Chinese Lending Still Looks Constrictive At Best (HAO, FXI, FXP, EDZ, EDC)

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October 24, 2011 1:23pm NYSE:EDC NYSE:EDZ

Scott Martin: The People’s Bank of China’s latest money supply and lending numbers reveal that Beijing’s efforts to clamp down on liquidity have worked. The question now is when they will finally ease.

Last week’s reading indicated that the M2, a broad gauge of overall supply of yuan in the economy, edged up only 13% in September — well below anything we have seen in a decade, much less what the analysts were hoping to see.

New lending also receded to $73 billion as the combination of rising interest rates, steep bank reserve requirements and extraordinary measures have forced both supply and demand for credit to retreat.

People are not talking about this enough. For all practical purposes, growth below 15% on this stat effectively represents monetary tightening.

When you consider that the M2 was expanding 30% a month two years ago as China was emerging from the global credit crunch you can imagine how horrible the chart is in terms of liquidity.

True, there are plenty of gray-market lenders in China (NYSE:FXI), but there always have been.

Economists are already using these numbers as evidence that Beijing will not need to clamp down on money supply any further. While an outright easing move may not be on the horizon, at least the decline seems to be bottoming out.

When we know the cost of financing has peaked — and the amount of yuan available to borrow has hit its lower limit  — it will be a positive for Chinese small-cap shares in particular.

These companies depend on credit to grow and cushion their operations through downswings. Premier Wen Jiabao’s recent moves to give these businesses other support beyond loans are encouraging here.

And with the small-cap China fund ETF (NYSE:HAO) still down 38% from its November high, there is plenty of room for a rebound on the chart:

Written By Scott Martin From Emerging Money

Emerging Money provides insightful and timely  information about the increasingly important world of Emerging Market  investments. CNBC Emerging Markets Contributor Tim Seymour leads the  team of Emerging Money to bring you cutting edge global news and analysis.

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