By John Richardson
BEIJING is clearly getting worried that its politically motivated 2012 economic stimulus programme has damaged the economy.
"Just when the world had bought into a Chinese economic recovery, along comes the government throwing proverbial spanners in the works," writes James Gruber, former fund manager and journalist in his latest Asia Confidential weekly financial newsletter.
"Actually, they're more like grenades. According to Bloomberg, China's central bank has drained Rmb910 billion (US$145 billion) from the banking system this week [last week as you read this], a record high weekly net drain.
"Reducing liquidity after Chinese New Year is normal, as is increasing liquidity prior to this holiday. But the extent of the liquidity reduction dwarfed the Rmb 662 billion added before the New Year.
"To put this in some context, the People's Bank of China has now drained a net Rmb548 billion from the banking system this year. This compares with a net injection of Rmb1.44 trillion last year."
"On top of this news came calls from outgoing Chinese Premier Wen Jiabao for local governments to impose home price restrictions and 'decisively' curb housing market speculation. He described house price gains as 'excessively fast' and also ordered major municipalities to publish annual price control targets."
This helps to explain a week of two halves in Asia's polyethylene (PE) market.
In the first half of last week there was quite a lot of activity as some end-users restocked, the blog was told.
But from Thursday, we also heard that buyers backed away on the liquidity drain, the expected renewed clampdown on the housing market and the realisation that PE supply will lengthen from March onwards.
The above chart illustrates why Beijing has been forced to act on credit.
As you can see, total credit as a percentage of nominal GDP was at an all-time high last year, when both Total Loans (formal lending via the state-owned banks) and Social Financing (the sale of Wealth Management Products by the state-owned banks and lending by privately-owned credit agencies - the shadow-banking system) were added together.
Last year's surge in credit was substantially down to the rise in poorly regulated, highly speculative Social Financing, say some economists, who add that the sector represents a systemic risk.
Formal bank lending now accounts for just 55% of total credit compared with what used to be 92%, according to Peking University finance professor Michael Pettis.
Further reductions in liquidity- especially within the Social Financing sector - seem probable, therefore, as the government attempts to restore some balance.
An increase in interest rates might also be necessary to bring inflation under control.
We warned on 6 February that China's PE history would repeat itself, at the expense of China's small and medium-sized enterprises.
It now appears that we were right.