Top China banker warns on asset bubbles

Some China top bankers said China needs an “urgent” tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles.
Monetary policy must not neglect asset-price movements. Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.

China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account – by far the largest among major economies. With China’s economy growth reached 8.9% in the third-quarter, it increases pressure on the stimulus end.

The Chinese government has used its control over the banks to engineer a massive increase in lending this year, with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8,650bn ($1,260bn). Much of this investment has gone into infrastructure projects. The M2 measure of money supply is up 29.3 per cent, year on year.

The giant investment program has polarized critics, with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices, while others have argued the lending binge would exacerbate over-capacity and encourage deflation.

The State Council, China’s cabinet, gave its first clear hint before the publication of third-quarter GDP figure that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth – the first time it has mentioned inflation since the global economic crisis hit China last year.

Usually this is the first thing you would expect the authorities to say before they begin to moderate policy. But the timing of any increase in interest rate is hard to predict.