China to check stock gains without capping loans

Chinese officials said they will scrutinise gains in stock prices without capping nelending after a record $1.1 trillion of loans in the first half added to credit risks and threatened to cause asset bubbles.

The government wants stock-market stability and is studying share-price rises, Vice Finance Minister Ding Xuedong said at a press briefing in Beijing today. The People’s Bank of China has a range of tools to limit money supply, Su Ning, a deputy governor of the central bank, told the briefing.

The Shanghai Composite Index has rallied 79 per cent in 2009 and real-estate prices have rebounded, fueling concern that loans meant for infrastructure projects are being used for speculation. The government wants to cool asset markets without derailing the recovery of the world’s third-biggest economy, which grew 7.9 per cent in the second quarter from a year earlier.

Ding and Su’s comments show the key factor in policy decisions is “economic indicators, not asset markets,” said Gabriel Gondard, a portfolio manager at Fortune SGAM Fund Management Co in Shanghai, which oversees about $7.2 billion. “Investors could read that as meaning liquidity levels will remain high, at least for now.”

Shanghai’s benchmark stock index closed down 2.9 per cent, before the briefing started, for the worst weekly loss since February. The measure fell by the most in eight months on July 29 amid concern that the central bank would rein in liquidity.

The government will monitor asset prices and create an “internal mechanism” to stabilise the stock market, the finance ministry’s Ding said, without elaborating.

The central bank won’t consider asset prices when adjusting policies, said Su, who also elaborated on a reference in a quarterly monetary policy report to “fine-tuning” policy, saying that this happened continuously.

“It’s not the policies that will be fine tuned, but the focus, intensity and pace of policies that will be fine tuned,” the central banker said.

The surge in loans in the first half was due to the rollout of the government’s stimulus plan and lending won’t grow as quickly in the second half, Su said.

The government will maintain a moderately loose monetary stance and an expansionary fiscal policy as domestic and external demand remain weak, Zhu Zhixin, vice chairman of the National Development and Reform Commission, told the briefing. Inflation isn’t a concern, Su said.

“Harsh lending curbs would just hurt the economy,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. She said the government would do more to monitor lending.

China’s banking regulator urged lenders on July 27 to ensure credit for investment projects flows into the real economy. Three days later, the regulator announced plans to tighten rules on working capital loans.

China Construction Bank Corp President Zhang Jianguo said yesterday that the nation’s second-largest bank will cut new lending by about 70 per cent in the second half to avert a surge in bad debt. Construction Bank plans to extend about 200 billion yuan ($29 billion) of loans, down from 708.5 billion yuan in the preceding six months. The company’s new lending through June 30 was 42 per cent more than for all of 2008.

“We noticed that some loans didn’t go into the real economy,” Zhang, 54, said in an interview at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

Investors are split on whether a stock bubble is a threat.

“This is a recovery story that is one of the strongest and most convincing in the world,” Chen Li, a Beijing-based strategist at Harvest Fund Management Co, which oversees about $22 billion, said August 4. “I don’t think we’re in a bubble.”

Credit Suisse Group AG said this week that it will be difficult to prevent a “huge and damaging bubble from emerging” without monetary tightening.