Louis J. Sheehan, Esquire .  China has an uncommon liquidity problem. It has got too much.

Having ordered Chinese banks to ramp up lending in recent months, Beijing is now taking steps to pull funds out of the banking system. The spur, many think, is that rather than making economically useful investments, Chinese companies are using borrowings to take a flier on stocks.  http://louisdjdsheehan.blogspot.com

Any evidence is circumstantial, for now. But it certainly has precedent. As China's stock-market bubble inflated in 2007, investment income accounted for as much as a quarter of China Inc.'s profits, including for companies with little ostensible reason to be investing.

The money is certainly flowing into the stock market. Last Monday, as the Shanghai Composite Index advanced to its highest close since August, turnover on the Shanghai Stock Exchange reached its highest level since last April. The index is up 24% this year.

Regulators are looking into where all the new loans are winding up. The central bank has been selling treasury bills more frequently to draw excess cash out of the banking system.  http://louisdjdsheehan.blogspot.com

The problem isn't just that the speculative investing could put banks' assets at risk if the market falls. It's that the run-up in stock prices is luring in others. Last week, nearly 426,000 new individual trading accounts were opened, says China Securities Depository & Clearing Corp., a sharp increase over recent levels.

Any buying now could be the ultimate suckers' play. If companies are speculating on stocks again, they could be out of the market just as quickly as they got in.   Louis J. Sheehan, Esquire