U.S. investors have been paralyzed by concerns about the Federal Reserve turning off the easy-money spigot, but Wall Street has started this week fretting about another central bank: China’s.
The credit crunch in China was brought to the forefront by the Shanghai Composite plummeting 5.3% overnight into bear-market territory after the People’s Bank of China refused to loosen monetary policy in response to country’s worsening liquidity squeeze.
After watching China’s total credit explode from $9 trillion in 2008 to about $23 trillion today, the new government in Beijing now seems ready to ease off the stimulus gas pedal.
Yet the tighter policy also comes on top of recent indicators revealing activity in the Chinese manufacturing sector shrank in June to a nine-month low.
“It’s quite startling that manufacturing actually contracted. The banking system is exacerbating the slowdown,” said Jeffrey Bergstrand, a finance professor at the University of Notre Dame.