On Saturday, November’s CPI number was released and - as widely leaked - it was 5.1%, the fastest in 28 months, and this included food at +11.7%. Similarly producer prices rose by 6.1% last month. On a happier note, industrial output moved up 13.3% and retail sales soared 18.7%; and, finally, urban fixed asset investment was ahead 24.9% in the first 11 months of 2010.
What didn’t happen, though, was the widely expected increase in interest rates. The prime reason for this was so to avoid attracting more hot money, which would simply add to the inflation rate. Perhaps, too, the authorities had one eye on the Yuan (on the one hand, appreciation will help inflation, but on the other it makes exports more expensive). On Friday, though, it did increase bank reserve requirements for the third time in five weeks.
Macquarie Securities said that “the Government knows quantitative measures like the reserve ratio work immediately and, consequently, are controllable and understandable. Raising interest rates creates much more uncertainty”. The reserve movement “clearly shows that the Government is more constrained in raising interest rates. The message seems to be that they don’t want to raise rates. Raising interest rates is difficult while raising the reserve ratio isn’t”.
“The reserve ratio and interest rates are tackling two different problems. If the Government thinks the biggest problem is credit growth it uses the reserve ratio because that will constrain bank lending and they don’t need to raise interest rates to change bank lending. If the biggest problem is asset market prices, then they will use interest rates. The way to affect the flow of deposits in and out of the banks is through interest rates. The stock market is down, the property market is not so hot and the release of bank deposit data from the central bank suggests there was a pickup in deposit growth in November. If we had seen a massive outflow of deposits they would probably have raised rates”.
Perhaps, too, the Government can see inflation abating in 2011. On Friday and over the weekend, the great and good were gathered for the Central Economic Work Conference, presided over by Messers Hu and Wen. No official release has been made but, again, there have been leaks. For example, it is likely that China has set the following targets for 2011: 8% GDP growth; 4% inflation; and 16% money supply expansion for next year. It may also set a target of at least Yuan 7 trillion ($1.1 trillion) for new bank loans for 2011. However, no final number has been set, it is also reported. Analysts’ estimates range from Yuan 6.5 to 7 trillion.
In 2010, the PBOC had a target of Yuan 7.5 trillion of new loans but this was virtually used up by the end of November (bar Yuan 50 billion). However, the total figure could be about Yuan 9 trillion, when off-balance sheet credits and short-term financing bills are converted into loans are included.
Nonetheless credit default swaps are a worry. For example, five year default swap contracts on China’s bonds have risen to 71.5 basis points, from a two year low of 52 basis points on 13 October, according to CMA. Similarly, RBS predicted this month that the swaps may trade as high as 150 basis points next year and recommended investors buy them as a hedge. “China is trying to cool things down and manage a deflation of the bubble. If that fails then that’s how CDSs get driven up, because concern will be that the sovereign balance sheet will have to bear the costs of restructuring banks”. Similarly, Citigroup added that “China’s golden era of low inflationary growth, underpinned by compliant domestic savers and enthusiastic external consumers, could well be at an end”.
Somewhat at odds, it seems, the stock market rose by 1.1% today, which the best one day gain since 25 November. A number of commentators, including CICC, are cautiously positive; and this, despite more sabre-rattling in the northern part of the Korean Peninsula.
“There are three secrets to managing: the first secret is have patience; the second is be patient; and the third most important one is patience” - Chuck Tanner
Shanghai Composite:
Today: +2.88% to 2,922.95 at close
Last week: no change
December: +3.6%
Since 5 July: +23.7%
YTD: -10.8%
Hang Seng:
Today: +0.67% to 23,317.61 at close
Last week: -0.7%
December: +1.4%
YTD: +6.6%
Oil futures: $88.89
Gold futures: $1391.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3245
NEW DATA FOR NOVEMBER
(year on year change unless noted)
- Saturday 11 December
Consumer prices +5.1% (+1.1% on month)
Food prices: +11.7%
Producer prices +6.1 %
Industrial output +13.3%
Urban fixed asset investment +24.9% (first 11 months of 2010)
Retail sales +18.7%
- Friday 10 December (business hours)
Exports +35% to $153.3 billion
Imports +38% to $130.4 billion (a new record)
Trade surplus $22.9 billion
-Friday (after hours)
New bank lending: Yuan 564 billion ($85 billion)*
M2 +19.5%
50 basis point increase in bank reserve requirement ratios to 18.5% (in most case; and effective from 20 December)
*total lending this year is now just Yuan 50 billion short of the Government’s target maximum of Yuan 7.5 trillion
ECONOMY
- Media reports say Government has the set the following targets for 2011:
- 8% GDP growth;
- 4% inflation;
- 16% money supply expansion; and
- no target set on new bank lending but maybe Yuan 7 trillion - China pledges to change growth model in 2011
- Inflation tops 5%
- China risks a “rush” to tighten in 2011 after inflation spikes
RATES
- Interest rate speculation splits analysts
- China may delay raising rates, says RBS
- China is constrained in increasing rates, says Macquarie
- Credit default swaps in China climb the most among the BRICs
YUAN
- Yuan weakens as Europe debt crisis lead to US dollar strength
- China is said to be considering Yuan options trading by banks
- Yuan potential appreciation of 10% per annum is “still modest”
EQUITIES
- Stocks advance
- No interest rate rise is “positive” for stocks, says former Golden Bull Prize winner, He Zhen of Shanghai Huli
- Stocks will not see a “major correction” on data, says CICC; albeit an interest rate rise before year-end cannot be ruled out
INTERNATIONAL
- North Korea says the US and its allies are provoking an “all-out war”
- China and US military talks are making progress, says the Pentagon in Washington
- China's Sky-mobi and Bona Film posts record largest first day drop since 2007 in New York IPOs
DOMESTIC
- Power output in China gains at slowest rate in 16 months on restriction to industry
HONG KONG
- Hong Kong residential property prices may be entering a bubble, says JPMorgan; but prime CBD office rents to rise 24% next year
CLIMATE
- UN talks endorse $100 billion climate aid fund and forest protection programme
IRON & STEEL
- Baoshan Steel raises prices for the first time in three months
- Iron ore prices set to rise 7% in Q1 2011, says UOB
- Anglo is awarded permit for Minas Rio iron ore project
- BHP lobbied to block Rio and Chinalco transaction, is reported via WikiLeaks
No comments:
Post a Comment