Elite Chinese Politics and Political Economy

Alright, what is going on in China? Bankers reported that a central edict has suspended all lending leading up to the May 1st holiday, but the CBRC is officially denying it. In the excellent article, some issues have been clarified, but much remains murky. Was there an order issued? I tend to think that yes, such an order was issued. Although both the PBOC and the CBRC are now shying away from explicit order on such concrete matters as lending, they will issue "circulars," which are theoretically suggestions. However, there are circulars, and then there are "circulars." In this case, it was clearly a centrally enforced circular, especially given that bankers received oral orders directly from the CBRC.

Why? 1. the government wants to stop a mad rush in lending in anticipation to an interest rate hike. However, this means that the government is still divided on how much to raise interest rate and for what categories. If they are in agreement, they can simply raise interest rate right away.
2. They would rather "cut with one-knife" and suspend lending than to raise interest rate. First, cutting with one-knife for a few weeks would cause the bankruptcy of many speculative projects and companies. Second, it would not have the undesirable effect of attracting more inflow of hot money, as raising interest rate would. This tactic, however, would drive up NPL ratio.
3. They want to see how bad things really are before deciding what to do. Using temporary suspension of lending, Wen can see what effect it has on inflation and money supply, but also what effect it has on NPL ratio. If it is effective toward inflation and is not increasing NPL ratio by too much, the government might choose to stick with quantity control over lending. However, if NPL ratio is all of the sudden surging rapidly because of the loan suspension, the SC might decide to bite the bullet and raise interest rate instead of imposing a quantity control on lending. It will not do for NPL ratio to increase by over 5%.
Of course, there is probably some disagreement over what to do within the central leadership. I suspect that Jiang is on the loose monetary side, while Wen is on the tight monetary side. Thus, I think the third scenario is closest to what's happening now.


Chinese Banks Tap
Breaks on Lending

By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL
April 30, 2004

SHANGHAI -- China's financial regulators, seeking to clarify a directive that prompted many Chinese commercial banks to stop new lending, said they weren't seeking to ban loans but were urging commercial banks to avoid rushing out new loans before a weeklong May holiday, which begins Saturday.

The statement followed widespread confusion after banking executives in Beijing and Shanghai said Chinese regulators had instructed them, sometimes over the telephone, to suspend new loans for the next two days. On Thursday, several banks said they were carrying out those instructions.

In a statement released Thursday, China's Banking Regulatory Commission said it had issued "guidance" urging commercial banks not to rush out new loans before the holiday to avoid inflating April loan data. Such an action would have caused a sharp rise in April loan data as policy makers are trying to judge whether measures to tighten monetary policy are taking hold.

At the same time, the commission said it had instructed banks to heed tough new lending criteria to cool overheated sectors while continuing to support projects in line with the government's industrial policies, such as improving coal production, power generation and transportation. The commission said it was "untrue" that it had asked banks to halt new loans, according to the statement posted on its Web site.

Despite strict controls on lending to property, steel and cement plants -- and other measures to restrict capital -- China's banks continue to overshoot official lending targets by a wide margin. A commission official said that a flood of new loans at the end of April would send the wrong signal to Chinese leaders that credit-tightening efforts aren't working.

Chinese regulators Wednesday had dismissed as "rumors" reports that the commission had issued a directive to suspend all new lending ahead of the May holiday. But numerous commercial bankers said they had received instructions, in some cases by phone, from the commission to temporarily halt new lending. The banking regulator said the commercial banks misunderstood its directive.

Some banks said Thursday they had begun suspending some loans. "Companies that had made arrangements for loans were suddenly notified they couldn't get them," said a Citic Industrial Bank Shanghai Branch official. "Clients were coming here and calling us, but there was nothing we can do."

China's regulators are casting an increasingly concerned eye at the country's credit boom. Chinese bank loans, as measured by assets at the banks, have swelled nearly 50% in a little more than two years, far faster than China's sizzling economy. Loans outstanding in China's banking system grew 21% in the first quarter from a year earlier and stood at $2.02 trillion at the end of March, one-and-a-half times the level at the end of 2001.

These numbers are the result of Beijing's orders in recent years to state-owned banks to lend, and underscore the government's continued power to dictate to the sector. But "lending growth can't bail you out" of a bad-loan situation, said Keith Irving, an analyst at Merrill Lynch & Co. in Hong Kong.

