China Slows Purchases of U.S. and Other Bonds vs. Chinese Stock Market rally
China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year. Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend.
On the other hand, the Chinese market rallies more than 50% in the first 4 months of 2009. The rally is under the circumstance that internal credit released by the Central bank has broken record, to 1.9T Yuan in March. Closely examining stock market performance and available credit reveals that the main driving power of the rally is from the credit funding. Sooner or later, when the credit influx wanes, the market will be ebbing too. The People’s bank had applied similar adjustment in 2007 and 2008 during the housing bubble. In short term, the rally seems to be continuing as long as the government is willing to relax credit control. The People’s bank also says they will continue these monetary policies in the coming months.
Such manual stimulation has more political manifestation than actual economic benefit. The government has been expressing their ambitious goal of “leaving the crisis behind earlier than any other nations”. On the other hand, the unemployment rate and bankruptcy rate are still hovering in the sky. Also considering the export driven market, it is hard to see how long the global market will fully recover to offset strength obtained from internal credit influx.
For those who are only looking at stock market performance, which is good time to make money after understanding the cause, they should realize that the People’s Bank cannot do this forever. When officials come out emphasizing they will continue to follow this monetary policy, that means they know such policy has influence and may pause from there. It is time to sell.
On the other hand, the Chinese market rallies more than 50% in the first 4 months of 2009. The rally is under the circumstance that internal credit released by the Central bank has broken record, to 1.9T Yuan in March. Closely examining stock market performance and available credit reveals that the main driving power of the rally is from the credit funding. Sooner or later, when the credit influx wanes, the market will be ebbing too. The People’s bank had applied similar adjustment in 2007 and 2008 during the housing bubble. In short term, the rally seems to be continuing as long as the government is willing to relax credit control. The People’s bank also says they will continue these monetary policies in the coming months.
Such manual stimulation has more political manifestation than actual economic benefit. The government has been expressing their ambitious goal of “leaving the crisis behind earlier than any other nations”. On the other hand, the unemployment rate and bankruptcy rate are still hovering in the sky. Also considering the export driven market, it is hard to see how long the global market will fully recover to offset strength obtained from internal credit influx.
For those who are only looking at stock market performance, which is good time to make money after understanding the cause, they should realize that the People’s Bank cannot do this forever. When officials come out emphasizing they will continue to follow this monetary policy, that means they know such policy has influence and may pause from there. It is time to sell.
posted by Intl.investment.services at
9:17 PM
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