First, the title of this story is sort of funny since China (the government) is the one who induced any potential bubbles within the Chinese banks themselves. So for them to warn the banks, after inducing the banks to act like this is a bit rich. Second, we've been very early on this story and warning about the potential outcomes way ahead of the pack. [Feb 16 2009: Is China Pulling an Alan Greenspan?] We wrote then:

Some very interesting data out of China of late in terms of loan growth - in fact staggering data.

Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. Keep kicking the can down the road, until one day it all implodes (which is what we are enjoying now after 20 years of kicking).

But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values.

Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.

Money supply, as measured by M2, climbed 18.8% at the end of January from a year earlier, accelerating from the 17.8% rise at the end of December, according to the PBOC.

As much as I like China over 5-10-20 years, I am concerned they simply are following Alan Greenspan's (and now adopted by Ben Bernanke) game plan of flooding the system with money to stave off bad outcomes. All this money has to go somewhere and its been going into commodity purchases, stock purchases Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] , real estate purchases. And many going to borrowers I think will go bad as well [May 27, 2009: How is China Spending their Stimulus Money; and How many Loans will go Bad?] There was actually a headline story in the Wall Street Journal yesterday that US banks are not increasing their lending. There is a reason for that - there are not enough Americans who are credit worthy and WANT new debt. Even though our government is doing everything in their power to get them to spend what they don't have with incentives out of the ears. So our velocity of money is stagnant even as the government does everything in their power to funnel more towards the bank. The situation in China is different as the government basically controls much of the banking system so when they say jump... the banks jump. Velocity of money is exploding there. Which is again, why the title of the piece is ironic. When I wrote my piece in February M2 was 18%; the last I read it has surged to 28%.

That said bubble mania can go on for a long time even if you've spotted all the signs in advance. We first mentioned it in February and here we are, half a year later, and the surge in all things China (even commodities by proxy) is unrelenting. So if you are a flexible dancer, you can tap dance on the top of the roller coaster - just make sure to hit the exit when the day comes it falls off the track. With all the bubbles Uncle Alan created for us; you could see them (if you didn't drink the Kool Aid) but that didn't mean they didn't continue ever upward (causing much frustration for those who were pointing them out) before the crashes happened.

I noted last week I was cutting back my direct Chinese exposure and for now am mostly just using proxies (American companies with Chinese exposure). [Jul 24, 2009: Selling China Exposure as Chinese Run In] But that doesn't mean the party has to end anytime soon. Remember, it all comes down to economics - supply and demand. Fixed supply of things (commodities, real estate, stock certificates) chased by ever increasing amount of currency - can push things to places they don't belong. Which is why many of our old sign posts (hey look at copper surging!) are difficult to trust - when China takes Alan Greenspan's model and amplifies it, who knows when and how it resolves.

Don't believe me? Even the biggest bull on China, Jim Rogers has now grown wary.

  • Jim Rogers, chairman of Rogers Holdings, said he hasn’t purchased Chinese stocks since November because prices have risen too fast and will probably “collapse.” “I much prefer to buy when things collapse,” Rogers said in a Bloomberg Television interview from Singapore yesterday.

But as I said above...

  • “While it’s obvious that the market is in a bubble, the rally could still go on as the government hasn’t stopped the liquidity,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which manages about $285 million.

And before we judge others - let's remember, the US government and Federal Reserve is trying to do the EXACT same thing.

Via FT.com:

  • Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.
  • The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend Rmb7,370bn in new loans, more than twice the amount lent in the same period a year earlier.
  • Beijing’s concerns are echoed in other countries across the region, most notably South Korea, where the government says it is taking steps to cool a real estate bubble, and Vietnam, where the government has ordered state banks to cap new lending to head off inflation.
  • In China, regulators are now concerned that too much money is being lent by the state-controlled banks and the country’s tentative economic rebound could come at the cost of a stable financial system. In statements published last week, Wu Xiaoling, who recently retired as deputy governor of the central bank, warned new lending this year would probably reach as high as Rmb12,000bn, a staggering increase of 40 per cent of the entire stock of outstanding loans in just one year. She called this sort of growth excessive and said it would lead to bubbles in the property and stock markets.
  • “China's economic recovery is being constructed on the back of a savaged banking system,” said Derek Scissors, a research fellow at the Heritage Foundation in Washington. “Tens of billions – and perhaps hundreds of billions – of dollars of loans will not be repaid.”

Key point here:

  • He points out that in recent years total loan growth of around 15 per cent has supported gross domestic product growth of higher than 10 per cent but in the first half of this year total loan growth of around 33 per cent supported GDP expansion of only 7 per cent.

One thing we can give Alan Greenspan - his legacy will be to have taught the world how to create bubbles. All the world has learned; thanks Maestro.

[Jul 17, 2009: China's GDP Rise Prompts Debate]