Did Chinese Government Stimulus Drive the Latest Rally?

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:

$1.2 Trillion Yuan Diverted

China’s Big Banks to Curtail Lending

Comments

[king Lee:]

China is still relatively closed equity and capital market ,What is happening in China stock market is confined to local players .And that can invite trouble for investment opportunities were limited with export market on the downside , domestic market too competitive and infrastructural investment /fixed assets investment controlled by SOEs and redundant ,the easy credit provided by the banking system go no productive outlet to go ,so ultumately they landed up or parked by the stock and property market,That explained for the volatile ups in stock market up to 20% and the up of property prices.

Believe me,China loosening up of its accommadative credit/and liquidity policy could not and CANNOT STOP half way NOW!Other wise it would threaten the one-party regime of CPC ,as nothing is more important and paramount that keeping the growth of eigne going forward ,as China is celebrating the 60 th anniversay of the founding of PRC.

AND based on my independent and analysis of China political reforms of my working group Peaceful Reunification of China--Oversea promoter(or in short PRC-Op) blog add:kinglee lianganguanxi.blogspot... login google blog search ) you might get some fresh idea of the how political development of corss Straits relationship between mainland China and Taiwan impacting on the economy of China .

The engine of growth of China fuel by adequately accommodating credit policy as emphasized by premier Wen and thus liquidity over flowing the market simply COULD NOT STOP ,it WOULD spell DISASTER .

And this explained why the world bank asking China to continue additional stimulus package to boost up the morale as well as the necessity .to navigate the world out of the slump created by the "USD syndrome" The question is for how long and at what cost China can afford to do it before before cave-in of China unfold?

Sep 03 06:39 AM

[Alphameister:]

Considering the overcapacity in China and the greatly undervalued bargains in China's equities late last year, should we be surprised that many sensible corporate officers, encouraged to borrow, concluded they could derive returns from stocks superior to those they could anticipate through real investment? Our US companies often do the same thing when they initiate buybacks of their own stocks. The run in Chinese equities was emintently justifiable by prospective gains in profits during the second half of '09 and in 2010 and beyond.

Sep 03 09:06 AM

[who:]

Sure did! The latest rise in housing market in HK (upto 1997 levels for some estates) were almost driven by mainland Chinese which have dropped significantly as reports of curbing loans went out. In HK we have highest level of unemployment for a long time and employment is still very weak.

Sep 04 11:36 AM

[Joseph L. S...:]

It may have worked out anecdotally for Wu Hua and any others who speculated with borrowed money, but it was likely pure luck.

Buying equipment with a 10- or 20-year life will pay off, albeit not this year. Doing stock buybacks will reduce float, retain dividends, and provide an investment in ones own company.

But he who borrows just to speculate on an overheated market should heed the adage usually reserved for over-eager and over-leveraged short sellers: “He who sells what isn’t his’n, must buy it back or go to prison.”

Sep 04 04:14 PM

[The Truth1798:]

See a good article here in Foreign Policy Magazine on topic: www.foreignpolicy.com/...

Sep 05 04:48 AM

[doubleshortetf:]

CCP (Chinese Communist Party) is looking for foreigners to pile in and sustain the bubble. Thus they've just increased investment quota's for foreign funds by 25%. Talk about impeccable timing...

From Bloomberg:

“We have raised the limit for each fund to $1 billion within the current total $30 billion size of all funds to encourage more good investors to come in,”

Got to give credit to CCP coots to invite the "foreign devils" suckers into the greatest gambling den where the house is CCP. And there will be plenty to see all these fools who think China will save the world from economic calamity. Don't they know China's GDP per capita is 3rd world?

Some sober data on China for investor (speculators) fascinated with China - 3rd world country ruled by 1 party AKA communist. Similar to the adoration US had for Japan 20 yrs ago right before the mother of all Japanese bear markets starting in 1989.

China would have to triple the size of its economy - and the US would have to stand still - if China were to pull even with the US in GDP.

Consider the following numbers, culled from official Chinese statistics:

1. About 65 million Chinese people live in households with more than $20,000 a year in income.
2. Around 165 million make between $2,000 and $20,000 a year.
3. About 400 million Chinese have household ­incomes between $1,000 and $2,000 a year.
4. About 670 million have household incomes of less than $1,000 a year.

As you see China is a land of extra­ordinary poverty.

And some dreamers to think that China can pull US and the world out of financial rut...

Sep 05 12:18 PM

[Ricard:]

Great comment, although the per capita numbers adjusted for parity are a bit more realistic and a bit less depressing.