As officials look for new ways to curb credit, there is talk of more drastic measures. One step is to raise interest rates, which Beijing hasn't done since 1995. Speculation about an imminent rate increase prompted selling of Chinese-government bonds Thursday.

A central-bank official played down the possibility of a near-term increase of borrowing costs. "I think in the short-term, an interest-rate increase is unlikely," said Li Yang, a member of the People's Bank of China Monetary Policy Committee. "It is only market speculation." He said an increase "is a very complicated issue and we must consider it in a prudent way."

Still, analysts expect further credit-tightening measures, that could include even more-stringent lending rules.

Some banking executives say they welcome moves to slow growth. "We support the decision made by the central bank to curb overheated investment," said a Beijing executive at Minsheng Bank. "The economy and banking system should avoid any hard landing."

-- James T. Areddy in Shanghai and Owen Brown in Beijing contributed to this artic

Okay, someone complained that firms should not be obligated to keep a cash reserve under a perfect financial market. I agree. My earlier comment about the selection effect of loan suspension has to do with particularistic features of the Chinese financial system, and is by no means a comment on how firms should operate in a perfectly competitive market. Currently, banks are required to lend to borrowers who can front a certain % of “self-raised funds.” In recent months, some banks have broken that rule and are lending to companies and projects that do not have any “self raised” portion. Suspending lending for a while might be a mechanism whereby the Chinese government can pick out the violators of this rule. Of course, the basic structural problem is that banks have little incentive to do due diligent in the first place

More on the lending suspension. A member of Chinapol suggests that the suspension of lending is due to preparations to increase interest rate, but I am not entirely convinced:

You present a very interesting scenario. In the past, whenever a lending crackdown or an interest rate increase was anticipated, banks usually lent out money rapidly. This suspension might be an attempt to stop this sort of behavior. However, if Wen really wanted to increase interest rate, he can simply call all the banks and do it; there wouldn't be time for rational expectation to kick in.

In today's WSJ, there was some bad press on the crackdown, but I think this method of cutting with one knife serves another important function (in addition to stemming the inflow of hot money), it also selects the bad borrowers from the better borrowers. With a sudden suspension of funds, companies that live from working capital loan to working capital loans or highly leveraged projects will get into trouble immediately. In the mean time, companies with better cash positions will stay trouble-free. This is a harsh tactic of artificially inducing a mini financial crisis, which is often characterized by cash shortage. However, given the way things are going, I would say this is not the most insensible way to go. After all, it has worked quite well in the past.

Wow, the mainland is resorting to the "one-knife cut" method sooner than I had expected. With inflation still relatively low, they have ordered a suspension in new loans before the May 1st holiday, which means that the suspension will last for two weeks. We really haven't seen this high handed tactic since 1993. One reason might be that inflation in some major cities might be quite high already, and the Chinese government just didn't want to admit it. Another reason might be that they really didn't want to raise interest rate (which draws more hot money from abroad), so they are forced to do this. See the article below:

Thursday, April 29, 2004

Mainland banks suspend new lending
Regulator and central bank deny they are responsible for the move despite top-level concerns about overheating


CHRISTINE CHAN, BEI HU, ELAINE CHAN and AGENCIES

Next Story



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Mainland commercial banks have stopped issuing new loans until Saturday, in a move reflecting growing official anxiety over China's overheated economy.
Bank of Communications, Shanghai Pudong Development Bank, China Merchants Bank and Shenzhen Development Bank said they would not issue any loans until May 1, suggesting the government may soon announce tighter loan policies to help slow economic growth.

"All lending has been suspended," said Shi Guang, a loans officer at Shenzhen Development Bank in Shanghai. "It's possible some new policy will come out during the holiday [next week]."

The freeze on lending came as Premier Wen Jiabao warned yesterday that "very forceful" moves were needed to control overheating. President Hu Jintao has also spoken in recent days of imminent administrative measures to contain unsustainable growth.

"We have been told to suspend all our loan business until May 1," said Guo Yi, a loans officer at Pudong Development Bank. "It's a decision from the very top."

China Banking Regulatory Commission spokesman Li Shaopeng said it had "been admonishing banks to control excessive loan growth", but he denied the regulator ordered the banks to suspend lending.

"We have never asked banks to suspend new loans," Mr Li said.

Sources at each of China's Big Four state-owned lenders - Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China - reported receiving an official directive this week to "suspend new loans until May 1".

"These banks are effectively state-controlled and therefore their lending practices aren't dictated by a combination of market conditions and risk management, but by letters they receive from the regulators," said Andrew Salton of Standard Life Investments in Hong Kong.

