China to Cut Loans as Stocks ‘Bubble’ Grows, Xie Says

(Bloomberg) -- China may cut growth in new loans by half in the last six months of this year to deflate a bubble in the world’s second-best performing stock market, according to former Morgan Stanley chief Asian economist Andy Xie.

The Shanghai Composite Index has surged 87 percent in 2009 as 7.37 trillion yuan ($1.1 trillion) of bank loans and government spending spur an economic recovery. The index plunged the most in eight months on July 29 on speculation the government will curb inflows into a market trading at its most expensive since January 2008. “The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said independent economist Xie, who correctly predicted in April 2007 that China’s equities would tumble. “I think the property and stock markets will come under pressure probably around October time,” he said in a Bloomberg Television interview in Hong Kong today.

China’s central bank said July 29 it will use market tools to control lending growth and affirmed a “moderately loose” monetary policy to support the nation’s economic recovery. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported, without saying where it got its information. That compares with new loans of 1.53 trillion yuan in June. A People’s Bank of China official said the regulator doesn’t comment on information it didn’t distribute. Fu Weiyi, a Beijing-based press officer at the China Banking Regulatory Commission, couldn’t be reached for comment at his office.

Equity Inflows
It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June. An estimated 1.16 trillion yuan of loans were invested in the stock market in the first five months of this year, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s cabinet.

The Shanghai Composite added 2.7 percent to 3,412.06 at the close, capping a 15 percent monthly gain, its biggest since August 2007. This year’s rally follows a 65 percent plunge in 2008. The index, which doubled in 2006 and 2007, remains about 2,700 points below its October 2007 high.
“The Chinese stock market is always like that,” Xie said. “It goes up a lot and then it goes down a lot. It never is in a steady stage. I’m afraid this time it’s very similar.”

Lending Caps
China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd., the nation’s two largest banks by assets, will cap second-half new lending at about 200 billion yuan each, Beijing’s Caijing magazine said in separate reports in the past two weeks, citing officials it didn’t name. Construction Bank lent 709 billion yuan in the first half, while ICBC advanced 864.6 billion yuan, the magazine reported.

“It’s very difficult for the Chinese government to manage” the risks of a bubble, said Lau Chi Yiu, Hong Kong-based executive director at United Gain Investment Ltd., which runs a $100 million fund investing in China, Taiwan and Hong Kong. “If they are too aggressive, the market may not recover.
Speculation the government would rein in lending sparked a 5 percent decline on the Shanghai Composite on July 29, helping value of shares traded in China to surpass the combined amount in the U.S., U.K. and Japan for the first time on record.

‘Speculative Mania’
Transactions on the Chinese stock exchanges surged to $63 billion on July 29, more than the $58 billion that changed hands on markets in New York, London and Tokyo that day, according to Bloomberg data going back to January 2008. “There’s absolutely clear evidence of a speculative mania having returned to the stock market,” said Grantham Mayo Van Otterloo & Co.’s Edward Chancellor, a Boston-based member of the asset allocation team at GMO, which oversees more than $90 billion.

Individual investors opened more than a million stock accounts in the two weeks to July 24, data from the nation’s clearing house showed, the fastest pace in 18 months. “The last leg of the market upturn is a lot of new investors jumping in,” Xie said. “We’re seeing that now. As soon as this wave of new investors is exhausted, then the market will start to go down.”

The slump on July 29 hasn’t scared retired elementary- school teacher Wu Ruiling away from stocks. Sitting at an outlet of Shenyin & Wanguo Securities Co. in Shanghai’s Luijiazui financial district yesterday, the 70-year-old said the rout cost her a paper loss of 30,000 yuan, paring the value of her investments to about 700,000 yuan.
“I’m not afraid of the plunge and I wouldn’t sell my stock because the upward trend is still there,” said Wu, who owns shares in 18 companies including Wuhan Iron & Steel Co. and Huaxia Bank Co. “Stock programs on the TV and radio all said it’s a good opportunity to buy.”