Excessive liquidity causes asset bubble in China

Written by fe Bureaus | Mumbai | Updated: Aug 27 2009, 03:38am hrs
China Construction Bank Corp said excess cash in the banking system has led to asset bubbles, underscoring concern that the nations lenders will rein in credit after the Shanghai Composite Indexs 64% rally.

There are uncertainties in the economy and bubbles in the capital market, Guo Shuqing, chairman of the nations second- largest bank, told reporters in Beijing on Monday. Chinas banking system still has excessive liquidity, he added.

Chinese banks handed out a record $1.1 trillion of new loans in the first half to support the nations $585 billion economic stimulus package. Chinese stocks briefly entered a so- called bear market last week on concern the government would curb new loans to reduce speculation in stocks and real estate.

Given the extraordinary loan expansion in the first half, theres no doubt that some part of it has been diverted to equities and property, said She Minhua, a Shanghai-based analyst at Haitong Securities Co.

The bubbles, if there are any, are still tolerable as the government is preoccupied with ensuring solid economic growth.

Chinas GDP expanded 7.9% in the second quarter while the benchmark Shanghai Composite Index rallied 25% as the nation became the first major economy to rebound from the global recession. The index has dropped 12% this month.

The China Banking Regulatory Commission last month required the nations lenders to raise reserves to 150% of their non-performing loans by the end of this year, up from 134.8% at the end of June. On July 27, it told banks to ensure loans intended for investment in fixed assets go to projects that support the real economy, and three days later announced plans to tighten rules on working capital loans. The regulator plans to tighten capital requirements for banks by requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, people familiar with the matter said last week. Banks have until today to give their feedback.

Zhang said yesterday the bank hasnt received a regulatory directive on capital adequacy changes and it is confident it will meet any new requirement.