a date on this bursting bubble and here's what I got:

Michael Pettis:
" I expected that after the 1987 crash Japan’s economy would get into serious trouble, but it enjoyed another 2 years and more of bubble conditions and high growth before the final adjustment took place. I think the same may happen in China. And as one of my Columbia professors assured me before I became a trader, “never short a bubble.”

Derek Scissors, Ph.D.:
from his recent (7-17-2009) paper "China Refuses to Adjust Its Economy"
"China's economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year. The core of this degeneration is the role of investment, but behind that investment, and making it possible, is bank lending..."
www.heritage.org/Resea...

And this article just out:
JULY 17, 2009, 7:34 A.M. ET Riding China's Stock Market Bubble

"...Individual investors too are piling in. In the mainland, more than 1.6 million stock trading accounts were opened in June – 68% more than the year before.

This buying could go on for some time. If easy money is the main driver of stock market gains, then predicting Beijing's efforts to turn off the taps is key to knowing when it'll all end.

For now, economists expect little in the way of tightening – with consumer prices in China still falling, and the economy far from secure in its recovery – until next year some time..."
online.wsj.com/article...

So this mother could inflate for several more months.
FXP =)












On Jul 17 09:47 AM johnthebears wrote:

> Total agreement with author and first comment.
>
> Question, EEM and FXI were on the verge of rolling over... until
> the big rally the last few days. Will that happen this fall or deferred
> to next year?

Jul 17 11:11 AM

[Mad Hedge F...:]

Load the boat! China’s National Bureau of Statistics announced the data for the only country that matters right now, showing that Q2 GDP growth came in at 7.9%, much better than expected. The Middle Kingdom’s gold and foreign currency reserves soared to a new record of $2.13 trillion. The main impetus has been the country’s $586 billion stimulus program announced earlier this year, which unlike our own, seems to be delivering immediate and impressive results. New bank lending in China is through the roof, thanks to aggressive government prodding. The China ETF (FXI) had a great week, and is now up 74% from my New Year recommendation at www.madhedgefundtrader.... Potentially of far greater importance is China’s decision this week to liberalize foreign capital outflows, a development that went virtually unreported in the Western press. This will make billion of dollars available for direct investment in foreign advanced technology and crucial natural resources. It also means that less cash will be available for investment in US Treasuries, an asset class the Chinese are clearly tiring of. For an in depth discussion of this important reform please read Keith Fitz-Gerald’s excellent piece at www.moneymorning.com/2.../ .

Jul 17 05:14 PM