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China Economy: Will China Market Conditions Continue to Worsen?

By Jim Trippon

A tighter monetary policy has been the anvil weighing on Chinese stocks this year and the latest batch of economic statistics out of the world’s largest country indicate more tightening could be on the way. On Monday, China reported a surprise $1.68 billion trade surplus for April, indicating March’s trade deficit, the first reported by China in six years, was more of a one-off event than the beginning of legitimate trend.

On Tuesday, China reported that retail sales and bank lending surged in April as property values jumped almost 13%. A rise in retail sales is one thing and probably not an issue Beijing is going to be alarmed by, but rising bank loans and property values are likely to result in some pensive attitudes among Chinese policy makers. After all, Beijing has been proactive to say the least in tempering bank lending in an effort to control the country’s property values.

The People’s Bank of China has already raised reserve requirements for China’s banks in an effort to suppress lending and down payment requirements have been sharply increased for both first-time home buyers and real estate speculators. Both maneuvers are part of a “soft” approach to monetary policy that has been China’s calling card…at least to this point.

These measures were introduced in April so the data points that have been reported this week aren’t going to reflect Beijing’s tightening efforts. Come June or July, if lending hasn’t subsided and if the property market hasn’t cooled, the PBOC may be forced to take a more heavy-handed approach.