China plays fall as more sectors face credit tightening
Hopes for a soft landing are diminished after last month's strong inflation data
China's extension of credit-tightening measures to a host of new industries sent mainland stocks plummeting yesterday as investors fretted that more stringent measures could be in the pipeline.
Any hopes that the economy was headed for a gentle landing have been put on hold with last month's inflation data showing the fastest increase in prices for seven years, raising the spectre of further credit tightening, higher interest rates and potentially stern counter-cyclical measures as recently indicated by the top leadership.
'Even though we've not reached the worst-case scenario, more measures are likely to come,' HSBC senior China economist Qu Hongbin said.
On Thursday, the State Development and Reform Commission, the People's Bank of China and the China Banking Regulatory Commission (CBRC) issued a circular adding textile, petrochemical, pharmaceutical, printing, construction materials, non-ferrous metals industries, as well as light industry, to a list where credit was to be suspended or tightened.
Yesterday, the H-share index, which tracks shares of Hong Kong-listed mainland state firms, dropped 4.7 per cent or 184.82 points to 3,747.03. This compared with the broader Hang Seng Index, which lost 1.05 per cent or 120.08 points. In China, the Shanghai A-Share Index slipped 2.19 per cent and its Shenzhen counterpart fell 2.18 per cent.
Mainland firms, which have enjoyed huge investor support, have rushed to allay concern and hopefully halt the selling rout, arguing that the new dictates will weed out weak firms and leave their industries stronger.
'We welcome such adjustments,' Beiren Printing Machinery company secretary Rong Peimin said. 'They help remove the underground printers responsible for doing business with counterfeiters.'
Red chip China Pharmaceutical Enterprise and Investment Corp, which makes penicillin and bulk vitamins, pointed to its $450 million in cash, against outstanding loans of $500 million, saying it had no need for fresh funds.
'Being listed in Hong Kong, about 60 per cent of our financing needs are being sourced in the territory, with the remainder from mainland banks,' financial controller Eddie Chak said. 'It won't be a problem even if bank credit is tightened on the mainland.'
Weiqiao Textile, China's biggest cotton-textile maker, said the latest round of measures were aimed at easing energy shortages and forging a better allocation of resources.
'Companies with a competitive advantage, as long as their projects are not redundant, are supposed to be beneficiaries of the new policy as more resources would be flowing to them,' said Wang Donghua, assistant to the chairman.
The latest curbs followed restrictions on capital spending in the steel, cement, vehicle, aluminium and real-estate industries, with 'over-investment' being blamed for capacity constraints contributing to 3.8 per cent year-on-year increase in consumer prices last month. Many economists reckon official data conceals a far greater increase in prices.
The earlier restrictions have apparently begun to take effect in some provinces and cities such as Jiangsu and Beijing.
According to the official China Securities Journal citing central bank figures, fewer bank loans were made last month in Jiangsu, one of the seven provinces that the CBRC sent inspection teams to check irrational lending.
New loans totalled 15.89 billion yuan last month, down 46.73 per cent from the average of 30 billion yuan in the first three months.
In Beijing, new bank loans reached 26.82 billion yuan at the end of March, down 48.66 per cent from a year ago.
Still, analysts and fund managers are not optimistic on the prospects for mainland stocks.
'The China stocks are dirt cheap now, but investors don't want them because they just don't know the extent of the downside risks from the credit tightening,' UOB Kay Hian associate director Foo Choy Peng said.
Additional reporting by Nichole Chan and Bei Hu
