Monday’s 5% drop in the Shanghai market was a stark warning to the credit-happy central government: do a U-turn on cheap money, and this is what you get.
So the government is already sending out signals that it won’t be tightening any time soon.
WSJ: Chinese bank stocks were higher after the People’s Bank of China announced it would use more market-oriented measures to guide credit growth rather than administrative controls. Industrial & Commercial Bank of China rose 3.3% and China Construction bank jumped 6% in Shanghai, while their Hong Kong-listed shares gained 0.4% and 0.3% respectively.
“Stimulative policies will remain intact before spring 2010, or conservatively, at least before end-2009, in our view,” Merrill Lynch analysts wrote in a report. “China’s top policymakers have repeatedly assured that the current policy stance will be maintained. Note that the People’s Bank of China, unlike the Federal Reserve or European Central Bank, is just part of the government and there is no way for the PBOC to run counter to the president or the cabinet,” they added.
As the stock market soars, and reports of mindblowingly cheap credit (and bad loans) proliferate, China has a long-term incentive to get the situation under control, so that it doesn’t have a bust like we had when all the loans come due. But when the market reacts to severely to the slightest hint of tightening, what’s a non-independent central bank to do?
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