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Wild swings leave investors edgy

By Wang Bo (China Daily)
Updated: 2009-09-15 07:57

Money supply is being seen as the barometer for bourses with investors often associating lending surges with a market boom. [Xie Zhengyi/China Daily]

With the mainland stock market swinging wildly in the past month, anxious investors are trying to unravel the mystery behind the dramatic ups and downs.

The nearly 20-percent plunge of the Shanghai Composite Index in August and the recent rally over a 10-session winning run have all driven home the point that the key driving force for the swings is directly related to the changes in liquidity supply.

Money supply, which has been the key driver for the nation's economic recovery and helped the mainland shares rebound over 80 percent in the first half of this year, has increasingly become the barometer for the nation's stock market, as investors are used to an associated lending surge along with the boom.

"There has never been such a close relation between bank lending and market movement like this year, as bank credit was endowed with a special symbolic meaning in supporting investor confidence," She Minghua, banking analyst with Haitong Securities, told China Daily.

Related readings:  BOC signals continued liquidity  Shares fall over 6.74% on liquidity worries; heavyweights plunge  Mainland fund assets set to top $1 trillion  It's time to adjust monetary policies to slow loan expansion

Signs of tight liquidity supply could be traced back to July, when the nation's top banking regulator announced a slew of measures to strengthen controls on mortgage loans as well as loans for corporate working capital and fixed-asset investment lending, indicating that banks are reining in lending.

In early August, banks were asked for feedback on a stricter capital requirement, ordering them to deduct holdings of subordinated bonds issued by other banks from their supplementary capital. The move, which was meant to drive down the flood of bank lending, was an indicator of the sharp decline in the stock market that followed thereafter.

Chinese banks churned out 7.37 trillion yuan in new loans in the first half of the year, triggering speculation that a good part of the loans have found its way into the stock market.

As the flood of lending ebbed in July the stock market plunged on concerns that liquidity might not be sufficient to support a bullish market. New loans totaled 355.9 billion yuan in July, less than a quarter of the level it advanced a month ago.

To make matters worse, the nation's top auditors have started to probe the flow of loans extended by major domestic commercial lenders in the first half, which might have sparked a massive exit of speculative capital from the bourses.

However, the Shanghai main bourse has recovered some 11 percent so far this month partly due to better expectations on the credit level in August. The latest credit figures released last Friday indicate that Chinese banks extended 410.4 billion yuan in new loans in August, beating previous prediction of no more than 330 billion yuan.

"With various rules and policies being issued so far, regulators have blocked almost every possible channel that could divert bank funds into the share market," said Fu Lichun, analyst, Southwest Securities, noting that the lending in the rest of the year could further retreat.

"Excessive liquidity cannot shore up the market in the long run, and capital market has to get back to a more profit-driven growth model," he said.

Looking into the breakdown of bank lending in August, short-term loans surged to 121.6 billion yuan, compared with the 10.3 billion yuan drop in July, indicating a strong recovery in corporate demand, said Fu.

"As the nation's macroeconomic environment continues to improve, companies will see their profitability further strengthened, leading the stock market into a more sustainable growth cycle," he said.