Chinese stocks soared this year after diving off the cliff in 2008. However, since hitting the high point, Chinese stocks are now down about 20% in the past month or so. Prior to this recent drop, Chinese stocks had had a very good run in 2009.
Now, we may be getting some inkling of what drove the performance and the answer is Chinese government stimulus. This report, based on analysis at the Bank of China suggests that massive amounts of cash from stimulus loans may have gone into buying stocks rather than equipment [emphasis added]:
Mis-Directed ‘Stimulus’ Was Huge Part of China Market Action (Business Insider, September 2, 2009, Vincent Fernando)
Shanghai stocks have cratered over 20% from their August highs, despite Premier Wen Jiabao’s continued jawboning.
Most people realize by now that speculative inflows, resulting from easy domestic lending, have fueled the rally year to date. What hasn’t been so clear, until now, was the exact size of these inflows.
It turns out that as much as 1.2 trillion yuan ($175 billion) of stimulus-related money, intended for fixed asset investment, may have accidentally flowed into Chinese stocks and property as per Bank of China analyst Shi Lei.
Such a massive quantity amounts to 26% of the entire Shanghai and Shenzen stock market turnover for the first half of the year. It also equates to 76% of real estate turnover over the same period…
This is interesting, but not terribly surprising I suppose. The Chinese government engaged in massive financial stimulus and, not surprisingly, a lot of that money was put into financial assets rather than long-term business equipment, factories and so on.
Assuming that flow of co-opted cash has slowed, it’s no wonder the Chinese stock market action has cooled off. Question is, is this a short-term phenomenon?
This report from China Stakes give details on borrowers using cheap government-backed loans to speculate in stocks.
Chinese Stocks, Bubbles and Bears – Kurt Brouwer, Fundmastery Blog
