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Why China's Next Move Is Critical to Its Markets

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Real recovery -- or total collapse?

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What does it say if China ends up requiring greater banking reserves (which is their way of curtailing lending growth), a stamp tax, or mortgage limitations?

Two days ago, China's banking regulator China Banking Regulatory Commission (CBRC) formally issued the "provisional measures on fixed-asset loan management." The measures will apply to loans issued for infrastructure, upgrades and renovation, real estate development, and miscellaneous fixed-asset investment projects.

These rules essentially require that the making of new loans be for real, tangible investments. This is their answer to the much-talked-about and (finally) recently reported news that a large amount of bank-lending this year has been put into their "you must be a Chinese citizen" version of an equity market.

I wonder what criteria were being used in granting those loans, and more specifically, what the stated reasons for those loans were? "We intend to expand our (fill in the blank)." Sure you do!

The Chinese buying of stocks with easy-money loans is over (hence the quick drop from nosebleed levels). There's a potential serious air pocket brewing there -- and they know it.

Back in 1997, Japan used postal funds to purchase equities and prop up its equity market. It appears that China is finally realizing that allowing its citizens to use government funds to do the same isn't such a good idea.

This is either China's way of leaking information to give its "market" a little reality slap on the back of the head, or a shot across the bow that they're not going to let its people do stupid things with money that wasn't intended for such.

Until we know for sure, it will only serve as a reason for people to take some coin off the table in a market that's doubled this year and is up 133% from its November 2008 lows. I'm using the Dow Jones Shanghai for those numbers; the Shanghai Index was up about 80% until yesterday's can of whoop-ass was opened.

The repercussions to the world are quite simple: It will put a serious question around China's ability to continue stockpiling basic materials and stimulating their economy with government spending. This is why the dollar is ripping and commodities are getting smoked. Commodities actually have the double-whammy worry of currency and demand.

As you know, I truly think the US and ROW (rest of world) economies will look like a hockey stick. However, if China does remove its stimulus and doesn't just put greater limitations on mortgages and loan activity in general, then they'll have the mother of all W-shaped recoveries.

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No positions in stocks mentioned.
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