China's economy grew 9.7 per cent year on year in the first quarter, after expanding 9.1 per cent last year. Lending by financial institutions surged 21 per cent to 17.9 trillion yuan in the year to March, indicating that earlier government measures to control loan growth have been ineffective.

"Previous attempts at monetary tightening [have not done the job]," said an analyst at Guotai Junan Securities in Shanghai. "This new loan suspension reflects the central government's determination to rein in overinvestment."

The People's Bank of China this week raised the amount of cash banks must set aside as reserves for a third time in seven months. The central bank has also increased interest rates on loans to commercial banks and sent inspectors to examine provincial bank branches' lending to steel, cement and other projects.

On Tuesday, the State Council reduced the percentage of debt companies may use to fund steel, cement, aluminium and property projects.

Companies must now put up at least 40 per cent of the capital for steel projects and 35 per cent for the other three industries, raised from 25 per cent previously.

Mainland leaders have been warning of legal consequences for officials who ignore their exhortations to cut back on blind investment.

China Central Television reported yesterday that eight officials, including a Bank of China branch manager, have been punished for illegally approving loans for a 10.5 billion yuan steel project in Jiangsu province.

Central inspectors are also investigating provincial and municipal trust and investment firms that are pumping loans into a sizzling property boom. Real-estate investments ballooned 41 per cent in the first quarter to 182 billion yuan. One mainland banker speculated that the PBOC initiated the ban on bank loans after seeing preliminary lending numbers for this month, despite official denials from the central bank.

"The PBOC has the lending numbers for the first three weeks of April. It may be the case that lending growth was not falling even with the previous warnings," the banker said.

PBOC spokeswoman Bai Li said: "There is no official notice. Even if there are some commercial banks that decided to stop lending, they made the decision by themselves based on their own situation."

Ah, my friend Matt Rudolph and I had a pretty interest exchange on the whole interest rate and exchange rate issue:

Matt: Li Ruogu has dangled it out there...interest rate hike. This will make there plans for guoyougu jianchi that much harder or the assets that much cheaper(relatively less domestic demand for stocks at current prices).

I believe they will raise, and am willing to bet on it. I'll even give you two-to-one. As for yuan peg....I'm still sticking with my belief that the CentComm are ornery fucks and will do whatever they can to wait until after the US election to loosen the serpentine.


Me: You are right that they should do it some time soon, but I really wonder why they haven’t done so already. It seems reasonable especially since many SOEs are now making money hand over fist, so they can certainly afford higher rates. One reason might be that an interest rate hike would attract even more hot money from abroad. In contrast, hiking up reserve requirement would not have the same effect. As for what Li Ruogu said, I wouldn’t take it at face value. The PBOC is always on these fishing expeditions to see what the public reaction is. The State Council can still veto a hike. Your theory about the “ornery fucks” might be right, and we will see what they do after the election.

Wow, Joe Studwell's recent editorial is awesome. It is really insightful, and I couldn't agree with him more. My only point of contention is that I think someone in the central government will step up to the challenge of suppress inflation, if it came to that. Back in 93/94, it wasn't apparent that Zhu was going to be the anti-inflation czar either, especially since Deng, the source of the last inflationary cycle, had personally promoted Zhu to the center. This time around, I think Zeng Peiyan or even Zhou Xiaochuan might take this opportunity to accumulate the "administrative merit" (zhengji) of stopping inflation. Whoever does it will surely get the support of Zhu, just as Zhu had received implicit support from Chen Yun before he passed away. The problem for the anti-inflation crowd now is that there isn't very serious inflation yet, so the issue is still not a high priority for the regime.

China's Hard Landing

By JOE STUDWELL
April 20, 2004

For the past six months the global-investment community has sung what is -- even by industry standards -- an improbable song. That booming China, currently yielding foreign companies their best returns since economic reforms began more than 20 years ago -- is headed for a soft landing. That a country where bank lending has increased by 40% in the past 24 months and fixed investment by much more is going to casually ease down a couple of gears without paying a price for its frenzy of state-driven investment.

Last week's economic data for the first quarter of 2004 put a bit of a damper on that proposition. Gross domestic product surged 9.7% in January-March, from the figure for the same period last year. Fixed investment increased by a jaw-dropping 43%, maintaining a share of GDP that is comfortably in excess of that recorded in other Asian countries such as Thailand before they were hit by the 1997-98 financial crisis. And outstanding bank loans steamed ahead by 21% over the same period last year. They now comprise 140% of GDP, an unprecedented share for a developing economy. For March alone, industrial production growth set an all time record of 19.4%.

