A Spring Ritual

In the words of Chinese Premier Wen Jiabao last Friday, the Chinese economy has become "unstable and unsustainable" and he was going to do something about it.

He wasn't kidding.

The newswires have been full of stories in recent days about the stepped-up effort to cool off one of the world's fastest growing economies. This seems to be a new spring ritual of sorts - each year there are new calls to slow down the economic expansion, but by the end of the year the economy reaches new highs.

It wasn't too long ago that the commodities boom was declared dead amid more calls for a slowdown in China. Demand for base metals and energy were sure to shrink after an inevitable cooling off, but each spring the same thing seems to happen - demand surges and prices go up.

The same has been true for real estate in recent years and now the Shanghai stock market has loudly joined the party.

The most recent efforts to hit the brakes were signaled during the press conference following the conclusion of the National People’s Congress last Friday. Bloomberg reported on comments by Wen Jiabao:

"China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced,'' Wen said at a press conference in Beijing today. Energy efficiency and environmental protection issues haven't been "properly resolved,'' he said.

Wen's comments underscore government concern that too many factories are being built in China, worsening pollution and leaving the world's fastest-growing major economy vulnerable to a slowdown in demand. A record $177.5 billion trade surplus has flooded the economy with cash, making it harder for the government to cool investment by reining in bank lending.

Data this week showed accelerating inflation, money supply and industrial production growth, while the February trade surplus was close to a monthly record. Central bank governor Zhou Xiaochuan said today he's watching inflation closely and Trade Minister Bo Xilai said he's "very concerned'' about the surplus, suggesting the government may raise interest rates or further tighten lending.

It didn't take long for those words to be put into action as Bloomberg reported interest rates were hiked the next day.

China raised interest rates for the third time in 11 months to curb inflation and reduce asset bubbles in the world's fastest-growing major economy.

The one-year benchmark lending rate will be raised to 6.39 percent -- its highest in almost eight years -- from 6.12 percent, starting tomorrow, the Beijing-based People's Bank of China said today on its Web site. The one-year deposit rate will be increased to 2.79 percent from 2.52 percent. A central bank spokesman confirmed the increases.

Central bank Governor Zhou Xiaochuan is concerned that cash from a record trade surplus is stoking excess investment, raising the risk of accelerating inflation and boom-and-bust cycles in asset prices.

Naturally, traders were emboldened by the rate hike and stocks rose on Monday. ChinaDaily reported on yesterday's developments.

Chinese stocks reversed a slump upon opening to gain nearly three percent Monday as financial shares surged following an interest rate rise announced by the central bank at the weekend.
...
The Industrial and Commercial Bank of China, the country's biggest lender, rose 4.65 percent to 5.18 yuan while China Life, China's largest life insurer, gained 4.38 percent to 35.29 yuan. China Merchants Bank surged 5.41 percent to hit 16.36 yuan and Bank of China was up 5.8 percent to 5.29 yuan.

The gain was coupled with an expansion in trading. The volume in the Shanghai Stock Exchange hit 94.82 billion yuan, with 10.997 billion shares changing hands while the turnover in the Shenzhen Stock Exchange reached 46.76 billion yuan, with 895 million shares changing hands.

The response from the government was swift. Bloomberg reported earlier today that new controls were being implemented to prevent the market frenzy from getting out of hand.

China's securities regulator barred companies from using proceeds from share sales to invest in stocks, in an attempt to damp speculative buying.

Companies are also banned from buying derivatives and convertible bonds with share sale proceeds, the China Securities Regulatory Commission said in a statement today. The Beijing- based regulator said it will monitor companies more closely.

"Regulators are concerned that proceeds are fueling the stock market frenzy,'' said Gabriel Gondard, who manages the equivalent of $3.5 billion at Fortune SGAM Fund Management, a venture of Societe Generale SA, in Shanghai. ``The government wants to start seeing more of that money reinvested into the companies or distributed as dividends.''

China wants to curb speculation in the real estate and stock markets to break boom-bust cycles fueled by 33.5 trillion yuan ($4.3 trillion) of household and corporate deposits. China's cabinet approved a task force last month to clamp down on illegal share sales and other banned activities in a market that saw $24.4 billion of share sales in the past year.

The photo of the empty chairs above must have been taken before markets opened as the Shanghai-Shenzhen Index rose 0.5 percent on the day, bringing its year-over-year gain to just over 150 percent.

Spring is in the air.