Will China Ease Banking Curbs? Has the Railway Stimulus been Launched?

China’s worsening slowdown has been prompting for a stream of news pouring out this morning.

One should note that the Shanghai Index broke down yesterday, but has opened mixed (slightly higher) today.

Yesterday I asked,

will China's policymakers ease on bank capital regulations?

I guess the initial indications points to the easing of restrictions on China’s shadow banking system perhaps as part of the proposed stimulus

Here is the Bloomberg,

China’s economic slowdown threatens to derail efforts to curb underground lending -- measures championed by Premier Wen Jiabao as crucial to future growth.

The country grew in the second quarter at the slowest pace since the depths of the global financial crisis in 2009, 7.6 percent, putting pressure on China’s leaders to boost stimulus spending. Wen’s proposals to rein in the shadow-banking system, estimated to be about one-third the size of official lending, may be sidelined as a result, according to half a dozen economists interviewed by Bloomberg News.

“With an economy slowing more aggressively than the authorities perhaps want, the imperative to crack down on shadow financing becomes increasingly conflicted,” said Alistair Thornton, a Beijing-based economist with research firm IHS Global Insight Ltd. (IHS) “With the government increasingly in firefighting mode, the desire to push through tough reform in the financial sector inevitably takes a back seat to staving off a hard landing and managing global economic volatility.”

Wen, whose term ends next year, has led calls to control what IHS estimates is $1.3 trillion of private financing, an amount equal to last year’s U.S. budget deficit. He has proposed channeling that money through government-regulated institutions to break what he called a “monopoly” on lending by state-owned banks and open a cascade of capital to China’s 42 million small and medium-sized businesses.

‘Terrible Damage’

Only 3 percent of those companies are able to get bank loans, according to Citic Securities Co. (6030), the nation’s biggest publicly traded brokerage, with underground lending by family, friends and acquaintances largely funding the rest.

If and when this becomes a reality, then this does nothing to solve the problem of systemic overleveraging, and in fact, should worsen it. What Chinese authorities are likely to do like their developed economy peers is to inflate aggressively.

Another Bloomberg article also says that China may have already launched a railway based stimulus.

China’s railway infrastructure investment may double in the second half of this year from the first six months, aiding efforts to reverse a slowdown in the world’s second-biggest economy.

Full-year spending will be 448.3 billion yuan ($70.3 billion), according to a statement dated July 6 on the website of the National Development and Reform Commission’s Anhui branch. That indicates about 300 billion yuan of investment in the second half, up from about 148.7 billion yuan in the first.

China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the stimulus rolled out during the global financial crisis. A decline in foreign direct investment reported by Vice Commerce Minister Wang Chao in Hong Kong yesterday underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy.

In my view, both are signs of the growing desperation by the Chinese authorities, who may trying to offset adverse market developments with public relations work.

None of the above seems to have been made official yet. “May be sidelined” or “may double” seem like the psychological power of suggestion.

The recourse to managing public communications or public relations campaign seem as manifestations of the ongoing political deadlock within the Chinese political system

This means that, so far, political actions has mostly been about promises or “talk therapy”.

The frictions from the clash of hope and reality will likely produce more market volatilities in either direction over the interim but enhances the risks of a fat tail event (crash).

Be careful out there.