Mis-Directed "Stimulus" Was Huge Share Of China Market Action

china yuan

Shanghai stocks have cratered over 20% from their August highs, despite Premier Wen Jiabao’s continued jawboning.

Most people realise by now that speculative inflows, resulting from easy domestic lending, have fuelled 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.

ChinaStakes: Shi’s study shows that when an entrepreneur has a firm with operating capital of 100 million yuan, normal short-term credit of 100 million can create the demand of 200 million to one billion in assets and commodity markets, even with no illegal use of the money.

What probably happened in many cases was that companies used loans to speculate rather than to invest in their businesses. Thus a further Chinese market collapse could result in substantial losses for a wide spectrum of Chinese entities, from normal people to major companies. Here’s an anecdote:

In March, Wu received the first loan of 20 to 30 million yuan. (He has refused to disclose the total amount he has received.) How to spend the money was a problem. Because of shrinking export orders and an inadequate rate of operations, purchasing equipment would merely have resulted in greater losses. Wu took 30% of the loan to invest in stocks.

For those of us looking in from the outside, this should be further evidence that the Chinese market is on some extremely shaky footing.

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