A week after Premier Wen Jiabao opened the National People’s Congress by lowering China’s 2012 GDP growth target, and just two days after China announced its largest trade deficit in more than a decade, People’s Bank of China (PBOC) Governor Zhou Xiaochuan claimed in his annual press conference on Monday that “big room” existed for further cuts to China’s reserve requirement ratio (RRR). He cautioned that any RRR adjustments, however, would not signal a broad change in monetary policy but rather an attempt to control market liquidity amid fluctuating capital flows. Reuters published a transcript of highlights from the press conference:

“Now banks’ reserve requirement ratio is just over 20 percent. We had low RRR, which was at 6 percent in the late 1990s.”

“There is a lot of room for RRR cuts. But we need to look at whether it’s necessary… and look at market liquidity. We cannot raise or cut RRR at will when we think there is room. We need to look at the liquidity condition, which is related to FX purchases and our international balance of payments.”

“The PBOC has always paid attention to price tools. It raised the benchmark interest rate five times from the fourth quarter of 2010 to the third quarter 2011. But when we use the tool, we need to consider some constrains. One consideration is the impact on capital flows.”

A closer look at capital flows in China would indicate a greater possibility of further RRR cuts. In addition to the massive trade deficit, Wednesday’s announcement by the Ministry of Commerce that foreign direct investment had fallen for the fourth straight month puts added pressure on China to generate liquidity from within. But despite both slower inflation and an RRR cut in February that was expected to boost domestic lending capacity by almost 400 billion yuan, China’s banks fell well short of new yuan loan targets in the first two months of 2012. Preliminary estimates of new yuan loans for March, reported today by the China Securities Journal, would represent an increase from February but still result in a first quarter total that falls short of the 2.4 trillion yuan target.

While a fresh RRR cut may be on the horizon, officials at China’s big four banks said Wednesday that the industry’s China Banking Regulatory Commission (CBRC) had already taken other steps to ease lending capacity. From Bloomberg:

The regulator is letting the lenders use more of their deposits to make loans, the bank officials said, after China’s exports, industrial production and retail sales declined in the first two months. Loan growth has slowed this year as depositors seeking higher returns removed money from savings accounts and the economy’s expansion at the smallest pace in 10 quarters curtailed demand.

The banking regulator is increasing the 2012 loan-to- deposit ratio target for Industrial & Commercial Bank of China Ltd. to 63 percent, an official at the Beijing-based lender said, declining to be identified as the matter is private and yet to be finalized. He declined to provide last year’s figure. The measure was also raised at two rivals, officials at those banks said, declining to provide their 2012 targets.

“Deposit growth has been sluggish since late 2011 and severely constrained banks’ lending capacity this year,” said James Liu, a Hong Kong-based analyst at CIMB Securities HK Ltd. “The regulator wants to alleviate the problem by giving banks adequate resources to lend.”

Another method by which China may look to release more capital into the financial system, at least on a more legal basis, is through legitimizing its informal lending system. The South China Morning Post reported on Monday that delegates to the annual Chinese People’s Consultative Conference (CPPCC), which took place alongside the NPC in Beijing, had called for an end to underground or shadow lending, which may make up half of all new loans in China as the big state-owned banks chiefly lend money to state-owned enterprises. Entrepreneurs in Zhejiang, which has been the epicenter for the funding woes that have befallen private enterprises in China over the past year, echoed the calls of public officials.

Wen Jiabao’s comments in his wide-ranging closing press conference at the NPC indicate that the central government may be listening, according to The Wall Street Journal:

He said that China’s central bank and the China Banking Regulatory Commission are considering launching trial reforms of informal lending in the Chinese city of Wenzhou, a city with a reputation as a center of private enterprise and informal lending.

“We should guide and permit informal capital into the financial arena, standardizing it and bringing it into the open, encouraging its development and strengthening its supervision,” said Mr. Wen, who was speaking at a news conference marking the conclusion of the annual meeting of China’s legislature. He also said informal loans should have clear legal safeguards.