Perhaps the soft-landing spinmeisters will now concede that the possibility of a hard landing has increased somewhat. But their analysis remains at best flawed, and at worst disingenuous. For historical experience shows that communist China does not do soft landings any more than subtle diplomacy or get-to-know-you meetings with political dissidents.

Since China began its economic reforms in 1978 there have been four violent economic cycles -- each dictated by government macro policy. That is one reason why it has been so difficult to make money by investing in China's domestic economy (as opposed to the export economy or opportunistic trading): just when companies put their cash on the ground, the economy tends to drop off a precipice. The peaks of the three previous cycles were 1978, 1984 and 1992. And now, 2004 may prove to be the peak of the fourth.

The gap between peaks and troughs has been enormous, even though this was partially disguised throughout the 1990s by the vagaries of China's statistical regime. A Soviet-based data reporting system understated growth in peak periods and overstated it in troughs.

Back in 1978, growth rocketed to 12% as Deng Xiaoping initiated China's economic reforms with a long-cherished wish list of industrialization projects. By 1981, it had crashed to 5% because China was unable to pay for them. But by 1984, investment fever was back with growth of over 15%, before it dropped like a brick to close to 0% in post-Tiananmen 1990.

In 1992, Deng reissued calls for fast development and that year saw another growth peak -- officially 14.2% and probably higher. Then former Premier Zhu Rongji hit the brakes in 1994. The economy slowed to a 1998 growth nadir that almost all China economists now agree was at most 3% -- and quite possibly less. Different means of calculating China's GDP (using consumption instead of socialist expenditure-based methodology) and looking at the performance of proxies for growth -- such as freight, air travel and power -- gave the lie to officially reported figure of 7.8% growth that year.

The same techniques show that growth in the latest peak has been faster than reported. After 1998, the government panicked over the implications of the Asian financial crisis and again began to pump up the economy with investment steroids. Official growth in 2003 was 9.1% but there is compelling evidence that real growth was closer to 11%.

The four growth cycles of the reform era, plotted on a graph, look like a child's cartoon rendering of a mountain landscape. Even Time Warner's Road Runner would be unnerved by the gradients.

The main reason why China does not do soft landings is because the Communist Party leadership controls the country's financial system, and small groups of people make much cruder judgments about money than are made by markets. China's capital controls mean that every legal avenue citizens have to save -- buying (state) bonds, buying stocks (of state companies) or making deposits in (state) banks -- puts their money, albeit indirectly, in the hands of politicians.

Those politicians always find excuses to maintain excessive levels of investment. And when that investment leads to overheating, there is nothing -- in the absence of effective market mechanisms -- they can do short of hitting the brakes with both feet.

Before this occurs, however, there is a ritual of rhetoric to be performed. At the height of the last investment frenzy in July 1993, Mr. Zhu issued a 16-point plan to curb excessive credit and thundered that inspection teams were being sent to the provinces to shut down speculative projects. Speculators nodded their assent and carried on speculating. Only at the end of the year did different factions in government concede credit was out of control and slash the growth of fixed investment in 1994 by more than 75%, compared with 1993.

Today the wailing and gnashing of teeth phase is well under way. All the leadership's recent assertions that the banking system has been commercialized and now makes its own decisions haven't stopped Premier Wen Jiabao from railing against sectors of the economy that are "overinvested," saying they must not be lent more money. Central bankers promise that increases in the proportion of deposits banks must keep on reserve with the central bank will tame reckless lending. But they miss the point. Because of state ownership and capital controls banks are awash with deposits. Making them park a bit more money with the central bank is neither here nor there.

Instead, banking is driven by the government's demand that financial institutions commercialize in a non-commercial, even anti-commercial, environment. They have no control over their interest rates and face no serious competition. Yet they are very liquid. So the banks lend and lend in the hope of earning themselves out of insolvency, since their liabilities far exceed their capital. The only way to stop the credit cycle is by fiat because there is no functioning market mechanism that provides an alternative.

But who, today, will be the new Mr. Zhu? Despite being his protege, there is no evidence that Mr. Wen -- or any of today's other leaders for that matter -- is ready to launch an austerity program. This opens up the possibility of a prolonged period of rhetoric, one with more unspecified "macro measures," multi-point "plans" and investigative "teams" dispatched from Beijing, as the investment boom continues.

