From Cover, issue no. 406, February 16, 2009
Translated by Tang Tang
Original article: [Chinese]

China's stock markets recorded a sharp rebound after the lunar new year holiday, whereby the 10-day trading volume ending February 12 had already exceeded that of any month since July 2008.

After a long period of decline, the upsurge should have been welcomed, but market observers cautioned that short-term speculative funds might be at work, which could ultimately destabilize the markets.

Market observers believed some of the 1.62 trillion yuan in new loans extended by Chinese banks earlier this year might have found their way into the stock markets instead of being invested in the "real economy".

Influx of Capital
In the first two weeks of February, the Chinese stock markets recorded an average daily influx of 17 billion yuan in new capital.

Between February 2 and 12, the 10-day transactions at both the Shanghai and Shenzhen stock exchanges totaled 1.72 trillion yuan (253.6 billion US dollars), resulting in the former composite index jumping 15%, and the latter 20%.

As of Feb 13, an estimated 15 stocks in the Shanghai market had doubled their prices within a six-week period, and 80% of all stocks on the exchange reached a level surpassing their previous year's peaks.

Similar to last year's bull market, several industries became the target of capital injections, including agriculture, aerospace, telecommunications, real estate, and petrochemicals.

This was a reversal of net outflows of capital from the Chinese stock markets in December last year and January this year, when 15 billion and 12 billion yuan respectively drained from the markets.

"The capital outflows may be somewhat related to the new year holiday and the spring festival, but it also reflected that the markets had not started to recover prior to the spring festival,” said Yuan Xuya, president of Northeast Securities.

Fund manager Pan Jiang believed that in the absence of negative news since January, and with some influx of capital, the markets became easily excited and more confident, thus encouraging more capital inflows.

Where Did the Money Come From?
Where did the capital influx orginate from?

"It is hard to tell for sure," said some market anaylsts.

But China's more relaxed monetary policies since the end of last year was thought to be a factor. As credit regulations were loosened, banks released more new loans. Meanwhile, the real economy was slowing.

"If businesses are now cautious about investing in the real economy, they are likely to look for short-term value-added opportunities for their idle capital and extra credit in hands. The stock market is an option," commented Jin Yanshi, chief economist of Guojin Securities.

In other words, credit expansion by banks might have contributed to the latest rebound.

In January alone, new loans issued by Chinese banks amounted to 1.62 trillion yuan, of which, commercial paper financing accounted for 623.9 billion yuan or 41.6% of the new loans, compared to December's 27.8%.

While the new loans soared, narrow money supply (M1) - a gauge for currency in circulation - declined to a historic low. A fund manager of Hua'an said that partly indicated that new credit injections were not retained in the real economy but had instead flowed into the stock markets.

In recent months, fund and private equity investment firms had also gradually increased their participation in the stock markets upon clients' demand. According to Dazhihui Data Center's estimation, half of the new capital influx in the stock markets in February could have come from these funds.

"The markets' outlook is not optimistic," commented Jin Yanshi of Guojin Securities. He warned that if the capital influx was mainly supported by short-term financial instrument, such as commercial papers, the markets would become highly sensitive. For instance, if the rebound slowed or stopped, the likelihood of a mass dumping of shares would be high.

However, Gui Haoming of SYWG Securities expected the Shanghai composite index to reach 2,500 points in the short run. At present, the market had already rebound beyond the 2,300 points projected by some analysts late last year.