So Much For Stimulus: Chinese Loans Diverted to Stocks, Feeding Rally

The China bulls have commented approvingly on the growth in loans in China, seeing it as a sign of pending recovery, along with an upswing in stock prices. We’ve pointed out that economist and China commentator Michael Pettis has heard quite a few reports that many of these loans were in fact sham transactions to meet government targets.

And now it gets even better. One analyst estimates that more than 1/3 of the total “new” lending (assuming that the loans were truly extended) may have gone into the stock market.

From Bloomberg (hat tip reader Michael):

Chinese companies may be using record bank lending to invest in stocks, fueling a rally that’s made the benchmark Shanghai Composite Index the world’s best performer this year, according to Shenyin & Wanguo Securities Co.

As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview today, citing money supply figures.

China’s banks lent a record 1.62 trillion yuan in January as part of a government drive to stimulate the world’s third- largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of 2009, compared with a 10 percent decline in the MSCI World Index.

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  1. ndk

    Potemkin bank recapitalization versus Potemkin stock market appreciation. While I’m not sure which is more pathetic, I would like to thank Nakagawa and Abe for making our leaderships look good by comparison.

    We’re watching global margin compression in the wake of oversupply in a wide variety of industries, and profitability in China was never that good to begin with. I certainly believe they’ll see the worst of this economically, but also emerge in relatively good condition on the other side of the chasm.

    Until then, remember the massive overhang of capacity dangling over almost every industry in the world right now. Whether it’s a desperate South Korean chipmaker or North American shale gas, pricing power and profits will have an extraordinarily difficult time getting off the mat any time soon.

  2. Anonymous

    of course the money will leak to the asset market. What do you expect? Michael Pettis showed in one document that ICBC had 1/3 of its Jan. loan lent to infrastructure projects. 2/3 of the loan was spent in discounted bill market, which was the funding sources for many private companies. The money was intended to reinflate. It seemed at least for now, it did reinflate.

  3. ndk

    The money was intended to reinflate. It seemed at least for now, it did reinflate.

    I’ve got to disagree with you here, 12:08. We’ve become far too obsessed with the financial side of the economy and ignorant of the real side.

    Supporting the equity value of corporations does nothing to directly increase demand in an economy. Nothing is purchased; nothing is consumed; nothing is built. Profits and revenues from operations don’t increase. At best, the corporation could issue more stock to take advantage of the artificially inflated share price.

    The only other possible benefit to the real economy is through the psychological wealth effect. While that’s not negligible, it’s not efficient, and I have strong doubts that any government can so directly control the expectations and emotions of its citizens.

  4. Anonymous

    12:21 sounds like inflation to me. Increasing money supply while the economy stagnates has led to asset price appreciation and a commensurate drop in purchasing power. It seems our generation will be one that gets unceremoniously reminded that fiat currency is not a reliable measure of wealth.

  5. Anonymous

    NDK said:

    “and I have strong doubts that any government can so directly control the expectations and emotions of its citizens”

    But damn if they’re not going to try…again and again and again

    The rebate checks in the US, the stimulus bill aimed at ‘helping Main Street and not rewarding Wall Street’, or in the more distant past the Japanese Government’s attempts not to stabilize the Nikkei, but to try to create a new bull market (1992-1996) when they unleashed the Postal Savings and Postal Insurance money into the stock market.

    All failed, or are in the process of failing.

    Though I doubt the Chinese Government’s intent was to prop up the stock market, they may be welcoming that bit of (perhaps temporary) serendipity. The danger is if the general public doubles down, and then the rug is pulled out a second time, leaving the 140,000,000 private stock investors burned yet again.

  6. Cathryn Mataga

    Governments, give up trying to start up consumer spending with more debt!

    It’s about time for some good ole’ fashioned redistribution of wealth or monetary expansion into the hands of consumers, right now — massive scale. We need to improve demand before the rest of the planet’s companies go bankrupt.

    Time is running out, and common wisdom these days allows governments to give money to everyone except the ones that matter.

  7. MyLessThanPrimeBeef

    On the moral ladder, that is a couple of rungs higher than using government loans to pay yourselves bonuses.

    Still, if nations keep this up, soon we will have 1 billion people on the planet out of work – the first billion unemployed global depression in history.