Back in 1993, the question of whether China would slam on the economic brakes was not terribly important for the outside world. In the whole of the 1990s, the United States exported more to Taiwan than to mainland China. But in the past two years the scale of the China boom has sucked in unprecedented imports -- up by $170 billion in the last two years.

So the question of whether the credit continues is rather more important this time. It affects other Asian nations whose economic and stock-market recoveries have been heavily dependent on sales to China. It affects the bottom lines and stock prices of very large companies like BHP Billiton and Rio Tinto, both beneficiaries of China's maniacal orders for commodities. It affects the exchange rate of a currency as significant as the Australian dollar because of the country's commodity-based economy. And it affects the outlook of those ceaselessly optimistic investors, who think that the increase in China's demand for power, steel and cars last year is a reliable guide to demand for the next decade.

There are no easy answers to what will happen and when. Because the point is that China's basic problem is that the country is still far too dependent on the whim of men rather than systems. All that can be said is that an economy driven by spiraling state-mandated investment will eventually see economic gravity reassert itself.

Either that happens through the traditional emergency braking method or, in a new scenario, because of some external driver. Under current conditions that would be rising dollar interest rates which once again threaten China with capital flight and jack up the costs of much-increased state debt.

Once again, there is talk of revaluating the peg again. They might loosen the peg, but it wouldn’t exceed 25 basis points. Again, the problem they face is that it might make the hot money problem worse. I think that they really don’t want to increase interest rate and might resort to more flexible peg if they have to in order to avoid increasing interest rate.

sigh.......well, the Chinese just put the breaks on the CCB IPO plan. I could've told you a few months ago when there was a lot of talk of the IPO. The problem, as the article below points out, is not just the NPL ratio, which really is quite low. According to the PBOC data I have, CCB NPL ratio really is as low as they announced. Of course, local branches hide a lot of NPLs from headquarters, which probably adds another 5-10% to the official figures. The government is saying that CCB is not ready, but I really think that the Chinese government also doesn't want to let go. Every Premier, including the current one, wants to have that giant cookie jar there to use, if not for "developing the west" then for national emergencies. This will make Liu Mingkang, the champion of these IPOs, look bad. This will also serve as a warning to scholars and analysts of the Chinese financial system: people like Liu Mingkang or any of the bank Presidents don't make real decisions. It is almost useless to listen to what they say, since what they say only reflects what they want, not what the State Council will ultimately decide.
SCMP
Thursday, April 15, 2004
Beijing puts the brakes on bank's listing plan
WANG XIANGWEI in Beijing

China Construction Bank (CCB), the mainland's top property lender, is likely to delay its initial public offering to next year or later as top government officials and economists have expressed serious doubts about the bank's readiness.

This means the Bank of China (BOC), the mainland's top foreign exchange bank, may overtake CCB to become the first state bank to list sometime next year, according to people familiar with the two banks' plans.

CCB, which with BOC has received a combined US$45 billion capital injection from the central government, has said it will complete its restructuring by September and seek a listing, raising as much as US$10 billion, towards the end of this year.

The bank wants to list its shares simultaneously on the mainland and in Hong Kong and New York, setting a precedent for mainland firms.

But there have been growing indications that CCB's rush to list has caused considerable worries among the top leadership in Beijing and leading government economists.

Recent reports that US securities regulatory bodies are investigating China Life, the mainland's biggest life insurance firm, have also raised questions on whether it is wise for CCB to list in New York, which requires higher disclosure and regulatory standards.

Several people familiar with the bank's listing plan said there was little hope that CCB could come to the market this year.

"The earliest possible listing date could be sometime in the second quarter of next year, but many officials and economists have urged the central government to delay the listing even further, arguing that a hasty flotation would be extremely counter-productive," one source said.

Premier Wen Jiabao has expressed doubts about the capabilities of CCB's management and is believed to be undecided on the bank's listing schedule.

An influential mainland banker who declined to be named said there was little confidence in the bank's ability to transform, in such a short time, its decades-old operating structure to ensure it would run according to market forces.

"Chinese state banks should follow the model of Deutsche Bank, which spent at least five years putting its house in order before its IPO," the banker said.

Many economists have warned that a stock market listing cannot solve the structural problems that have plagued the banks for decades.

"I believe the pace of listing the state banks is too fast," said Zuo Dapei, a researcher at the Economics Research Institute of the Chinese Academy of Social Sciences.