Wenzhou, in Zhejiang province, brought the funding pressures of China’s private sector into sharp relief late last year when Beijing tightened monetary conditions, making it even more difficult for the city’s small manufacturers to access credit or repay high rates of interest.

More than a dozen business owners shut their factories and skipped town, leaving their creditors behind, according to state media reports.

Spotlight: Yuan Near Equilibrium?

Of the other topics covered by Zhou Xiaochuan in his Monday press conference, observers also focused on his comments about China’s yuan exchange rate. Here, the Financial Times reports that Zhou stopped short of making any bold statements about renminbi appreciation going forward:

The central bank governor also dodged a question about whether the central bank had decided to halt the appreciation of China’s currency. “Generally speaking, as the renminbi exchange rate gets closer to the equilibrium point the market supply and demand should take a greater role – that is to say we should allow and encourage a greater role for market supply and demand,” he added.

…

A growing number of analysts point to China’s trade data, cross-border capital flows and slower accumulation of foreign exchange reserves as evidence that the renminbi is no longer grossly undervalued. “Fundamental surpluses have continued to narrow and the renminbi is closer to the equilibrium value than ever before,” said Paul Mackel, head of Asian currency research at HSBC. “This structural change in China’s balance of payments has profound implications for the currency.”

During his press conference on Wednesday, however, Wen Jiabao went a step further in suggesting that the renminbi may have already reached equilibrium:

The yuan has gained 30 percent in value in real terms since 2005 and has moved up and down since September in Hong Kong trading of nondeliverable forward contracts, Premier Wen Jiabao said. Such contracts are used by traders to bet on movement of currencies that are not freely traded. They are settled in dollars or other hard currencies.

“That shows that the renminbi exchange rate may possibly have reached an equilibrium exchange rate,” Wen said at a news conference at the end of China’s annual legislative session.

Wen pledged to create a more flexible, market-based exchange rate system, saying, “We welcome greater elasticity of the renminbi exchange rate.”

Time for Interest Rate Reform?

Reuters reports that public anger about rising bank profits, which mainly stems from the robust spread they earn by capping interest rates while setting a floor on lending rates, has put bank executives on the defensive while bolstering support for interest rate liberalization. The always-candid Li Daokui, who recently resigned his post as an adviser to the PBOC, said at a Saturday forum that enough support may exist for such reform. From The Wall Street Journal:

“We need market-oriented interest rates,” he said, adding that the time is right for such a move as part of an overall economic restructuring, which is now the key task for China.

“Banks have high profits, and we don’t need to worry about protecting them. They are like dinosaurs,” he said, suggesting that these “dinosaurs” were big but weren’t about to disappear.

Interest-rate liberalization has long been discussed for China’s state-managed financial sector, which is dominated by state-run banks and which relies on interest rates that are generally set under guidelines from the central bank.

But Mr. Li suggested that circumstances may be changing.

“I think there is tremendous support…within government for this.”

See also a China Daily video interview with Li on the subject, in which he says commercial banks should “lose weight.”

Premier-in-Waiting Touts Reform

After outgoing Premier Wen Jiabao used his Monday NPC press conference to push for bold reforms, Premier-in-waiting Li Keqiang sang a similar tune during a Sunday speech, promising flexible policies and structural reforms to keep up with an evolving economy. From Reuters:

“China has reached a crucial period in changing its economic model and (change) cannot be delayed. Reforms have entered a tough stage,” Li said, echoing comments made by Wen last week.

“We will make policies more targeted, flexible and forward-looking to maintain relatively fast economic growth and keep price levels basically stable,” Li said in a speech at an economic policy conference, attended by top Chinese officials, the head of the IMF and dozens of foreign business leaders.

He said China would “deepen reforms on taxes, the financial sector, prices, income distribution and seek breakthroughs in key areas to let market forces play a bigger role in resource allocation”.

