Tag Archives: bank lending

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.

Credit Contraction Heralds Recession

5 May

Does a contraction in the growth of Broad Money Supply say that recession is looming?  Australia’s most recent history responds with a resounding ‘Yes’.

Take a look at the following chart, showing the 12 month percentage change in Broad Money Supply. Note in particular the time frame of Australia’s last recession – Paul Keating’s “recession we had to have” – back in the early 1990’s. See how Broad Money Supply growth peaked in June/July 1989, before falling sharply and eventually turning negative in Nov ’91 – Mar ’92  (click image to enlarge):

Now, consider the dates of the most recent peak (and fall), coinciding with the onset of the Global Financial Crisis.  Broad Money Supply growth peaked again in December 2007 – coincident with the peak in the Australian (and global) stock markets:

Broad Money Supply in Australia has been falling ever since December 2007.

According to John Williams of ShadowStats (commenting on the US economy) –

Money supply and credit are now generally contracting. We’re going to see an intensified downturn in the near future. I specialize in looking at leading indicators that have very successful track records in terms of predicting economic or financial turns. One such indicator is the broad money supply. Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It’s happened four times before now, in modern reporting. You saw it in the terrible downturn of ‘73 to ‘75, the early ’80s and again in the early ’90s.

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