On Sep 05 12:18 PM doubleshortetf wrote:

> CCP (Chinese Communist Party) is looking for foreigners to pile in
> and sustain the bubble. Thus they've just increased investment quota's
> for foreign funds by 25%. Talk about impeccable timing...
>
> From Bloomberg:
>
> “We have raised the limit for each fund to $1 billion within the
> current total $30 billion size of all funds to encourage more good
> investors to come in,”
>
> Got to give credit to CCP coots to invite the "foreign devils" suckers
> into the greatest gambling den where the house is CCP. And there
> will be plenty to see all these fools who think China will save the
> world from economic calamity. Don't they know China's GDP per capita
> is 3rd world?
>
> Some sober data on China for investor (speculators) fascinated with
> China - 3rd world country ruled by 1 party AKA communist. Similar
> to the adoration US had for Japan 20 yrs ago right before the mother
> of all Japanese bear markets starting in 1989.
>
> China would have to triple the size of its economy - and the US would
> have to stand still - if China were to pull even with the US in GDP.
>
>
> Consider the following numbers, culled from official Chinese statistics:
>
>
> 1. About 65 million Chinese people live in households with more than
> $20,000 a year in income.
> 2. Around 165 million make between $2,000 and $20,000 a year.
> 3. About 400 million Chinese have household ­incomes between $1,000
> and $2,000 a year.
> 4. About 670 million have household incomes of less than $1,000 a
> year.
>
> As you see China is a land of extra­ordinary poverty.
>
> And some dreamers to think that China can pull US and the world out
> of financial rut...

Sep 05 05:24 PM

[Fighting Yoda:]

The Chinese markets are in a much bigger bubble than even the US. Chinese Govt is printing a lot more RMBs than US - that is the only way they can keep the RMB from appreciating. Lot or most of stimulus money has directly gone into stock speculation. The GDP growth in China is pure fiction- with exports and imports down by 20-30% how can there be growth, even electricity consumption is down. Loan disbursements count as GDP in China, and the investment of these loans to fuel the stock market bubble is considered proof positive of growth. The Govt. would also soon realize the limitations and limits of commodity stock piling – we will see where commodities and oil go.

China is too very small and too very poor (per capita income) to pull the world through any kind of recession, and right now we are in the Great Recession. But for all the hype and Trillions being mis-spent is cushioning the blow and delaying the inevitable - we are headed towards the Depression.

Fools never learn, after the 70% crash we would hope people would have learnt - but no - hype springs eternal and fools and their monies always part.

Sep 06 12:18 PM

[huangthomas:]

It is more depressing. Chinese per capita GDP is comparable with most of subsaharan African nations. Let's examine the PPP (purchasing power parity) figures: China, 9.8 (current figure is 3.5); Namibia, 10.9; South Africa, 20.3; Botswana, 28.9; ......


On Sep 05 05:24 PM Ricard wrote:

> Great comment, although the per capita numbers adjusted for parity
> are a bit more realistic and a bit less depressing.

Sep 06 08:02 PM

[Roman Sagdiyev:]

interesting article..

Sep 07 07:27 AM

[Paul Harper:]

aren't you getting alittle bored with posting this same piece on every article on China ?


On Sep 05 12:18 PM doubleshortetf wrote:

> CCP (Chinese Communist Party) is looking for foreigners to pile in
> and sustain the bubble. Thus they've just increased investment quota's
> for foreign funds by 25%. Talk about impeccable timing...
>
> From Bloomberg:
>
> “We have raised the limit for each fund to $1 billion within the
> current total $30 billion size of all funds to encourage more good
> investors to come in,”
>
> Got to give credit to CCP coots to invite the "foreign devils" suckers
> into the greatest gambling den where the house is CCP. And there
> will be plenty to see all these fools who think China will save the
> world from economic calamity. Don't they know China's GDP per capita
> is 3rd world?
>
> Some sober data on China for investor (speculators) fascinated with
> China - 3rd world country ruled by 1 party AKA communist. Similar
> to the adoration US had for Japan 20 yrs ago right before the mother
> of all Japanese bear markets starting in 1989.
>
> China would have to triple the size of its economy - and the US would
> have to stand still - if China were to pull even with the US in GDP.
>
>
> Consider the following numbers, culled from official Chinese statistics:
>
>
> 1. About 65 million Chinese people live in households with more than
> $20,000 a year in income.
> 2. Around 165 million make between $2,000 and $20,000 a year.
> 3. About 400 million Chinese have household ­incomes between $1,000
> and $2,000 a year.
> 4. About 670 million have household incomes of less than $1,000 a
> year.
>
> As you see China is a land of extra­ordinary poverty.
>
> And some dreamers to think that China can pull US and the world out
> of financial rut...

Sep 07 06:05 PM