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Drop in Chinese Lending Leads to Declines In Both The Shanghai Composite & The BDI

August 20th, 2009 Michael McDonough

A reader recently brought to my attention the fact that the BDI and the Shanghai Composite Index both appeared to have peaked from interim-term highs at the beginning of August (see chart).  After looking more closely at the data I quickly began to realize the significance of this relationship and its implications on shipping.  Let me start by saying if you haven’t read Andy Xie’s recent article on the present outlook for China’s markets read it, its implications could be very important for not only China but the shipping sector as well.

Shang BDI

Source: Bloomberg

There is one important factor missing from the chart above, and that is the level of new lending in China. The level of new lending has started to drop sharply in July on the back of fears over its potential effects on non-performing loans on the Chinese financial sector, and a potential asset bubble.  These loans were not intended to be used for speculative investments in the equity markets, but undoubtedly at least a portion of these funds ended up there.  These funds were likely also used to purchase raw material dry bulk imports, either for speculative reasons or business use.  Now that new lending has begun to dry up we are beginning to see a pullback not only in the Shanghai Composite, but also in shipping rates, likely on the back of lower demand for raw materials.  A lack of new lending, at least relative to recent levels, will likely continue to weigh heavily on China’s domestic indices along with shipping rates.  We will need to continue monitoring China’s new lending levels along with imports to determine the full magnitude of this effect, but we have already begun to see a decline in steel prices in China over the past couple weeks couple with an increase in Chinese steel inventories.

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