Other News

• Chinese stocks ended the week on a high note, buoyed by consumer companies on speculation that they will benefit from government emphasis on generating domestic demand.
• The chairman of both China National Petroleum Corp (CNPC) and PetroChina told reporters on the sidelines of the NPC that China should raise fuel prices following the recent surge in the price of crude oil, according to Reuters. The former head of China’s National Energy Administration, however, says the time is not right and any hike in fuel prices will hurt Chinese consumers.
• Tianjin boasted the highest GDP per capita (US$10,783) of China’s 31 provincial regions in 2011, beating out Shanghai and Beijing, according to The Global Times.
• Rising green onion prices are causing a stir in some parts of China.
• China set ambitious shale gas output targets in a development plan released Friday by the government. The plan, which runs through 2020, urges local companies to work with foreign companies as they exploit China’s national gas resources.
• The Ministry of Commerce said China must “step up its efforts” to secure free trade agreements with the likes of Japan, South Korea and other neighbors in Asia Pacific. Meanwhile, a former MOC official asked why China hasn’t pursued a free trade agreement with the United States yet.
• U.K. banks are lobbying the Bank of England to sign a currency-swap agreement with the People’s Bank of China, in an effort to make it easier for the banks to facilitate yuan liquidity. China has signed 1.3 trillion yuan of currency-swap deals with 14 countries and territories, according to The Wall Street Journal.

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Post tags: CDT Money, China Banking Regulatory Commission, Chinese People's Consultative Conference, exchange rate, free trade agreement, Fuel Prices, hard landing, interest rates, Japan, lending targets, Li Daokui, Li Keqiang, Ministry of Commerce, monetary policy, National People's Congress, peoples bank of china, reform, Renminbi appreciation, reserve requirement ratio, shadow lending, shale gas, south korea, Tianjin, United Kingdom, United States, Wen Jiabao, wenzhou, yuan loans, Zhejiang, zhou xiaochuan
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The pocket of China’s economy that may stand to gain the most from looser monetary policy, the property sector, remained in the spotlight this week as well. A China Daily op-ed rushed to dispel assumptions that the reserve reduction signaled a diversion from the government’s pledge to continue its tight grip on China’s housing market, and cautioned against overestimating the effects of the RRR cut:

Despite being regarded as a sign of the country’s relaxation of its years-long restrictions on bank lending, the latest reserve cut is more a kind of slight monetary policy adjustments to adapt China’s economy to domestic and global changes. It will not cause fundamental changes to the backbone of the country’s tightening monetary policy.

Some market analysts believe that part of the released liquidity will likely flow to the housing market and will help ease the ongoing funding shortage that has hit many developers. This, they believe, will possibly change the trend of the country’s persistent regulation of the housing market.

The reserve reduction will not mean the government’s intention of relaxing its monetary policy on the housing market. Currently, the differentiated credit policy, whose core is putting a ban on third-home purchases by local residents and second-home purchases by non-local residents on mortgage loans, has made the biggest contribution to a lingering slump in the domestic housing market.

Still, other signs of potential easing – and tension – emerged within the property space. A state-run newspaper, the Shanghai Securities News, reported on Wednesday that the city government had revised home purchase restrictions to allow residence permit holders who have lived in the city for at least three years to buy a second home. The news touched on a critical component of Shanghai’s property laws, which allow locals to purchase a second home but have not specified if or how residence permit holders could be classified as locals, and an index of property stocks on the Shanghai Composite Index surged to its highest level since early November. But while the report claimed that the definition of “local” would be broadened to include certain residence-permit holders, a statement by the head of Shanghai’s housing authority also stressed that the city had not diverted from its course of real estate policy tightening. The public balancing act by the Shanghai authorities indicates a potential point of conflict between local and central government officials, according to one analyst. From Bloomberg:

“The reiteration shows that the local governments are in fear of going against the central government even though they have the intention of secretively loosening their policies,” said Jinsong Du, a Hong Kong-based property analyst at Credit Suisse Group AG. “The Shanghai government left the definition of ‘locals’ vague, so they could have a lot of leeway to explain when needed.”

