MORE ON THE POTENTIAL CHINA MARKET CRASH….

MORE ON THE POTENTIAL CHINA MARKET CRASH….

Courtesy of The Pragmatic Capitalist

Guest post from Sajal at Fundamental Insights and Ideas:

Blockbuster Chinese June loan growth: 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.

We titled this report “Is China the Next Bubble?” Well, is it? If it is, we probably are in its very early stages. Despite the sharp increase in lending over the past few months, there is little evidence to support the notion that important sectors of the Chinese economy have excessive amounts of leverage at present. Obviously, specific households and individual businesses may have borrowed too much recently, and they could run into problems. However, leverage does not seem to be a systemic problem at present. If we had to list five things that keep us lying awake at night, worries about the imminent bursting of a credit-fueled bubble in China would not be on that list. That said, if Chinese credit growth remains unabated over the next few years, our nights may eventually become more restless.

“Today’s data show that Chinese policymakers have been successful in turning growth around, but looking forward the main question is how long will they keep policy so accommodative? In the near-term we think the focus will remain on supporting growth, but there is an increasing chance that policy will need to be tightened sooner and more forcefully to deal with potential problems caused by very easy liquidity. The accelerator is clearly working well, but at some stage the brake will need to be used.”

BNP isn’t the only one worried about a double dip market crash in almight China.  Regular readers are familiar with the recent piece we posted about the potential of a Chinese market bubble.