The 2009 surge in bank lending in China was accompanied by allegations of substantial funds being funneled into the nation's stock and property markets. This paper uses 2004–2010 People's Bank survey data to examine the possible linkages between banking activity and the stock market as well as the associated inflation risks. In general, stock market strength in China seems to be accompanied by rising inflationary concerns, increased bank lending activity, and reduced banker confidence that stable conditions will be maintained. This suggests that the Shanghai market could serve as a useful indicator variable for Chinese monetary policy.
The bad loan problems of China’s large state-owned commercial banks (SOCBs) have been well documented, as have the successive capital infusions and balance sheet cleanups that allowed Bank of China (BOC), Bank of Communications (BOCOM), China Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC) to go public in 2005-2006, followed by Agricultural Bank of China (ABC) in 2010. Reports of rising bank profitability have been accompanied by allegations that substantial amounts of the funds lent were being used not in financing real economic activity but in speculation in the nation’s stock and property markets, however. Such claims came to a head in 2009 with a surge in bank lending prompted by Chinese government efforts to support the economy during the global financial crisis. Bank loan issuance in the first half of 2009 alone totaled RMB 7.37 trillion, exceeding the full-year total from 2008. This was accompanied by a 60% rise in the Shanghai stock market over the first six months of 2009, with many observers pointing to large sums being “diverted into shares and property” [
Full-year lending in 2009 totaled RMB 9.6 trillion, representing nearly half of that year’s GDP. Although the China Banking Regulatory Commission (CBRC) released reports from some regions that two to three percent of funds were misappropriated [
Beginning in the first quarter of 2004, the People’s Bank of China has reported quarterly survey data based on a sample of 2900 different banking institutions (including rural cooperatives). The survey is answered by those in charge at the bank’s headquarters, presidents of first and second-rank branches or vice presidents who are in charge of loans and credits. The survey results reflect quarter-to-quarter comparisons for the following two measures.
(i) The Banking Business Index (after first excluding any institutions providing a “not sure” response) calculates the proportion (
(ii) The Index of Bankers’ Confidence is the arithmetic average of the proportion of bankers who believe this quarter’s economy is normal and the proportion of bankers who expect conditions to be normal going forward.3
The banking survey data offer a perspective from top-level officials across a very wide range of China’s banking institutions. The two series also have the advantage of reflecting sentiment on current conditions whereas standard bank performance measures continue to be heavily influenced by historical factors and preexisting conditions. For example, the SOCBs had longstanding bad loans to loss-making state-owned enterprises (SOEs), while successive government recapitalizations affected not only the large SOCBs but also the city commercial banks and other institutions.4 Although the sample period for the sentiment series is limited, the 2004 start date precedes the IPOs of four of the five large SOCBs in 2005-2006 and also encompasses a number of sharp swings in China’s economy. Surging economic growth and growing capital inflows led to repeated concerns with the rate of credit expansion from 2003 to 2007 that spurred a series of tightening measures by the People’s Bank and government pressure on commercial banks to rein in lending (see, e.g., [
Stock market sensitivity to such policy swings would be in line with Sun et al. [
Our analysis examines the relationship between the two bank survey measures and the stock market during 2004–2010 while also incorporating People’s Bank survey data on “Current Price Satisfaction” and “Future Price Expectation” to take into account inflation concerns. Both of these latter series are based on approximately 20,000 questionnaires returned from 50 large-, medium-, and small-sized cities across the country. The Current Price Satisfaction index simply reflects people’s stated level of satisfaction with current prices. The higher the index, the greater the satisfaction—and the less those surveyed appear to be worrying about inflation. Meanwhile, higher values of Future Price Expectation imply increasing concerns about future inflation. Thus, insofar as higher bank lending rates lead to concerns about overheating, we would expect a rising Banking Business Index to be accompanied by falling Current Price Satisfaction and rising Future Price Expectation. In the analysis below, we examine the empirical support for this proposition in addition to testing for causal relationships between the banking measures and stock market performance. We utilize the complete set of available survey data from the first quarter of 2004 though the last quarter of 2010.9
The sharp ups and downs in the stock market over our 2004–2010 period, along with the accompanying movements in the Banking Business Index, can be seen in Figure
Simple Correlation Coefficients Between the Shanghai Market, the Banking Measures, and Inflation Expectations.
