In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers whether the recent sell-off in Chinese stocks and moves by the People's Bank of China to restrain shadow lending are signs of greater troubles ahead.
Are the sharp sell-off in Chinese stocks and the efforts to restrain shadow lending by the People's Bank of China signs of greater troubles ahead for the Chinese economy?
The People's Bank of China recently embarked on a strategy to limit so-called shadow lending throughout the Chinese economy. The PBOC has specifically asked commercial lenders to focus on lending into the "real" economy and to avoid lending for "financial speculation." Consequently, commercial lending rates have risen dramatically, and the formal banking system has endured a severe liquidity crunch, which required massive liquidity injections from the PBOC.
This event joins other signs of the weakening of the Chinese economy and has sent shares of Chinese stocks into bear market territory. It appears that investors have not only noticed but also expect further deterioration of the Chinese economy. Of the 897 respondents to our poll, about 60% expect further deterioration of the Chinese economy and/or ongoing weakness in Chinese share prices. Other respondents indicated that they think the direction of China is unclear at this point (25%), which leaves only 15% of respondents who are bullish on China.
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