Overnight, Asia stocks dropped 0.7% in the aggregate, taking markets down 2.9% for the week. This is the steepest drop since the week of June 19. The Nikkei (-1.4%) and Hang Seng (-0.6%) were the loss leaders, while the Korean Kospi did manage a tepid 0.3% gain.
However, all eyes were on the China Shanghai Composite, which ended the session up 1.7%, following a strong 4.5% bounce on Thursday. The index had dropped 20% over the prior two weeks on concerns of the country’s pace of economic recovery before rebounding over the past two trading days.
Even though the Shanghai share index put in a positive session, trading would have advanced even more had continuous negative talk not have overshadowed the day. Fears are entering traders’ mindset again as rumors about China clamping down on credit lending are having an impact on investor sentiment.
According to Reuters, China’s main banking regulator, who is concerned record lending could lead to a spike in bad loans, might tighten banks’ capital rules by excluding subordinated bonds they sell to other banks from their capital base.
Steven Leung, sales director at UOB Kay Hian had this to say to Reuters: “This is old news and the market has already responded to this once. But investor confidence has been so shaken by the [Shanghai] sell-off earlier this week that every time this news surfaces it’s an excuse to sell.”
But there is concern over the amount of debt that is being issued this year, which has many analysts and investors thinking there is a flood of cheap money in the market. According to Bloomberg, China’s banks have sold 236.7 billion yuan ($34.6 billion) of subordinated bonds so far this year, almost triple the amount issued during all of 2008. The banking regulator estimates about half of the subordinated bonds in circulation are cross-held among many banks.
Shenzhen Development Bank Co. Chairman Frank Newman said on an earnings conference call today, “We understand the regulator’s concerns about the proportion of subordinated debt.” The bank hopes that any new rules will only be applied to future debt sales, not the existing inventory already in the marketplace.
Bloomberg added data on the debt sales. To wit:
The subordinated debt sales came as new loans rose to a record 7.37 trillion yuan in the first half. Lending in July fell to less than a quarter of June’s level. About 1.16 trillion yuan of loans were invested in stocks in the first five months of the year, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s cabinet.
The Shanghai Composite Index has been on a tear, nearly doubling during the first seven months of 2009, after plummeting 65% in 2008. Since the index reached its 2009 peak on Aug. 4, shares have declined 15% entering the weekend.
Pressure will remain on Shanghai shares until resolution is met with China’s main banking regulator. Until then, investors will need to pay close attention to issues not necessarily affected by subordinated debt sales, such as China’s insurance-related companies.
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