Stock boom alarms Beijing

Source: Straits Times Aug 3, 2009

BEIJING - THE crowd in the packed Guosen Securities office jostles around buzzing printers that spit out receipts for their share buys, hoping to cash in on China's stimulus-fuelled stock market boom.

FIRMS USE LOANS TO PLAY MARKET THE Finance Ministry says it found some companies played the market with money borrowed for stimulus projects. It gave no details but Chinese companies frequently are accused of violating China's already lax financial controls by diverting money from borrowing or their core business into stocks in hopes of making a quick profit when the market is rising. ... more

'The central government has to fulfil their promise of 8 per cent economic growth,' said Wu Jun, 62, a retired civil servant who has part of his life savings of 50,000 yuan (S$10,500) and lives on a 2,000 yuan-a-month pension in stocks. 'They'll come up with measures to keep the market in good shape.'

But while investors expect the market - up more than 80 per cent this year - to keep rising, Chinese leaders are alarmed. They worry that too much of the $1 trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.

Beijing is trying to tighten credit controls without derailing the economic revival or causing a market crash - a risky path at a time when Chinese leaders say a recovery is not firmly established.

'It's a very serious threat. The Chinese government is walking a tightrope,' said Mark Williams, Asia economist for Capital Economics in London. 'There is the question of what happens if they rein in lending, because there is really no strong evidence that private sector demand is picking up.'

Any hiccup in China's recovery could dent its rising demand for imported industrial raw materials and consumer goods, damaging hopes it might lead the global economy out of its worst downturn since the 1930s.

China's growth accelerated in the latest quarter to 7.9 per cent over a year earlier while the United States and Europe struggle with recession. The surge was driven by Beijing's 4 trillion yuan plan to insulate China by pumping up domestic demand with heavy spending on building highways and other public works.

But the growth - up from 6.1 per cent the previous quarter - highlighted China's continued reliance on stimulus spending. The big gains were in construction and other stimulus-fuelled areas, while retail spending and other private sector activity lagged.

Bank credit soared to a record 7.1 trillion yuan in the first half of the year and the rate of lending is accelerating. Loans in June expanded to more than double the May level at 1.5 trillion yuan ($220 billion).

Economists say as much as 15 per cent or 1 trillion yuan ($145 billion) of that money has been diverted into stocks and real estate despite government rules that say banks should lend only for productive investment. -- AP

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