China business model: get bank loan, buy stock

Stocks rally linked to record bank loans
(1 hr ago)
Mainland companies may be using record bank lending to invest in stocks, fueling a rally that has made the benchmark Shanghai Composite Index the world's best performer this year, according to Shenyin & Wanguo Securities.

As much as 660 billion yuan (HK$747.91 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said, citing money supply figures.

Mainland banks lent a record 1.62 trillion yuan last month as part of a government drive to stimulate the world's third-largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of the year, compared with a 10 percent decline in the MSCI World Index.

Part of the liquidity flowing into the stock market could be from companies using borrowed funds to invest in the stock market instead of working requirements, said Li. The brokerage was voted the best in the country for research by the national pension fund, China's largest investor.

The jump in new loans was twice the record set a year earlier. The biggest proportion of new lending, 39 percent, was through discounted bills, which supply working capital. Medium and long-term corporate loans accounted for 32 percent.

Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns, said Li.

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