By Li Hong People's Daily Online
Bubbles seem once again forming in China's equity markets, at a 'ferocity' that could eventually swallow substantive proportions of the investment as many Chinese households are reaching deep into their wallets. Alarm provoking as the thought sounds to most, but, another round of frenzy could loom soon.
For the policy-makers, the priority is to keep tracing the very latest developments, get to know the trends, and intervene at the earliest possible time when foreseeing anything negative is in the forming. A smooth while healthily quick economic growth is what governments of China and other countries desire. For the central bankers and economic advisers, it is their job to take precaution measures in order to prevent roller-coaster ups and downs of an economy.
Signs have popped up that overall price rise, or inflation, could follow the heels of colossal government and private investments in a short time span in China. The idea sounds bizarre to many, those still combating credit crunch and economic slowdown in the West, especially, but the danger is real here.
More than 150,000 potential homebuyers flooded a 4-day Spring Realty Trade Fair in Beijing early April, clinching 3,483 deals at a price tag of more than 3.2 billion yuan. The average price reached 11,000 yuan per square meter, which is about 10 percent higher than at the end of last year, when the global economic crisis was in its crescent and was churning China hardest.
Housing prices in Shanghai, Tianjin, Guangzhou and other cities also shot up in the spring as more decided to be homeowners, and investors buoyed by signs of a warming-up economy began to gobble up apartments in anticipation of lucrative profits. Throughout the nation, the property prices haven't receded much before another buying spree mimicking the 2007 housing exuberance daunts.
And, like the previous economic cycle, the stock market frenzy fosters a booming property one. The Shanghai stock market index, closing at more than 2,500 points on April 13, has arisen more than 36 percent since the beginning of the year, making China's equities the best performer in the world.
Thanks to the money-making effect of the stock market and the wild expectation of more interest rate reductions by the People's Bank of China to boost domestic spending and jerk up investment, residents are opening new stock accounts at a rate seldom seen before. Market pundits have trumpeted that the Shanghai index could keep growing, and may exceed 3,000 or even 4,000 points by the year end. Even alien investors have been lured to China’s bourses in anticipation of big returns.
True, the challenge facing the governments worldwide now remains to fight economic contraction. However, once the global recession stabilizes and investments picks up pace, so does inflation.
The banks in China gave out 4.58 trillion yuan new loans in the first three months this year, a historic high. In March alone, new loans jumped six-fold to 1.89 trillion yuan. The credit 'deluge', although, freed the liquidity on the domestic market, may result in huge repetitive construction projects and non-performing loans in the bank’s balance sheet.
Some analysts have said that amounting sum of the loans slipped into the equities market, creating ‘bubbles’ again. We are not advocating the central bank rein in money supply or reinstitute tightening policies immediately, but it will be highly appropriate for it to give up timely hint that monetary policy could be adjusted.
Pledging ample liquidity to ensure credit flow may meet the government's economic development needs, but a deluge of credit could have adverse effect on the economy. For the sake of prudence, the central bank could hint that it has not planned to cut the interest rate, leaving the one-year benchmark deposit rate at 2.25 percent intact; and the State Council may make it clear that it will not loosen control on housing gouging and property price manipulation.
After a bust, no more bubbles.
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