China Triple Whammy

Concerned about rampant speculation, China acted today to let some air out of the rapidly inflating equity bubble:

• China will raise benchmark deposit
and lending rates (effecitve Saturday) in an attempt to control rapid
credit and investment growth

• The one-year yuan lending rate will be increased by 18
basis points to 6.57% from 6.39%. The one-year yuan deposit rate will be increased by
0.27% to 3.06% from 2.79%.

• China’s central bank said it will raise banks’
reserve requirement ratio by half a percentage point, effective June 5.

• China will also widen the trading
band of the yuan against the dollar to 0.5% above and below its central
parity rate, effective Monday.

One would expect these events to be be felt in the coming weeks, especially in the Asian bourse. In the U.S., "expiration related noise" may be muting the impact this morning, said Peter Boockvar of Miller Tabak.

Why are Chinese Central Bankers so concerned with the public rushing headlong into their own stock bubble?

• Their
indices are now up 55% year to date, and have tripled in a relatively
short period of time.

• The P/E of the Chinese stock markets are now over

• New trading accounts are opening by the 1/4 million each
day. The number of brokerage accounts
set up to buy mainland shares and mutual funds amounted to 327,019 [Wednesday]. Investors opened a record 385,121 new accounts on May 8.


There is a short WSJ piece on the official PBOC release here: China to Widen Yuan Trading Band,
Increase Deposit and Lending Rates

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What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on May 18

    George Bernard Shaw correctly observed “What we learn from history is that man never learns anything from history.”

  2. Jackie the joke man commented on May 18

    The problem with Chinese Central Bank rate increases is that an hour after you raise rates, you feel like raising rates again . . .

  3. Winston Munn commented on May 18

    These piddly, half-hearted measures by the BoC will have as much impact on the Chinese markets as does a sea achor for a yacht during a hurricane.

  4. johntron commented on May 18

    WMT’s going to have to find a new low cost supplier, perhaps North Korea? ha.

    higher CNY = continued inflationary pressures? but since there is no more inflation since the Bern-span era began, don’t have to worry about that.

    USD v renminbi since ’05, the trend is your friend (or not).

  5. Philippe commented on May 18

    China should remember the years 1990 2000 when a prolific money supply had devastating consequences on its banking system which was under assistance as plaged with poor performance loans (the strengh of the financial systems is their amnesia)

  6. lloyd commented on May 18

    I’ve heard that ~300,000 brokerage accounts have been opened daily in China over the last few weeks. Yup, 300,000.

    All of these moves will have little impact and I don’t think the government will get serious for quite some time. They can’t afford to pop the bubble ahead of the Olympics. Social unrest is not what that country needs ahead of the games.

  7. Eclectic commented on May 18

    -Russell has reversed himself lately. He’s now bullish and catching flack for it:

    -“Sell in May and go away” is getting bad press this AM on CNBC.

    -Gross at Pimco (earlier quoted by BR and linked) has given something of a mea culpa on his assessment of the equity markets, lesser so but still a meecuppa as well on rates and bonds out at the end of their target range (3-5 years), although he’s still holding to economic weakness in the U.S. and lower rates in the short term (you left that off, Barringo).

    -The market is ignoring every poor indicator of upcoming weaknesses, as though they don’t exist or they won’t bridge us to worsening conditions, or that they’ll be overcome by other factors that improve at the same time and compensate for weakness.

    -I’m tingling with bullishness, so much so that I have to hold a gun on myself while I’m shaving, just so I won’t cut my own throat before I can do some buying.

    -I’m gonna sell my house and move to Kudlowvia.

    -Jack Bourousian is on CNBC and bearish this AM… I’m livin’ in the Bizarro World.

    -Up is down… down is up. My head is spinnin’ and I need to sit down.

  8. worth commented on May 18

    China IS serious, and they have learned from history. They’re taking this in baby steps to avoid the spectacular implosions of other historic bubbles, starting with the People’s Daily commenting on the bubble last week in order to discourage individual investors (but not much was impacted in terms of the continued run-up), and now these small measures ahead of their upcoming visit to Washington. But they only waited about a week to see that the newspaper prodding had no effect, so they are demonstrating that they will take stronger, more direct measures to continue tweaking things until the Chinese people get the message that this stock market party isn’t going to continue as it has. The thing to know about China is that they take a long time to deliberate the potential impact of actions before they take any, but once they eventually decide on a course, they resolve to stick to it and give it time to work (unlike some countries I know). Kind of like a global tortoise vs. hare contest between them and the U.S., if you will. Unfortunately, we all know how THAT turned out…and they feel time and history are on their side. After all, which country has been an extremely important global influence for thousands of years, going back to the Great Wall, Confucius, the Huns, the Silk Road, etc., and which has been one for a couple hundred?

  9. ManhattanGuy commented on May 18

    Consumer sentiment improved unexpectedly in May, according to researchers at the University of Michigan on Friday. The consumer sentiment index rose to 88.7 in May from 87.1 in April.

    I bet Barry will ignore this news:)

  10. Michael C. commented on May 18

    The anecdotal speculation in China must be phenomenal.