As the central government stands by its drive to curb property speculation, Shanghai’s predicament mirrors that of other local governments across the country: How to offset both softer property prices and a slowdown in private real estate investment, while still ensuring that local coffers have enough to fund the cost of more than $300 billion in socialized housing projects that Beijing wants to see constructed this year. Such a situation explains why other cities, including Guangdong’s Zhongshan and Anhui’s Wuhu, have recently tweaked restrictions and implicitly challenged the central government to prove how far it will go to stay the course. From Reuters:

As Chinese property prices fall, tensions are rising between cash-strapped local governments that want to pump up the market and a central government determined to preserve social stability by keeping a lid on housing costs,” Rosealea Yao, an economist at Beijing consultancy GK Dragonomics, said.

…

An uneasy compromise could be hammered out if Beijing is prepared to turn a blind eye to some infractions that break the letter — but not the spirit — of calming measures. Such measures have taken nearly two years to gain traction, but now have delivered gently easing property prices four months in a row.

An example of one scenario for a mix of maintaining and easing cooling steps would be for local governments to keep slapping down multiple home purchases by an individual while cutting transaction taxes to revive a comatose market.

Spotlight: Hidden Debt

While looser reserve requirements may produce an uptick in lending, where will banks direct the new loans? The Wall Street Journal’s Tom Orlik highlights the “splurge” in loans to local governments in recent years and the implications of such lending for China’s banks:

Official numbers put banks’ exposure to local government borrowers at 8.5 trillion yuan ($1.35 trillion), equal to 15% of total loans at the end of 2011. The fear is that with many of those loans wasted, or invested in projects that generate returns only in the long term, banks will be saddled with vast quantities of nonperforming loans. That’s one reason China’s listed banks spent much of the last year trading close to trough valuations.

The chances of a public blow-up, though, are small. A large proportion of government loans—about 51%, according to Bernstein’s China bank analyst Mike Werner—are parked in unlisted local and state-owned policy banks. That gives regulators room to massage the problem outside the eye of the markets.

Authorities may have more room to maneuver when managing local government debt issues, but Forbes’ Gordon Chang warns that China’s “hidden liabilities” indicate a “gross misallocation of capital” since the government implemented a massive stimulus package during the 2008 global financial crisis:

Here’s some terrific news about China’s economy: at the end of last year, the debt-to-GDP ratio of the Chinese government, the key measure of its fiscal sustainability, stood at 16.3%. That’s an improvement from the already impressive 17% at year-end 2010.

…

All this sounds wonderful, but none of it correlates with the facts. The 16.3% calculation excludes Beijing’s “hidden liabilities.” Once you add them in, China’s debt-to-GDP ratio increases to somewhere between 90% and 160%. And if you believe Beijing has been overstating its GDP recently—it has, at least starting from the last quarter of last year—China’s ratio approximates Greece’s 164%.

Other News:

• Preliminary and non-official Purchasing Managers Index (PMI) data, released by HSBC on Wednesday, still indicated a manufacturing contraction in February, though at a slower pace than January. China’s National Bureau of Statistics is expected to publish official PMI data for February on March 1.
• While analysts have said that interest rate cuts will likely remain a “secondary monetary policy tool” as the government hopes to avoid rising inflation, new research suggests that China may cut interest rates in the first half of 2012 after all.
• China’s chief banking regulator introduced new guidelines on Friday which it hopes will incentivize lenders to extend more credit to “green” enterprises.
• The Wall Street Journal writes that the recent fall in China’s thermal coal prices is a sign of things to come.
• Walmart has made another investment in Yihaodian, a player in China’s growing eCommerce field.
• Ford Motor announced plans to play catchup in China and narrow the gap with its foreign rivals, a plan which includes the introduction of15 new vehicle models to the world’s largest auto market.
• NPR’s All Things Considered asks whether China is an economic miracle, or a bubble waiting to pop.
• While Chinese microblogging sites such as Sina Weibo do not yet make a profit, China Bubble Watch highlights the ability of certain Weibo celebrities to monetize their online influence.
• State-owned China Satellite Communications Corp. named the son of Chinese Premier Wen Jiabao, Wen Yunsong, as its chairman on Wednesday.

