China on track to deflationary bust as reports show that China’s loan spree goes to stocks, property.


The demented policies of the China’s Politburo that is forcing banks to lend the liquidity that it is pumping into the economy as part of the 4 Trillion Yuan ($586 billion) stimulus, are as expected resulting in gross malinvestments. As much as 50% of that stimulus money is flowing into speculative stock market and real estate trades which is not stimulating anything, and is instead creating an enormous bubble that will inevitably lead to a spectacular collapse of the Chinese economy faced with shrinking global export demand for its goods from its major trading partners as well as retrenchement of the Chinese consumers in the face of the economic crisis. The anecdotal evidence suggests that there is not anybody in China who can afford to buy the $600,000 condos when even highly payed doctors are making only about $20,000 a year. While this artificial sitmulus boom is looking good for now, it will only make things worse when the speculative bubble pops. Consider this AP article:

Reports: China loan spree goes to stocks, property

June 29, 2009.

SHANGHAI (AP) — China risks frittering away its stimulus spending on speculation in stocks and real estate, reports said Monday, citing economists who say surging bank loans risk inflating risky asset bubbles.

The comments by prominent economists came as Shanghai’s benchmark Composite Index hit another high for the year, gaining 1.6 percent, or 47.10 points, to 2,975.31. The index has gained more than 60 percent since the beginning of the year.

While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government’s effort to boost growth and reduce the economy’s heavy reliance on exports.

About 20 percent of bank lending is going into stock speculation, and another 30 percent or so is going into the property market, state-run newspapers cited Wei Jianing, an economist with a Cabinet-level think tank, as saying.

China’s economic planners have urged banks to issue loans to support the government’s 4 trillion yuan ($586 billion) stimulus program, aimed at protecting the economy from the global slowdown by pumping money into spending on building airports and other public works.

Wei and other economists told a conference in Beijing that the huge flow of money into shares and property could be fueling risky, unsustainable price increases, China Business News and other reports said.

Through an intermediary, Wei refused requests Monday for comment. The reports said Wei cited estimates based on his research, but noted that his comments were his own personal opinion, not that of the Development Research Center, which is affiliated with China’s State Council, or Cabinet.

State media reports last week said new bank lending in June is estimated to have surged by 1.2 trillion yuan ($175.7 billion).

Added to the 5.8 trillion yuan ($849 billion) in new bank loans in January-May, that would push new lending in the first half of the year to about 7 trillion yuan (over $1 trillion).

That is more than the total annual new lending for China for any year.

But warnings against misuse of such funds for other purposes, such as stock speculation, are appearing increasingly frequently in the state-controlled media — including one in Monday’s People’s Daily, mouthpiece of the ruling Communist Party.

“Extraordinary times call for extraordinary measures,” said the commentary, which noted that much of the spending, even on construction projects, was unlikely to yield much of a return.

“However we must at the same time improve the lending structure and guard against risks to ensure that lending supports good quality economic development,” it said.

Copyright © 2009 The Associated Press. All rights reserved.

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