Banking Business Index | Bankers’ Confidence | Current Price Satisfaction | Future Price Expectation | Shanghai A-Share Index | |
---|---|---|---|---|---|
Banking Business Index | 1 | ||||
Bankers’ Confidence | −0.185 | 1 | |||
Current Price Satisfaction | −0.495 | 0.233 | 1 | ||
Future Price Expectation | 0.827 | −0.087 | −0.505 | 1 | |
Shanghai A-Share Index | 0.724 | −0.597 | −0.588 | 0.577 | 1 |
Note: All variables are in levels.
The two banking measures and the Shanghai A-share index, 2004–2010.
The tendency for Bankers’ Confidence to move inversely with the stock market, in contrast to the Banking Business Index, can be seen in Figures
The Shanghai A-share index plotted against the two banking measures.
The two banking measures against current price satisfaction and future price expectation.
The Shanghai A-share index plotted against current price satisfaction and future price expectation.
In order for formally test the significance of the relationships between the variables in question, we conduct a series of Granger-causality tests. The data are converted into log growth rates owing to unit roots in levels, with all series being stationary after conversion to growth rate form.11 Causality test results are based on Wald test statistics generated from vector autoregressions (VARs) for each pair of variables under a lag length of one for the quarterly data.12 The general form of the bivariate VARs is as follows:
Summary statistics on each data series are presented in Table
Summary statistics for the Shanghai index and survey data.
All variables in levels
Variables | Number of observations | Mean | Standard deviation | Minimum | Maximum |
---|---|---|---|---|---|
Banking Business Index | 28 | 67.39 | 1.88 | 63.80 | 70.70 |
Bankers’ Confidence | 28 | 53.63 | 18.50 | 21.00 | 82.40 |
Current Price Satisfaction | 28 | 35.97 | 9.42 | 13.80 | 51.45 |
Future Price Expectation | 28 | 67.52 | 7.22 | 53.05 | 81.70 |
Shanghai A-Share Index | 28 | 2559.36 | 1220.96 | 1135.12 | 5827.66 |
All variables converted to log growth rates
Variable | Number of observations | Mean | Standard deviation | Minimum | Maximum |
---|---|---|---|---|---|
Banking Business Index | 27 | 0.002 | 0.019 | −0.045 | 0.037 |
Bankers’ Confidence | 27 | 0.0003 | 0.276 | −0.558 | 0.446 |
Current Price Satisfaction | 27 | −0.049 | 0.136 | −0.462 | 0.146 |
Future Price Expectation | 27 | 0.010 | 0.094 | −0.233 | 0.181 |
Shanghai A-Share Index | 27 | 0.018 | 0.204 | −0.416 | 0.425 |
Causal relationships between the banking measures, inflation expectations, and the Shanghai A-index.
Causal Relationship | Coefficient Sum | Chi-Squared Statistic | Number of Lags | Confidence Level |
---|---|---|---|---|
Banking Business → Shanghai A | −0.023 | 0.937 | 1 | 66% |
0.041 | 5.387 | 1 | 98% | |
−0.311 | 6.516 | 1 | 98% | |
Shanghai A → Bankers’ Confidence | −0.230 | 0.814 | 1 | 63% |
Current Price Satisfaction → Banking Business | −0.050 | 2.214 | 1 | 86% |
Banking Business → Current Price Satisfaction | −0.239 | 0.026 | 1 | 13% |
0.149 | 16.815 | 1 | 99% | |
Banking Business → Future Price Expectation | −1.104 | 0.951 | 1 | 67% |
Current Price Satisfaction → Banker’s Confidence | −0.644 | 1.880 | 1 | 83% |
Banker’s Confidence → Current Price Satisfaction | 0.060 | 0.375 | 1 | 45% |
Future Price Expectation → Banker’s Confidence | 0.740 | 1.761 | 1 | 81% |
Banker’s Confidence → Future Price Expectation | −0.062 | 0.846 | 1 | 64% |
Current Price Satisfaction → Shanghai A | 0.424 | 1.593 | 1 | 79% |
−0.299 | 6.127 | 1 | 98% | |
Future Price Expectation → Shanghai A | 0.000 | 0.000 | 1 | 0% |
Shanghai A → Future Price Expectation | 0.117 | 1.588 | 1 | 79% |
Note: The above statistics reflect Wald tests for Granger-causality based upon VARs estimated with one lag on each variable (all of which are in log growth rate form); relationships significant at the 90% confidence level or higher are depicted in bold print.
