What happens when China cuts its stimulus?

01/07/2010 9:21 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

 China too.

It’s not just the United Kingdom and the United States where turning off the stimulus cash faucet has the potential to take a bite out of the economy and financial markets in 2010.

 In China the big question is What will happen to consumer spending on things like cars, to real estate prices, and to spending on corporate and public infrastructure projects when the country’s banks pull back on a government-ordered lending spree? Between increased bank lending and the official government stimulus plan, China has poured far more cash into stimulating its economy, as a percentage of GDP, than any of the countries in the developed world.

 The likely result is that stocks in China will correct along with the prices of other speculative assets (Shanghai apartments, for example) as bank lending slows despite economic growth projected at near 10% for 2010.

 Global financial markets are getting a sneak preview today of what such a correction would look like.

 As of noon in London on January 7 the MSCI Emerging Markets Index was down 0.8% with the drop being driven by a steeper 1.9% drop in the Shanghai Composite Index. Commodity stocks, especially metals stocks, fell as commodity prices declined. Copper, for example, declined by 0.5% from a 15-month high.

 All this just because China’s central bank gave a signal that it is interested in controlling the country’s lending spree. The People’s Bank of China sold three-month bills with a higher interest rate for the first time in 19 weeks and flagged the sale as part of an effort to slow loan growth by attracting bank deposits that might otherwise go to new loans.

 It’s no coincidence that the biggest losers on Chinese markets today are shares of companies where revenue is dependent on the availability of cheap loans. For example, shares of SAIC Motor, China’s biggest carmaker fell 4.4%. Shares of Industrial & Commercial Bank of China (IDCBY), the nation’s largest publicly traded lender, fell 2%.

Related Articles on STOCKS