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China Weekly 03.15

China Weekly 03.15

2010-03-15 09:49:00
Jonathan Granby,




Chinese data released last week helped to deflect attention away from some heavy Yuan related rhetoric that had been dominating headlines. The key release came in the form of February consumer-prices which rose 2.7% from a year earlier; accelerating from a 1.5% increase in January’s reading. The increase was higher than the 2.4% rise that was widely expected. Deutsche Bank’s chief China economist Jun Ma said in a note following the release that the results would increase pressure for tighter monetary policy, including a possible interest rate hike in the next two months. Ma continued to say “a growing number of households would realize their deposits in the banking system were losing purchasing power with a negative real interest rate.” Many analysts commented that it was the 6.2% adjustment in food prices that helped drive the price index higher. February’s produce-price-index showed a similar upside surprise, accelerating 5.4% from the year earlier to beat forecasts for a 5.0% increase.

Separately, lending by Chinese banks rose 700.1 billion yuan, while money supply measured by M2 was up 25.5% from a year earlier. These figures also beat median analyst forecasts for lending growth of 675 billion yuan and an M2 expansion of 25%. Although higher than expected, the lending result was still below the 1.39 trillion yuan in new loans made in January. Citigroup analysts said money supply data showed efforts by Beijing to reel back the amount of liquidity in circulation appears to have had little effect. Citi analysts wrote in a note “tightening measures so far have actually pushed more liquidity into current activities rather than long term real and portfolio investment”. Elsewhere, China’s banking regulator said the country’s five biggest state-owned commercial lenders issued 4.6 trillion yuan in new loads last year, and that their troubled loan portfolio fell by 1 percentage point to 1.80%.

Among other data released Thursday, fixed asset investment, the country’s main gauge of capital investment, rose 26.6% in the first two months of 2010, compared to a 30.5% rise in the same period a year ago. We maintain the opinion that this number will fall in coming months as the government stops approving new public works projects and shifts its focus to completing those already underway.  Real estate investment also picked up speed, rose 31% in the first two months of the year, versus a 25% annual rise in the fourth quarter. Meanwhile, industrial production in the first two months of the year expanded 20.7% from a year earlier, picking up from an 18.5% rise in December and exceeding median estimates of 19.5% for the period.

The data showed faster-than-expected inflation, loan growth still soaring and heaving capital investment essentially renewing concerns the economy may be growing too fast and suggesting emergency stimulus measures may be withdrawn ahead of schedule. J. P. Morgan’s Jing Ulrich in Hong Kong said that continued inflation could lead to Beijing allowing a rise in the yuan’s value versus the US dollar. China has restricted the local currency’s movements to a very tight range around the current level of 6.82 yuan to a US dollar since July 2008, apparently to protect the country’s exporters and the millions of jobs they provide. However, international pressure has mounted on China in recent months to allow the yuan to appreciate, with economists saying that a stronger yuan would alleviate inflationary pressures on the Chinese economy; hence another strong CPI reading will likely spark a fresh round of rhetoric.

Politicians and economists should feel they are chipping away at Chinese resolve following comments last week from Chinese central bank governor Zhou Xiaochuan who said China will in due course move away from its current currency exchange policy, indicating that Beijing doesn’t plan to keep the yuan’s peg indefinitely. The central-banker described the policy as a special response designed to weather the aftermath of the global financial crisis, adding “sooner of later, we will exit these policies”. However, we contend that yuan appreciation may not begin anytime soon, since China’s trade surplus is rapidly shrinking, as its imports rise while exports remain sluggish. The nation’s trade surplus in February shrank to $8 billion from $14.2 billion for the same period last year, while the surplus in the first two months of the year contracted 50.2% from about $44 billion in the same period a year ago.

Elsewhere in currency related news, the director of the State Administration of Foreign Exchange (SAFE) said in a statement that the comparatively high interest rate paid on yuan deposits and expectations the currency will rise are likely to attract greater inflows of investment capital adding further pressures to appreciate. Yi Gang, the director of SAFE and a vice governor of the PBoC said the agency will strengthen its supervision of unusual cross-border fund inflows and steadily promote yuan convertibility under the capital account. Stephen Green, Standard Chartered’s head of China research, said in a note Monday that Beijing will likely allow the yuan to appreciate against the US dollar sometime later this year, although it will probably opt for a gradual appreciation rather than a sharp one off move.  Separately, Yi Gang said China’s appetite to diversify foreign exchange reserves into gold is limited because of the metal’s poor returns over the past 30 years. China’s gold reserves sits at 1,054 metric tons, the fifth largest in the world but Yi played down any desire to add to the holdings as a strategy to diversify the nation’s $2.4 trillion stockpile of foreign exchange.

Last week we reported that China Mobile were in talks to buy a 20% stake in the Shanghai Pudong Development Bank and after a rocky ride,  a conditional agreement has been announced. The 20% share will cost China Mobile 39.80 billion ($5.83 billion) buying 2.21 billion shares at 18.03 yuan a piece, representing a 13% discount to the bank’s traded price. The rise was not a smooth one as days before the deal was announced the nations regulator of state-owned assets threatened to block the deal. Liu Nanchang, general office head of Sasac, China’s state-owned assets regulator, said his agency his opposed to state-owned enterprises buying into non-core business. The final deal was structured through a China Mobile subsidiary, Guangdong Mobile which required a less complex approval process.

Chinese car maker BYD Co. made noise last week by saying they were looking into building an assembly plant and open its North American headquarters in Los Angeles County. The Los Angeles Business Journal, citing unnamed sources, reported that the BYD plant could top 1 million square feet and create hundreds of jobs. The Chinese automaker burst onto the US landscape when it displayed its e6 electric crossover at the Detroit auto show in January and said it planned to start selling the car in the US some time in the second half of the year. BYD has been carefully watched by many after it made headlines in 2008 when Warren Buffett invested $250 million in the company. In related news, a delegation that included officials from Lancaster, California traveled to China to meet with BYD about locating an assembly plant in the city, located roughly 70 miles north of Los Angeles. Deputy City Manager Jason Caudle said BYD is only one of several Chinese firms that the delegation plans to visit and stressed the car maker has not yet committed to a US location. Caudle said it was unclear how many jobs could come to Lancaster, which has a relatively high unemployment rate, but he said “with any large manufacturing facility, there are hundreds of jobs that are needed”

In closing, the recent data and yuan-related news that dominated headlines certainly increased market fears that tightening measures from Beijing may be in the offing. We are of the opinion that while shares of developers are being sold on concerns that the property sector will likely be targeted by policy makers to prevent overheating, consumer stocks could prove to be an attractive alternative. It is now clear that the real-estate market is on fire and inflationary pressures are rearing their head too. Being long Chinese consumer stocks may be the way to play the domestic growth without excessive exposure to sectors that will likely be targeted for regulation.


Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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