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Loan squeeze may spook investors, warns economist

ALTHOUGH China has tightened the reins of monetary policy in recent months, it should not threaten the nation's economic recovery, but may undermine equity market sentiment, warned a top economist today.

"The market's current focus is on the monthly loan numbers, based on the common view that credit growth is the main force behind equity prices. But this assumption is not quite right. Liquidity has rarely been a problem in China," said Stephen Green, senior economist at Standard Chartered Bank (China) Ltd.

The Shanghai Composite Index, the benchmark of Chinese shares, has lost more than 20 percent from its peak on August 4, mainly due to concerns of a sudden credit squeeze.

Media reports said China may have extended 320 billion yuan (US$46.8 billion) of new credit in August, lower than a previous market expectation of 500 billion yuan.

"The direct impact of new loans on the additional money injected into the stock market should be small, but the indirect impact on market confidence and the perception of possible policy changes is significant," said Green.

He also noted the industrial sector, which accounted for about half of the gross domestic product, has staged an impressive V-shaped recovery.

"Growth has come back powerfully, thanks to a massive stimulus," said Green. "Investment, particularly in infrastructure, again dominates growth. Most projects will take two to three years to finish. Private investment appears to be recovering, too."

The Purchasing Managers Index, a measure of the nation's manufacturing activities, grew at the fastest pace in 16 months to stand at 54 in August from 53.3 in July.

Green estimated China's GDP would grow 8.5 percent this year, ahead of the government target of 8 percent set at the year beginning and may expand 8.9 percent in 2010.


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