Salient to Investors:

Stephen Bell and Dr. Hui Feng at the University of Queensland write:

  • The current Chinese credit crunch differs markedly from those in the late 1980s and early 1990s, and shows China no longer relies solely on political and administrative controls, and is allowing market forces take a greater role.
  • The most recent tightening of liquidity appears to have been caused by a crackdown on bond-market irregularities along with lower foreign-exchange inflows and by seasonal factors.
  • China is worried about a financial crisis developing as a result of its 2009 anti-crisis lending spree, the rapid expansion of the money supply from the PBOC’s foreign-exchange intervention and the phenomenal growth of a shadow banking sector that escapes regulatory supervision.
  • China’s largely regulatory-induced credit restrictions serve as a real-world stress test of the capacity of its banking system and financial markets.

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