  8. alexblack

    One billion unemployed! Think of the size of the Keynesian ditch that they can dig and then refill! The 8th wonder of the world!

    And to pay them all, we might even create a few Permanent jobs – hiring people to add zeroes to all of the world’s banknotes.

  9. Anonymous

    Really, if it’s a pump and dump in China, it will take another injection at 2X the previous amount to try and restart engines again.

    In the meantime I suggest you withdraw enough cash to have on hand for at least a 30 day emergency.

    Things ain’t look’in so good.

  10. Anonymous

    A chance that the money did not flow to physical assets. China is pegged the dollar and it shows… Massive worldwide inflation is the next step anyway. Money poured into the monetary-financial system will run to the exits, tangibles i including gold.

    This economy, the worldwide one, has over-invested in long term assets that offer negative returns, from homes in Nebraska to steel in the “middle” of China (yes the “Middle” is a problem)…

    Please Yves help people understand that we need to stop the fiat-paper-nightmare…

    A foreigner supporting Ron Paul

  11. Expat

    Given the news coming out of China and the performance of the Shanghai exchange, it seems pretty obvious to me that most Chinese cadres own shares. The stimulus money has directly stimulated share prices, avoiding all that mucking about with lending, investing and creating wealth.

    Well, it means just one thing, folks. China is now a full-fledged capitalistic nation, following firmly the example set by America.

    To paraphrase Coleridge, “FIRE, FIRE everywhere, nor any value to drink.”

  12. ndk

    To paraphrase Coleridge, “FIRE, FIRE everywhere, nor any value to drink.”

    It’s quite unfair to liken government stimulus plans to albatross. I’d prefer perhaps a Californian condor, or even an emu.

    We can move on to zombie sailors if they keep up with the zombie banks, though.

  13. Anonymous

    I perceive there is a difference between banks actions where they have been strong armed into lending more money, and the government stimulus. Who are banks going to lend to into a downturn and why then are we surprised when accountancy tricks are used and the money ends up anywhere but where it was intended to go.

    Cement and Iron ore prices though are beginning to rise a little as railway schemes get under way. I don’t think the stimulus package is anywhere near big enough to have a real affect other than to push up some commodity prices and cause problems outside of china. In other words it may be a good way to export unemployment back to the US.

    My big concern at the moment is not Japan, Asia, China or Eastern Europe although all look to have the earmarks of delivering a black swan event, but Russia and the exposure of certain banks to it. With ruble devaluation continuing and reserves dwindling Russian banks have been using government money to speculate on currencies. Already there are rumours of some Russia banks seeking government intermediaries in refinancing certain loans with European banks. Meanwhile GDP has gone from 5.6 growth last summer to around 4 percent shrinkage during January with 800000 jobs lost in December. There are also rumours of deep government budget cuts and increases in some lending rates as the government tries to stabilise the currency. The worry is that further problems if not contained by the authorities could cause big write downs at some European banks, with German banks suspected of having a sizable stake in this pie, hence some of the recent declines in the Euro.

  14. Anonymous

    “The regulators are overwhelmed because of personnel cuts (particularly heavy among their best, most experienced examiners that had worked banks that had engaged in sophisticated frauds. Buyouts were common, because more experienced examiners appear more expensive.”

    Didn’t I read that the Bush administration had starved the regulators of funds?

    Wasn’t obvious we wuz being robbed when we heard of the first $8 billion in CASH disappeared ini Iraw?

    This looting is beyond belief –and continues.

  15. Donlast

    The Chinese cadres and state company men are really incorrigible. They do this time and again – use public money and the company to play the market. That’s the Chinese way of capitalism. It is borne by the citizenry with an enduring patience because they do not expect anything else from government whether Emperor or Communit Czar. But the people are hard-working and entrepreneurial. Savings are high. Consumption is only 40% of GDP. International reserves are massive. China will make out for sure.

  16. Aaron Krowne

    You guys are silly. And you are comparing this to what… the US, where no money ever is misappropriated and “leaks” into the stock market?

    Oh wait, here, we consider the stock market the DE FACTO diagnostic of whether the economy is doing well. The government seems to be happy to outright PRETEND to conduct stimulus, as long as it thinks it will please the stock market.

