The banks have finally stopped lending, and the market bubble has popped. Shanghai fell another 4.3pc today.
In Shanghai, new bank loans dropped by 80pc between June and July, from 99.9 billion yuan to 17.11 billion, according to the Oriental Morning Post.
Without that huge stream of money flowing into the system, investors appear to have taken fright. Shanghai’s market has tumbled around 20pc in two weeks, a technical bear market.
Although the government keeps insisting that loose monetary policy will continue, and that economic growth is a priority, it is becoming clear that officials feel that the property and stock markets are far too hot.
The banking regulator’s first step has been to suspend sub-prime lending by small and medium-sized banks. By the end of the first half, banks had passed out 160 billion yuan of sub-prime debt.
The Chinese securitization market is in its infancy, but if banks were securitizing this sub-prime debt to circumvent their capital adequacy ratios, that practise will now stop, meaning some more liquidity will be taken off the market as banks build up their reserves.
It’s not the biggest sum of money in the scheme of things, but it’s a strong signal to both the property and equity markets that government policy is about to turn against them.
Goldman Sachs is now predicting that there will be a 0.5pc point rise in the reserve ratio requirement for banks by the end of the year, and three 0.27pc point interest rate hikes through 2010. Goldman has one of the most bullish outlooks for the Chinese economy, so it’s unsurprising that it has one of the most aggressive predictions for monetary policy.
The big question is whether the market has now peaked. Typically, bull markets peak in the middle of a tightening cycle, rather than at the end of an easing cycle. However, China is different for many reasons. The first is that the market is structurally volatile, and trades on perception rather than fundamentals. Shanghai, as we all know, is no reflection of the Chinese economy in general.
It may well be that companies continue to have access to cheap money, but that won’t stop investors from feeling gloomy that the good times are now over. Since Shanghai has performed so much better than any other market in the region, funds may choose to take profits now and try to reap safer returns in Hong Kong or the US.
Secondly, and more importantly, there has always been a very clear link between money supply and the market. The charts of M1 and M2 money supply tracked the expansion of the market in 2006 and 2007 almost perfectly.
Chinese investors have learned to intuit the warning signs from the government about the market. This time the message is clear and the reversal is likely to continue.