Although there are no significant causal relationships between Current Price Satisfaction and the Banking Business Index, Future Price Expectation has a positive causal effect on the Banking Business Index that is significant at the 99% confidence level. The direction of this effect is consistent with the signs of the simple correlation coefficients laid out in Table
People’s Bank survey data on banking activity, and inflation expectations support a causal relationship between inflation expectations, banking activity and the stock market during 2004–2010. The results imply that fears of inflation amidst surging bank lending and share prices are not just a figment of the 2009 experience but hold also over the sample period as a whole. While there is evidence of direct causal relationships between banking activity, inflationary pressures, and the stock market, the banking indicator seems to be driven by stock market moves and concomitant inflation concerns, rather than being the actual cause of any overheating that takes place. This leaves open the question of whether heightened bank lending is more a symptom than a cause of inflationary pressures in the economy, with the stock market seemingly moving before the banks. Finally, there is some support for a negative relationship between banker confidence and stock market strength. In general, stock market strength in China seems to be accompanied by rising inflationary concerns, increased bank lending activity, and reduced banker confidence that stable conditions will be maintained. This would seem to offer at least some justification for the People’s Bank continuing to pay attention to the stock market in determining its monetary policy stance and suggests that the Shanghai index might actually serve as a useful indicator variable in China.13
The authors thank Tom Willett and Li Jie for helpful comments and are grateful to Sze Wai Yuen for valuable research assistance most kindly funded by the Lowe Institute of Political Economy at Claremont McKenna College. An earlier version of this paper was presented at the Western Economic Association annual meetings in San Diego, California, June 29–July 3, 2011.
See “Expert warns more than RMB 1 trillion in new loans made their way to the stock market” (2009), July 6 [
One reporter found that 28 of 30 business owners surveyed were engaging in such practices in mid-2009, typically taking out the loans solely because of the opportunity to play the market with the proceeds [
While no precise definition of “normal” is provided in the People's Bank survey materials, it implies a belief in stable operating conditions. Regular commentary on the two series is provided, in Chinese, in the “survey and statistics” section of the People's Bank website (
For analysis of recent trends in Chinese bank balance sheets, and the relative position of the SOCBs, see, e.g., Lu et al. [
As part of the efforts to bring bank lending rates back down, the CBRC acted to close a loophole that had allowed China’s banks to move loans off their balance sheet by repackaging them as “trust products” [
Although the property market may also be sensitive to bank lending rates [
The A-share market for local investors is far more liquid than the separate B-share market for foreign investors and is the bellwether stock index for mainland China. For more details on the evolution of China’s financial markets, and the different share classes, see, for example, Wong [
CCB and ICBC retained their top positions through the end of the year 2010 with BOC and ABC following in sixth and eighth place, respectively.
The banking survey series were subsequently reconfigured at the beginning of 2011.
The stock exchange data are drawn from the Global Financial database (
As an alternative to the end-of-quarter values for the Shanghai A index we considered quarterly averages. This had very little impact on the findings and led to no change in our inferences, but had the drawback of remaining nonstationary even after being converted into log growth rate form.
Although limited by the length of the available quarterly dataset, this parsimonious specification at least allows us to maintain 22 degrees of freedom for the causality testing. Allowing for longer lag lengths up to a maximum of four produced only two instances where the AIC criterion selected a lag length greater than one. The only effect such longer lag lengths had on the inferences was a suggested additional causal effect running from Current Price Satisfaction to the Shanghai A index under a lag length of four. We put less stock in this result as experimentation showed it to emerge only under this specific lag order and also because of the highly limited degrees of freedom when four lags are included in the VAR.
Zhao and Gao [