Shanghai's key stock index dropped more than two percent today as investors took profits after a central bank announcement said it may fine-tune the macroeconomic policy. The benchmark Shanghai Composite Index tumbled 2.11 percent, or 72.17 points, to close at 3,365.33 points.
The Shanghai market is still up approximately 88% from last year’s lows. Corporate valuations are still relatively high compared to Hong Kong and New York. The mood of the market is somewhat nervous on rumors that the huge amounts of liquidity pumped into the economy are inflating the market.
New lending tripled to more than US$1 trillion in the first half of 2009 from a year earlier, fuelling concern that banks are taking on too much risk and bubbles are inflating in stocks and property.
Nothing would pop a Shanghai bubble faster than a sudden tightening of monetary policy by Beijing. The Shanghai market setback reflects investor concern and some profit-taking in the wake of statements from Beijing that have received differing interpretations in the investment community.
China's central bank reaffirmed yesterday the “moderately loose” monetary policy that has driven a rebound in the nation’s economic growth and pumped up stock prices and property transactions.
But Beijing hedged its bets because of concerns about bubbles developing in the market and the larger economy. Policymakers will fine-tune the approach as needed, the People's Bank of China (PBOC) said in a quarterly monetary policy report on its website. The nation will keep the yuan basically stable, it said. It will also use monetary tools to ensure reasonable loan growth.
Last month Premier Wen Jiabao pledged to maintain the 'moderately loose' policy, hoping to counter speculation that record new loans and surging asset prices will trigger a tightening of national monetary policy.
The Shenzhen Composite Index, which tracks the smaller domestic market, dropped 1.62 percent to close at 1,125.55 points. Clearly investors are in a mood to take profits because the central government has given mixed signals.
The way we see it, strict lending quotas and interest rate hikes are not in the cards for the time being. The government’s loose monetary policy will continue for the time being but it is on a short leash.
For the time being, Beijing will attempt to micro-manage asset and credit bubbles. Runaway real estate prices or stock market bubbles will likely trigger specific clampdowns rather than sudden tightening of monetary policy. The flood of money being poured into the economy is considered vital to continuing China’s GDP expansion.
A clampdown on new loans would cause a much more dramatic pullback in Shanghai and affect Chinese issues on markets around the world. But that is apparently not a problem on the horizon for the moment.
For the foreseeable future, Beijing’s lending and spending spree continues to support domestic growth as well as commodities prices around the world and exports from Asian trading partners.
China may not lead the world out of recession single handedly, but it’s definitely and important factor in global recovery.
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