Less money for stocks and corporates

Less money for stocks and corporates
In June money was leaving the stock markets as M1 growth dived; Credit
tightening was not eased, evidenced by falling credit growth towards the 14% cap;
Smaller increase in FX reserves suggested that hot money inflow plunged after
Beijing stepped up scrutiny. Beijing is perplexed and is working on a plan for
2H08. Policy is to remain in a tight mode, though some fine-tuning is on the way.
Both M1 and M2 growth slowed

In line with market expectations, broad money supply (M2) growth fell to 17.4% yo-
y in June from 18.1% in May. Narrow money supply (M1) growth slumped to
14.2% y-o-y in June from 17.9% in May. It’s quite well known that M1 moves
closely with stock indices in China. Not surprisingly, the Shanghai Stock
Exchange Composite dropped to an average of 2996 in June from 3552 in May.
Credit growth moved closer to the 14% government cap

Growth in outstanding RMB loans declined to 14.1% y-o-y in June from 14.9% in
May, with the net increase of RMB loans falling to RMB 332bn in June from
RMb448bn a year ago. The impact of the restrictive credit tightening started to
weigh on the Chinese economy, especially the real estate and exports sectors.
Hot money inflow plummeted

FX reserves increased by US$11.8bn to US$1808.8bn at end-June. Note that in
June China posted US$21.4bn in trade surplus (the highest this year) and
US$9.6bn in FDI (the second highest this year). The decreased inflow (or even
outflow) might be a result of slowed RMB appreciation and higher volatility against
USD in 2Q08. The major factor, however, should be government’s administrative
efforts in cracking down on hot money inflow.

What you can expect from a perplexed government…
For policymakers they have to deal with elevated inflation pressures, squeezed
corporate margins and an economic slowdown. Many officials and advisors
started to doubt and even attack the 14% credit growth cap; some others are
fingering the rapid RMB appreciation. In contrast, some hawkish government
advisors still believe the current policies are too loose.
We believe Beijing is to stick to the credit growth cap to tame inflation and to
maintain its credibility, but regulators could help developers by allowing more of
them to tap money through issuing bonds. Fiscal subsidies in the form of higher
VAT rebates could be applied to some money-losing sectors like textile and
garment. We officially cut our rate forecasts from 3 hikes to one (27bp for deposits
and 18bp for lending) this year, though we have been arguing for less hikes since
April. We maintain our forecast that RMB appreciation pace is to slow in 2H08.