International | Feb 22 2007
By Greg Peel
The Peoples’ Bank of China is on the horns. If it tries to curb Chinese economic growth by raising rates, it will only attract more foreign capital into the country. But GaveKal points out that fixed asset investment grew by 24% last year. In response, the PBoC has raised reserve requirements by 50bps – the fifth hike in eight months. Chinese lenders must now retain 10% of their deposits. This is about the only tool at the PBoC’s disposal.
It doesn’t help the situation, however, that in the past 18 months Chinese banks have been recapitalised through IPOs and private placements to the tune of some US$100 billion. Given banks usually multiply their capital by ten times, notes GaveKal, this represents another US$1 trillion of potential loans.
In January, Chinese money supply growth accelerated to 20% year-on-year, and yuan loan growth to 16%.
This is hardly a surprise when real rates are actually negative. Why wouldn’t you borrow and invest in China’s booming economy? In one example, China Mobile has posted its fourth record month in subscriber growth, adding 4.86 million subscribers in January.
There is also a growing “carry trade”, where investors borrow in Hong Kong dollars (the HKD is pegged to the USD) and invest in renminbi denominated Chinese assets.
When will this bubble burst? GaveKal is sure it must, but not in the foreseeable future. GaveKal’s biggest call is in Chinese real estate projects. GaveKal suggests “we are only at the beginning of what could well end up being one of the greatest bubbles of our time”.