"The Chinese are often like this - whenever leaders say something, officials do whatever it takes to do it, ignoring practical conditions."

Mr Zuo said the time was not right to float state banks.

"Bad loans are just one problem. A more important consideration is the quality of banks' management and whether management can cope with what is required of a listed bank. I have doubts about this," he said.

"Among the Big Four state banks, I believe BOC has the best qualifications to seek a flotation."

Unlike CCB, BOC reportedly plans to list only on the mainland's A-share market.

CCB officials said the bank had no news to report on its listing plan.

My friend Bill from UC Berkeley sent me a piece from the SCMP about how even investment banker Andy Xie is now worried about the Chinese economy. I agree with him that we should worry, and added some other comments:

You are absolutely right. If Andy Xie is worried, then we should all be. The investment banking community of course tends to put things in the best light. However, Andy Xie might also be intentionally pessimistic to affect a slight burst of the bubble. Of course, he would have to be an ego-maniac to think that. It is true that housing demand is rising rapidly in urban China, but I doubt that it is rising by 46%.

One thing that Andy said was particularly insightful: the China bubble now has global consequences. Billions of hot money is flowing into China. It would be fine if that money is just sitting in Chinese banks, but much of the money is speculating in mainland fixed assets or the stock market. If the PBOC is forced to take drastic action, such as imposing a lending quota, the bubble will burst, and a lot of hot money will be lost. This could trigger a debt chain in other parts of the world. The problem is we don’t really know where the hot money is coming from. If it mainly comes from off-shore Chinese money which fled China in the early 90s, the consequence might be mild. However, if a substantial amount of the money comes from investors borrowing heavily, then the lost of that money might pose a problem internationally.

For now, the PBOC is prevented from taking any drastic measure, probably for political reason. Traditionally, the CCP elites do not agree to burst a bubble until there is high levels of inflation. Due to surplus in manufacturing goods, inflation is still relatively mild, so there is no consensus in the leadership to harshly crack down on investment. The measures so far are half measures implemented half-heartedly. It will take much more for the PBOC to raise interest rate and even more before they impose a lending quota on the banks.

The SCMP article:

Thursday, April 8, 2004
Economists anticipate bursting of mainland's bubble

ALLEN T. CHENG in Beijing

China's rising importance as a pillar of global growth continues to concern economists.

Some see the hot mainland economy as a bubble waiting to burst, and fear it could cause global problems if it does.

Chief among them is Morgan Stanley's Andy Xie, who issued a report this week warning that the eventual bursting of the mainland's property bubble would send global markets crashing, triggering economic aftershocks far and wide.

There are two bubbles in the world today, according to Mr Xie, who is based in Hong Kong. The first exists in some western economies, where there is over-optimism that interest rates will continue to decline while incomes rise, a point of view which encourages consumers to borrow faster than their income grows.

The mainland's investment bubble is the second.

"It is the cause of the `gold-rush' mentality that dominates businesses and property speculators," he said. "Massive capital inflow is supporting property demand and credit supply. China's growth essentially comes from accumulation of speculative inventory in property and excess production capacity."

According to Mr Xie, gross fixed-asset investment stands at 42.9 per cent of China's gross domestic product, twice as big as in the previous bubble in 1993.

"This bubble is the same as what Southeast Asia experienced 10 years ago: excessive business optimism and massive capital inflow, which in turn will become an investment bubble," said Mr Xie, who believes that what is going on in the mainland today is a pyramid game played on a massive scale.

Local governments are borrowing massive amounts of money, with land as collateral, to build urban infrastructure, hoping that the value of the land will appreciate sufficiently to pay off the debts. Shanghai has used this method in the past.

Mainland officials are taking quick action to clamp down on hot money. Most recent was the implementation last week of a requirement that any individual or entity converting the equivalent of US$50,000 or more in foreign currency into renminbi obtain approval from the State Administration of Foreign Exchange (Safe).

Mr Xie believes Safe may suspend all non-foreign direct investment in the coming months and the People's Bank of China may ratchet up interest rates. "China pricking its investment bubble is becoming the most obvious risk to the global bubble," Mr Xie said.

However, not all economists see a bubble building up in the mainland or the government taking measures to prick it.

Andrew Rothman, an analyst for Credit Lyonnais Securities Asia, said he saw sustainable growth. "The government's focus is on improving quality and focus of the investment rather than just the speed of the growth. There are pockets of overheating, but if you look across the sectors we don't see that."