    With the market dropping only 0.5% on down days and advancing 1-3% on up days, there must be fishermen and noodle selling street vendors that have become millionaires.

    Where are those stories!

  11. erik commented on May 18

    “All of these moves will have little impact and I don’t think the government will get serious for quite some time. They can’t afford to pop the bubble ahead of the Olympics. Social unrest is not what that country needs ahead of the games.”

    do you really think governments and the fed have control over this liquidity beast to prick the bubble or glide the economy onto the tarmack at the precise time they request?

    if it was only that easy! i can’t see how china will hold past this summer, let alone next summer.

  12. Bob A commented on May 18

    Anyone seen the totals for yuan/dollars being transferred from savings into these newly opened accounts?

  13. lloyd commented on May 18

    Bob A: Residential deposits in China declined by a record $22b in April (biggest monthly decline since ’97) and it’s estimated that ~$10b of deposits removed during the first 4 months have gone into the stock market. Deposits are still up YoY through the first four months but $40b less than the amount of the increase during the first 4 months in 2006.

    Erik: I’m not saying that China will be able to safely stop this runaway train but what I am saying is that they will do little try to derail it. China will crash hard but the government will do everything possible to keep the pump primed to delay the meltdown.

  14. Fred commented on May 18

    The local China market is a closed system…only they can buy. Any “correction” will by hyped as the end of the wold as we know it…

    Any “fallout” from this correction will be met with open arms and open wallets.

    This global equity move is early. Billions of new consumers have now tasted a smidge of capitalism…there’s NO turning that back.

  15. BDG123 commented on May 18

    Isn’t it hilarious to see the press report this as conciliatory actions ahead of the trade meeting with the US? Since when did China care what the US thought? They are making these moves because they can’t get a grip on the economy and by association, the equity bubble.

    So, now they try to float the currency a little more, allow foreign investment, etc. So, in the US leading up to 1999 if the government encouraged investment in overseas markets, who would have listened? The Chinese are about to get a lesson in free markets. You let a little bit of the genie out and all hell will break loose. Central economic planning is bankrupt and is going to end the grand experiment with a bust.

    Then, hopefully the Chinese people will gain the freedom and dignity every human deserves.

  16. Winston Munn commented on May 18

    One would think by now that ample evidence validates the Austrian school of economic thought, that it is money supply (i.e. debt creation) that not only creates but sustains inflation.

    As long as the rate of return exceeds the target rates the bubble will expand; history shows us that bubbles are not balloons that deflate showly – bubbles are tenuous entities and prone, when stretched far enough, to simply pop and disappear.

  17. patu commented on May 18

    close your eyes and just buy, buy and buy

    new highs in many markets today, wowser!

  18. wunsacon commented on May 18


    Every information outlet has limits on what they can cover or cover well. Given the time that goes into gathering the data and writing intelligent posts, Barry seems to have time for 1-3 posts a day. So, I prefer not to see Barry “mention” the basic headlines every one of us reads elsewhere.
    It’s better (for us) he preserve that time for his “value-add” stories.

    Just sayin’, bro.

  19. S commented on May 18

    I closed my eyes and bought some Yen today.

  20. Fred commented on May 18

    Buying YEN (FXY) will be an excellent hedge when the carry trade comes undone. Calling the timing is tough, to say the least, but makes sense.

  21. Jim commented on May 18

    Don’t look now but the S&P is ready to break the all time high. I expect to see 1700 by year end. China is just getting started and has at least a year before any meaningful correction in my opinion.

  22. MDDWave commented on May 18

    Perhaps China is playing the ultimate market play in relation to US Treasuries/Yuan. Once they have “seven good years” and stored enough internally for “seven bad years”, dump their inflated US treasuries and see the world markets go crashing down. With capital reserves, China then could buy industries for cheap.

    Of course, people are never that manipulative so that would never happen.

  23. jagmohan swain commented on May 18

    Too many people are worried about the economy.”If everybody knows something it’s not worth knowing” goes a famous saying and I beleive it’s true.The other day a colleague pointed how an entire block of buildings are supported by services and housing and housing debacle will leave that place impoverished.Guess what born-in-america dudes just look at things one way: glass half empty.It’s such a shame ’cause optimism and unrelenting spirit was once symbol of this great country.When at school these complaining types seldom fail to mention how the world views this great country with a jaundiced eye.I always wondered where was the source for such negative view. Emulation is the greatest form of flattery one wise man had said.All one had to do was to look around and see Americanism being emulated, replicated all around the world.It’s only to be expected since Mankind has always been led by the greatest civilizations of the day.It started with Sumer and continues to this day with Americans.But all you hear from these pessimistic fellows averse of new competetion is doom and gloom.Well that’s good for me ’cause I am making plenty of moolah being long this market.
    I was short in February and long in March.My point is how many people were bearish in 2000? The sort of pervasive bearishness out there doesn’t typify a long term top.When a respectable research institute like ECRI predicts that we are due for a reacceleration after a short slowdown why it would be such an outlandish
    proposition.Is my conclusion drawn upon a quick perusal of some housing crisis blog, financial newspapers advantages me so much so that my diagnosis of economics status-quo would be superior to a dedicated economic research institute with an unenviable record?I don’t think so.