Friday, August 14, 2009

Stimulus Watch: Has China closed the spigot already???

As I have mentioned before, the massive stimulus program in China is driving much of the revival of exports in across the global, particularly in regional partners like Japan and South Korea and commodity producers like Brazil.

But has the Chinese government started to close the spigot of easy money already???

"The benchmark Shanghai Composite Index fell to 3112.72, as data showing a 77% decline in bank lending in July from June raised fears that banks may make fewer loans following record disbursals during the first half. The Shenzhen Composite Index fell 4.4% to 1052.51.

"Even though the Chinese government insists it'll keep a loose monetary policy, the reality may be that some credit tightening measures have already been implemented," said Ben Kwong, chief operating officer at KGI Asia. "The market is worried that a significant slowdown in lending means less liquidity and investors are taking profits."(1)

The evidence of the change might be represented by the recent turn in the Baltic Dry Bulk Index. The index is largely driven by the movement of raw commodities in international trade, and the recent surging demand from China provided a major boost to the index from January's historic lows.

There is still too little data to substantiate a change in the economic climate. But many estimates made by Brazil and even use manufacturers like Alcoa hinge on the sustained growth in China to offset economic stagnation elsewhere. It will be interesting to observe over the next few months if China will be able to maintain it's momentum with or without easy money policies.

(1) "Drop in Bank Lending Spooks Investors; a Fall Back Below 3000?", WSJ, August 14, 2009 by V. Phani Kumar