Not so Mighty Hand

So I was wrong.

The Wall Street Journal's report that Beijing is imposing lending curbs on banks didn't turn out to have quite the dramatic impact I thought it would have.

In fact, it doesn't seem like such a big deal after all. The Shanghai and Hong Kong bourses both fell slightly, but it was nowhere near the drop I thought would follow.

The confusion over the accuracy of the report probably contributed to this. In direct contradiction to the Journal's report, both Bloomberg and AP reported that there was "absolutely no lending freeze being imposed on Chinese banks,'' each quoting a different person from the China Banking Regulatory Commission (CBRC). The Journal, which first broke the story yesterday, had used an unnamed CBRC source.

Apart from showing up the opaqueness of Chinese policy making, the bottomline - for me at least - is that it also demonstrates how tough it is to control the growth of this economy.

Trying to strike a balance doesn't seem to work. On the one hand, the Chinese government would be loathed to be seen using draconian edicts like telling banks to stop lending. Yet its market-influencing measures like repeatedly raising interest rates or the reserve ratios of banks seem to have little effect on cooling investment fervour or curbing the higher costs of living.

Certainly, even if ordinary Chinese citizens cannot borrow money from banks to buy shares, there are still the big private equity firms from overseas who are putting their faith into the stock market. Even if business cannot get credit lines, there is still the underground system to turn to.

A recent Newsweek report estimates the value of such underground transactions to be between 2 to 5 percent of the country's gross domestic product, though it could be twice that much. It proclaimed that "either way, China's private sector would grind to a halt without it."

Certainly, some are blase over the government tinkling. Been there, done that. The Chinese, entrepreneurial as they are, have already adjusted to the realities of their economy.

The AP report quoted Andy Rothman, a China strategist for investment bank CLSA, saying: "This is a very routine thing. This runs for several months and then they call and say, 'OK, back to normal.'" He said the latest government intervenation, if indeed it did happen, will have "zero impact" on the Chinese economy and stock markets.

"Everybody knows it's coming. If you're a company and you have access to credit then you'll go ahead and borrow what you need for the full year before you get to the third quarter because you know this is coming."

So the party seems likely to continue. Players continue to dance despite the slight jarring of the music. The question remains. What will it take to cool the economy? Will the stock market be due for a correction anytime soon?

Any takers?