The Mystery Over China's Financial Plans Grows As Goverment Tightens

Are the Chinese adding liquidity into the nation’s economy to encourage consumer spending and manufacturing activity, or are they restricting the access to capital by tightening bank lending requirements?

The data this weekend pointed to a tightening.

In notices put at the China Bank Regulatory Commission website, financial regulators announced two new initiatives that will cut access to money for both individuals and businesses. According to an account by Reuters, “The regulation on working capital loans stated that banks must calculate borrowers’ actual needs and also consider their cash flow, liabilities, repayment abilities and other factors when assessing loan applications.”

China’s exports and the rate at which manufacturing has increased in the country and an extraordinary improvement in imports indicate that the central government is still pouring money into the economy. There is nothing in the GDP numbers of the largest developed nations that would show that consumption patterns are up enough to support a surge in Chinese exports, although it could be that companies on the mainland are dumping goods at below market prices. That would  increase trade tensions between China and the West significantly.

It is also hard to understand how the Chinese middle class remain voracious consumers, since the growth of the economy on the mainland did slow last year.  The fact that they are shows the emerging bubbles in equities, commodities, and real estate prices are based on “easy money.”

The China plan to tighten lending may have come too late, or it may be undermined by a huge pool of liquidity already circulating in the markets.

Douglas A. McIntyre