China's lavish bank lending spurred a recovery but also pumped up markets as speculators scooped up stocks and property and even dabbled in garlic, dried chili pepper and luxury Pu'er tea.
Now, China is reining in its spendthrift banks, shifting toward an exit strategy that aims to avoid a bust.
After a brief slowdown a year ago, China's economy has bounced back rapidly, with growth forecast at 8.3 percent for this year. Yet the stimulus spending that led that revival — supported by more than 9 trillion yuan ($1.3 trillion) in new bank loans last year — has spurred speculation, raising alarm over a potential housing bubble.
The stimulus has also propelled huge investments in industries already larded with overcapacity. On an average day in 2009 some 1,000 new industrial projects were launched, Standard Chartered bank economist Stephen Green estimates.
The challenge now is to stave off inflation and ensure that the stimulus goes into productive investments rather than to speculators.
Boosts reserve requirement
To help curb those risks, Beijing late Tuesday increased the reserves that banks must hold by 0.5 percentage point, to 15 percent of their deposits. U.S. banks must hold 10 percent in reserve, though that requirement is based on only a fraction of their balance sheets.
The surprise move followed reports that Chinese banks lent 600 billion yuan, or about $88 billion, in the first week of January — nearly double the total for all of December.
"We need to guide rational investment to avoid speculation," Qi Ji, Vice Minister of Construction, told reporters in Beijing on Wednesday.
Qi's bland comment belies concerns voiced by many prominent Chinese economists. In an article in the state-run newspaper China Securities Journal on Monday, He Fan and Yao Zhizhong of the government-affiliated Chinese Academy of Social Sciences warned that without tighter controls the economy could overheat, with growth rising to as high as 16 percent this year.
If stimulus policies remain unchanged "the economy is destined for serious overheating," they said.
The resulting bust could derail growth and leave banks with massive holdings of bad loans.
The government earlier reimposed taxes on some property transactions and clamped down on lending for second homes, ordering tighter scrutiny of loans and inflows of foreign funds to prevent illegal investments.
But such requirements might not deter deep-pocketed investors looking for fast gains. Among those notorious for running up property prices in Shanghai are private businessmen from the capitalist manufacturing bastion of Wenzhou.
Having helped drive up prices for property and stocks — the Shanghai benchmark surged 80 percent last year — the Wenzhou speculators, among others, moved into agricultural commodities.
Last autumn, cash flooded into the market for garlic, and then into the wholesale market for dried chili peppers, which tripled in price in late 2009 to about 30 yuan ($4.40) per kilogram. Market vendors complained of scarce supplies, and consumers and restaurants griped about the cost. In an earlier speculative frenzy, investors focused on Pu'er tea.
"Farmers were hoarding the chilli peppers, expecting the price to rise, and the market speculators were buying as much as possible to control the supply," said Gao Wang, an analyst with Beijing Orient Agri-business Consultant Ltd, a leading agriculture and food business consulting company.
Underscoring their appetite for risk, some of the Wenzhou speculators will be heading to Dubai for property bargain hunting over the Chinese New Year holiday in February even after some were burned by the Middle Eastern city state's meltdown in late 2009.
"Most of us have realized that traditional manufacturing industries no longer bring us more profits, so many who used to run factories are switching to stock markets or real estate," said Zhou Dewen, the head of a Wenzhou business association, who is heading the tour. "We think it's time to go and see how is Dubai's economy going as opportunity always follows after the crisis," Zhou said.
For now, economists say, China's planners are likely to confine tightening to technical tinkering to discourage excess lending. They are likely to wait some time before raising benchmark interest rates or cutting back on the government stimulus spending credited with helping revive domestic demand — and creating jobs.
The government has successfully navigated numerous crises using such a piecemeal, gradual approach — including sweeping state industry reforms that slowly but surely put tens of millions of workers out of their jobs during the 1990s.
While a few have thrived amid the torrent of bank lending, property speculation has frustrated the ambitions of many would be home buyers. With some 10 million households living in shantytowns across China, the most urgent need to is supply low cost housing, said Qi, the Ministry of Construction Official, not the luxury housing and commercial projects favored by most developers.
The report by He and Yao of the Chinese Academy of Social Sciences estimated that about two-thirds of bank lending last year found its way into real estate and stock investments — keeping housing purchases out of reach for many average Chinese.
Housing prices in Beijing and Shanghai have soared since late 2008 to an average of more than 12,000 yuan ($1,700) per square meter, double the level three years ago, according to a December report by U.S. bond manager Pimco. Food prices rose 0.6 percent in November after nine months of declines.
"The economic recovery has done nothing for me at all," said Li Naikang, a strategist for an advertising company in Shanghai.
"Frankly, I am not able to buy an apartment and I don't even want to think about it. I can't afford to marry, but at least my girlfriend is nice and understands how hard I work and how helpless the reality is," said Li, who earns about 7,000 yuan ($1,000) a month.