It time for a profit booking. Sound pretty harsh and surprised that I have started the topic with a bang of sell trigger. Yes you are correct to read what I wrote. Last week the equities markets in US and Asian economies went for a vacation of free fall. We saw Indian browsers and other Asian markets went for a profit booking followed with US markets.
But what made the sudden fall of the markets across the globe followed with a skeptical outlook among the investors. The upward and strengthening equity market and many economies coming out with aggressive GDP numbers, all were going great but what made this earthquake and why all are expecting more tremors of the quake will hit the market in coming days.
Its not due to interest rate hike of world economies or due to any other reasons but it happened with a flash of bad news and skeptical outlook of investors. In other words it’s the skeptical outlook of the citizens of the recession affected economies. They are unhappy due to the polices which have been adopted by the recession affected government.
If we look at China which is the 2nd largest economy is the world we find that economic growth have been abnormal. Yes abnormal in this sense that it has created asset bubble. In my previous articles I have given host of indications about the movement of the Chinese economy towards asset bubble and over capacity bubble of production. If we look in depth we find that it’s really high time for china to step in to take actions. If don’t take the steps the economy might go in the hands of depression.
• In the fourth quarter Chinese economy expanded at 10.7% compared to a year ago.
• In 2009 the economy grew at 8.7% above its target rate of 8%. China also revised its third quarter expansion to 9.1% from the previous estimate of 8.9% and first quarter at 6.2% from 6.1%.
• Fixed investment in urban areas soared 30.5% in 2009 according to the Chinese statistics agency.
• Industrial production increased in December at 18.5% and retail sales surged at 17.5% according to a separate report issued by the agency.
• Consumer price index in December increased 1.9% and producer price index rose by 1.7%, meeting the forecasts laid out most economists.
• Reports from Chinese economy decaled today revealed that inflation-curbing measures had already started, with major banks told to stop lending to customers for the remainder of January.
• This also means cheap money flow is now being restricted from all corners of china. Its policies of keeping the economy out of its cold breeze of recession it made stimulus packages followed with incentives to all sectors.
• The government is now expected to dramatically scale back its $US586 billion stimulus measures followed with its incentives to other sectors. It also proposed consolidation is various sectors starting from automobile to steel.
All these aggressive economic data and growth number china have also given birth to a uncontrolled bubble of over capacity production and an imbalance of more supply as compared to production.
I request my readers to read these previous articles where one will get a clear idea of how China plans to control the dragon of its abnormal expansion. CHINA LAYS THE GROUND WORK TO CONTROL THE DRAGON.
The below chart is the China Industrial Production.
In the above chart we find that in April 2008 we get the Chinese industrial production around 17.8%.When recession began we find a dramatic fall in the production. In January 2009 the Chinese government declared the stimulus package followed with incentives for doing investments. And finally the colors of the stimulus became prominent from April 2009 to till date.
Clubbing all these has forced the Chinese economy to put a tab on the lending and disbursement of loans.
• Chinese banks doled out a record 9.6 trillion yuan ($1,406 billion) in new loans last year.
• Moreover it added more fuel to the fire by some loans where we find the total net disbursement of loans added 1.2-trillion yuan ($175-billion U.S.) worth of credit just in the first two weeks of January.
• The Chinese commercial banks to keep more funds in reserve for the first time since June 2008.
• This also meant they had lesser funds to lend. Bank of China plans to sell up to 40 billion yuan ($5.8 billion) in bonds to replenish its capital and meet government standards.
• Regulators have warned some banks that they have fallen below minimum capital requirements after such a huge growth in disbursement of loans in 2009.
Now the quality of credit also becomes a big question and whose answerer we will get in the coming days. Easy lending also increases the NPA. China put the leash on the lending of banks to stop the rising bubble of credit default which might come up in the next coming quarters due to easy and higher disbursement of loans. It might be that Chinese economy is already aware of the rising NPA and not to take risk beyond their capacity they are putting curbs.
All these might ask the central bank of china to press the button of rate hike. If that happens then one will get prolong range of correction in the Asian economies as cost of borrowing s will go up more resulting to sell of assets spread across the globe. So end of the cheap money era from Chinese investing firms in India and other economies. FII’s from Chinese economies will press the trigger of sale even if no rate hike is made immediately. Since the investors and the lending curb will force them to sell as they will need funds for the rest of the days left in china. In 2010 we will get the loan disbursement coming from the demand of Chinese industry consolidation and merger and acquisition in various sectors from automobile, steel etc.
In my next article I am going to present the 2nd part of the SUDDEN SELLING TRIGGER.
Authored by: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.