    And they have made sure to supply the liquidity on liberal terms with near-zero accountability to the money center banks to help make it happen.

    I know most of US Westerners are secretly wishing for the rest of the world to have it as bad as us, but that is just unlikely to be the case. The Chinese haven’t torched their banking system with toxic loans, and they’ve got huge surpluses to mobilize. Sure, a significant portion of that will be wasted, but that’s no different than anywhere else. What is massively different is the starting conditions.

  17. mxq

    “The Chinese haven’t torched their banking system with toxic loans, and they’ve got huge surpluses to mobilize.”

    Right. But, quid pro quo, they have torched/outsourced their consumption and productive investment capabilities.

    As pettis once pointed out, saving is and always will be perceived as being more virtuous than spending. But in economics, things are only virtuous until a certain point is reached (equilibrium). The savings in china aren’t being properly converted into productive investments.

    So where the west’s profligate spending has been an error of commission, Asian mercantilist savings have been in error of omission.

    btw, there’s tons of info at the US china economic and security review commission, which is having a hearing today on the Sino-American economic relationship. Pettis and Roach (to name a few) have testimony posted.

  18. VangelV

    In some cases it could well make sense to use the cash to buy shares that are selling at liquidation prices because of deleveraging and fear. If a Chinese fertilizer or seed company can use bank loans to buy back shares selling for three times cash flow why shouldn’t it do so? Or if a company can purchase growth in the stock market at a far lower price than it could by investing in greenfield operations why not take the opportunity?

    What may be lost by some of the critics on this site and elsewhere is the future purchasing power of the currencies. As someone who remembers the effects of removing zeros from the currency and who has listened to parents and grandparents describe their hyperinflationary experiences I am quite reluctant to critique a policy that would use debt to buy claims on real assets.

  19. mxq

    angel: “I am quite reluctant to critique a policy that would use debt to buy claims on real assets.”

    I don’t disagree with that notion, but China doesn’t seem to be doing just that:

    from IHT:

    “39 percent of the new loans in January were in the form of discounted bill financing, in which banks trade short-term corporate bills, usually bankers’ acceptances, that they have endorsed for corporate customers, the central bank said. That was up from an average of 13 percent for 2008.

    Companies generally use such financing for short-term cash needs rather than long-term investment…[bill financing as a] share of new loans may reveal flaws in the government’s economic stimulus efforts. It implies that loan demand for projects under China’s 4 trillion yuan spending plan remains insufficient to absorb excess liquidity created by monetary easing”

    China doesn’t have a massive financial black hole to fill and their problem isn’t a lack of credit.

    Their problem is overcapacity that was geared to serve over-consumption from the West.

    But attempting to soak up this capacity by pumping more money into the system in the hopes that everybody will reverse generations of thrift seems ill-conceived (at best) and will (at worst) serve to exacerbate the already bleak over-capacity situation.

  20. VangelV

    I see no reason why the Chinese can’t start to consume more of the products that they already make for Western markets. While it is obvious that many factories will have to close down that is not an unusual process for China. When I was there last March many of my contacts were pointing out that thousands of toy and textile factories had closed or were in the process of being closed as production was moved to cheaper jurisdictions like Vietnam.

    If the government is going to offer cheap money it makes sense for the businesses to use it for their highest priority and most effective projects. That is unlikely to be investing in more capacity where none is needed.

    We also have to keep in mind that China is expected to go through many corrections as it moves forward. I do not believe that anyone but the most naive of China bulls ever thought that the ride would be a smooth one. Eventually the Chinese will figure out that if they want to decouple from the West they need to bite the bullet and let the USD go down. One way to do that and still hedge their holdings would be to purchase large commodity producers and other non-financial companies that have plenty of long-term USD denominated debt on their books. After the dust settles the Chinese could find themselves with a lot of productive capital and infrastructure, large stakes in solid commodity producers that provide the inputs that their industries need and a well trained domestic workforce that can consume many of the products that Chinese factories are producing.

    It certainly makes sense for the Chinese to think about putting themselves in a position to outbid the American consumer for goods and commodities in a world where resources are limited. This is particularly true in the energy markets, where depletion is running at 6-7%, production is running ahead of discoveries and investment is collapsing.

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