China Brakes, Australia Breaks

14 May

From Business Spectator:

In an ominous sign for Australia, the Chinese sharemarket is slumping on worries that the Chinese government will soon lift interest rates in response to rising inflation and surging property prices. Such a move would slam the brakes on Chinese growth, and deal a cruel blow to Australia, which is counting on Chinese growth to keep commodity prices high.

Although it rebounded by 2 per cent yesterday, China’s Shanghai Composite Index is down more than 20 per cent from its peak in August 2009, which means that it is still technically in a ‘bear’ market.

The market’s gloom has been deepened by signs of mounting inflationary pressures in the Chinese economy. Inflation figures released this week showed consumer prices rose by 2.8 per cent in April from the year before, an increase from the 2.4 per cent rise in March. Meanwhile, home prices in 70 large and medium-sized Chinese cities rose by 12.8 per cent from a year earlier in April, picking up pace from the 11.7 per cent rise in March. There are also worrying signs that the property price bubble is spreading beyond the major cities and into the country-side.

So far, the Chinese government has held off raising interest rates – which are currently negative after allowing for inflation – in order to cool the super-charged economy. Instead, its ordered banks to hold more deposits on reserve, as well as lifting the minimum deposits that home buyers require to make to get access to home loans, and raising mortgage rates for second and third home buyers.

But there are intense worries that these steps won’t prove sufficient. Earlier this week, the Chinese central bank reported that banks lent 774 billion renminbi ($113 billion) in April, which is about 30 per cent more than in the same month last year. Lending for the first four months of 2010 has now reached 45 per cent of the total quota of loans for the year.

This explosion in Chinese bank lending has led to worries that the country will eventually be saddled with a mountain of bad loans. These concerns were heightened after China’s National Audit Office reported that it had uncovered lending irregularities amounting to tens of billions of renminbi in its latest audit of the Agricultural Bank of China.

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