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Post tags: CDT Money, debt crisis, interest rates, local government debt, real estate bubble, reserve requirement ratio, Shanghai
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One of the world’s few remaining real estate bubbles finally seems to be losing air. Real estate transactions have slowed so quickly that in the last two weeks, brokerages across China have laid off thousands of brokers and closed hundreds of offices.

News media have reported on at least five street demonstrations in Shanghai since Oct. 22 as early buyers in condo projects have protested discounts offered to later buyers, even breaking into sales offices and smashing models of the buildings and apartments.

A 32-year-old protester said that he and his wife had paid $173,000 last January for an 850-square-foot apartment in a building on the outskirts of Shanghai. But the developer later cut the price for the remaining units of this size in the building to $124,000, wrecking the resale value of the condo.

To add insult to injury, the building is not scheduled to be completed until May.

AFP is reporting that cash-strapped developers are offering a series of enticements, including luxury cars, to lure potential apartment buyers. Today, The Diplomat’s Mu Chunshan placed China’s housing bubble in the context of broader economic uncertainty and the European debt crisis:

Europe is the largest single market for Chinese exports, and the crisis in Greece and Italy will naturally put pressure on China’s economy. Indeed, figures released today already show China’s exports rising at their slowest pace in two years. To protect growth and prevent a hard landing, China may consider easing monetary policy, a move that would risk exacerbating the property bubble that the government has busily been trying to deflate.

Such concerns aren’t unfounded. I remember during the global financial crisis of 2008 receiving half a dozen marketing text messages a day. I sometimes even received cold calls from sales agents. At the time, China’s property market was still depressed, with properties within a six to seven kilometer radius of the Forbidden City being priced at as little as 10,000 yuan ($1,580) per square meter.

…

And now, my phone is once again ringing with sellers highlighting the falls in property prices. Is the Chinese real estate bubble bursting? Could falling property prices and a possible slowing of European demand prompt the Chinese government to ease monetary policy once more? And would this spark another property boom just as prices look to be falling in some areas?

Similarly, the Wall Street Journal questions how the Chinese government will walk the tightrope if property prices fall too far and fast:

An unanswered question is whether China can gently let the air out of its real-estate bubble or whether the bubble will burst, undermining economic growth. With the European Union and U.S. struggling to kick-start their own economies, global growth depends increasingly on the health of the Chinese economy, the world’s second-largest.

Beijing’s top officials say they plan to stay the course. “I will especially stress that there won’t be the slightest wavering in China’s property-tightening measures—our target is for prices to return to reasonable levels,” Premier Wen Jiabao said in a speech on Sunday in Russia.

See also previous CDT coverage of China’s attempts to curb debt and regulate inflation, and growing signs of a credit crisis in Wenzhou, where property developers and entrepreneurs have turned to the shadow lending market after monetary tightening hindered their access to traditional funding sources.

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Post tags: debt crisis, economic slowdown, hard landing, housing bubble, inflation, interest rates, monetary policy, property prices, Wen Jiabao
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China is not winning its inflation fight and that could mean a return to monetary tightening in the months ahead. China is the world’s steam engine at the moment, and any additional pressure to slow the economy could lower global growth estimates going forward.

China’s core inflation index came in at 6.5% in July, up a tad from 6.4% in June, but breaking a three year record nonetheless. The National Bureau of Statistics in Beijing reported on Tuesday that rising food prices were to blame. Average food inflation rose a whopping 14.8% in July from a year ago. The price of pork, a staple food in China, soared by nearly 57% last month, the National Bureau of Statistics reported.

