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Market mania needs cooling down

(China Daily)
Updated: 2007-05-15 09:09

The latest financial figures for April put increased pressure on policymakers to tackle the stock market mania.

The central bank announced on Sunday that Chinese households deposited less money in bank accounts last month, rare in a country where people save rather than spend.

During the same period, growth in M1, the narrower measure of the money supply that includes cash and bank deposits that can be withdrawn on demand, achieved a growth rate that outpaced the M2 indicator, which includes cash and all deposits.

The two figures undoubtedly indicate that many Chinese are keeping money readily available for, or have already invested in, the stock market.

As proof, the number of new stock market accounts totaled 8.58 million in the first quarter. The number was 5.38 million for all of 2006.

The rush to invest would be invaluable in a bear market, but it can only indicate increasing danger in a market that has already risen by 50 percent this year after more than doubling last year.

Policymakers are aware of the risks, as central bank governor Zhou Xiaochuan admitted last week in Basel, Switzerland. But they are obviously hesitating to raise the interest rate.

Whether or not to raise interest rates is always an issue of dispute. The growth in the money supply and loans in April and the macroeconomic growth in the first quarter indicate the need to cool off the economy by raising interest rates.

But the April consumer price index, released yesterday, indicated that such a move may not be imminent.

The CPI grew by 3 percent in April and 2.8 percent in the January-April period. The April figure was on a par with the benchmark set by the central bank and was below the 3.3 percent increase in March.

The interest rate is certainly an important factor influencing the amount of money flowing into the stock market.

The soaring stock market is obviously attracting investors to divert money from their savings accounts. The root cause is that the de facto negative interest rates as a result of the low interest rate and rising inflation have attracted people to join the stock market gold rush.

If they had more channels for investment, people might not have swarmed into the highly risky stock market.