News of manufacturing slowdown in China, coupled with the news about inflation, has caused Chinese stocks to fall to a twelve month low. From Xinhua:

Chinese stocks dropped to a 12-month low on Tuesday on concerns over the strength of global economic recovery and China’s stubbornly high inflation.

The benchmark Shanghai Composite Index fell 0.03 percent to close at 2,526.07. The Shenzhen Component Index rose 0.02 percent to finish at 11,315.08.

Combined turnover dropped to 198.52 billion yuan (about 31.02 billion U.S. dollars) from 214.8 billion yuan the previous trading day.

Losers outnumbered gainers by 588 to 322 in Shanghai and 837 to 460 in Shenzhen.

The country’s Consumer Price Index (CPI), a main gauge of inflation, surged 6.5 percent in July year-on-year, its highest level in 37 months, the National Bureau of Statistics said on Tuesday.

A faltering global recovery will make it harder for the government to curb inflation, as a possible third round of quantitative easing by the U.S. Federal Reserve is expected to worsen global liquidity.

However, despite concerns that the Chinese government may increase interest rates again to curb inflation, other analysts say that interest rates may remain stable, in an attempt to boost exports. From Bloomberg:

China may join Asian nations from South Korea to India in delaying interest-rate increases as the global stock rout encourages officials to put growth ahead of tackling inflation.

The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed yesterday. Economists’ median forecast is for South Korea to extend a pause for a second month tomorrow, while Indonesia stayed on hold yesterday.

“Usually the Chinese government stops doing anything when there’s chaos around, that’s the instinct,” said Andy Xie, an independent analyst who was formerly Morgan Stanley’s chief Asiaeconomist. Interest rates will be “on hold for the time being, until global markets are recovering,” he told Bloomberg Television in Hong Kong.

The nation’s key one-year lending rate is 6.56 percent after three increases this year, the most recent in July.

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Post tags: China stock market, inflation, interest rates
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The People’s Bank of China raised interest rates three times this year and boosted lenders’ reserve-requirement ratios on six occasions, exacerbating a cash crunch that’s driving bond yields higher and making local assets more attractive to overseas investors. U.S. Treasury yields are falling amid signs the economic recovery is losing momentum. Gross domestic product rose 1.6 percent in the second quarter, compared with growth of 9.5 percent in China, official data show.

“U.S. Treasury yields have eased on growth concerns, while China remains characterized by a strong GDP outlook, still high inflation and a relatively tight monetary stance,” said Delphine Arrighi, a Hong Kong-based rates strategist at Standard Chartered Plc. “It is an incentive to bring funds into China, which is why the central bank monitors this very closely.”

Despite the rising value of the yuan, an advisor to China’s central bank remarked that the yuan will not be a major reserve currency in the next decade. From Reuters:

Confidence in the dollar and the U.S. economy has taken a beating after the United States narrowly escaped a disastrous debt default this week, running the risk of losing its gold-plated credit rating.

Xia’s prediction for the yuan’s future contrasts with others in China who, worried about the dollar’s prospects, have called for alternative reserve currencies, including the yuan.

Xia did not elaborate on why he thought the yuan would not grow into a major reserve currency, but made clear that Beijing should stick to its present model of a managed floating currency regime to shield its economy from risks.

Without giving details, he said China should not have a free float currency regime in the next 10 years, and that while its capital account must be freed to make the yuan convertible, capital controls should only be loosened gradually.

Dagong Global Credit Rating Company, a Chinese agency, downgraded the United States from A+ to A, signifying growing concerns over Washington’s long-term ability to repay its debts. From CNN:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,” Dagong Chairman Guan Jianzhong told CNN.

“The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,” he said.

Ironically, Dagong’s move could hurt not just the United States but also China, the largest foreign owner of U.S. debt with holdings worth almost $1.2 trillion.

“Our downgrade simply reflects reality,” Guan said. “Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.”

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Post tags: bonds, credit rating, currency, Economy, inflation, interest rates, renminbi rate, renminbi revaluation, reserve currency, US debt, yuan
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A double-digit jump in food prices pushed China’s inflation higher in January, adding to pressure on Beijing to cool living costs with more interest rate hikes and other measures.

Consumer prices rose 4.9 percent, driven by a 10.3 percent jump in food costs, data showed Tuesday. That was up from December’s 4.6 percent rate and close to November’s 28-month high of 5.1 percent.

Beijing has hiked interest rates three times since October to cool rapid economic growth and tamp down inflation. But analysts say it needs to do more to curb soaring bank lending while it also tries to increase food supplies to bring down prices.

However, despite the revelation that  there had been a sharp surge in food prices, others believe that these increases were less than expected. From Bloomberg News:

“The driver of the below-consensus reading is the smaller- than-expected increase in food prices,” said Lu Ting, a Hong Kong-based economist with Bank of America Merrill Lynch.

Food prices climbed 10.3 percent last month from a year earlier, according to today’s report, after gaining 9.6 percent in December. Vegetable prices jumped 2 percent, fruit prices surged 35 percent and grain rose 15 percent, according to the statement. Non-food prices rose 2.6 percent from a year earlier.

Inflation has long been an attendant problem to China’s rapid economic growth. Curbing inflation is a key concern for the Chinese government. It has already raised interest rates twice in the past few weeks in an attempt to alleviate inflationary pressures. Read more about recent governmental responses to inflation here.

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Post tags: food prices, inflation, interest rates
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Financial markets are braced for fresh action from China to curb inflationary pressure after Beijing announced the second increase in the cost of borrowing in six weeks. Analysts predicted that the tightening of policy from the People’s Bank of China, which will come into force on Wednesday, will be followed by further steps to deal with the price increases brought about by the country’s double-digit growth rate.

With dealers caught unawares by the timing of the move, the cost of oil and industrial metals initially fell on commodity markets, but later bounced back on speculation that the 0.25% jump in interest rates would do little to reduce China’s rapid expansion or global demand for fuel, food and raw materials.

“It is the first interest rate rise in the Year of the Rabbit, but it will not be the last,” said Xu Biao, an economist with China Merchants Bank in Shenzhen, after the PBC said that from Wednesday benchmark one-year deposit rates would rise by 0.25 percentage points to 3% and one-year lending rates would go up by a similar 0.25 points to 6.06%. “If inflation stays high in February, the central bank will be forced to increase interest rates on a continuous basis,” he added. “Investor confidence will be seriously hurt by expectations of aggressive policy tightening.”

Bloomberg reports on the response to this news in the U.S. stock markets:

US stocks have opened flat as Wall Street weighed China’s latest interest rate hike that stoked concerns growth will slow in the world’s second-largest economy.

Dow Jones Industrial Average rose 1.97 points (0.02 per cent) to 12,163.60 in early trades.

The tech-rich Nasdaq Composite fell 2.63 points (0.09 per cent) to 2,781.36 and the broad-market S&P 500 index pulled back 1.22 points (0.09 per cent) to 1317.83.

With no economic news or earnings releases of note on the US calendar, investors digested the Chinese central bank’s announcement overnight that it would raise interest rates for the third time since October in a bid to tame rising inflation.

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Post tags: consumer price, inflation, interest rates
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Mainland Chinese and Hong Kong shares fell sharply in early Wednesday trading after the central bank surprised markets a day earlier with an interest-rate increase.

Property developers and commodity shares were hit the hardest, but banks outperformed on hopes the rate increase would improve their interest-rate margins.

The Shanghai Composite Index /quotes/comstock/16k!i:000001 (CN:SHCOMP 3,021, +19.57, +0.65%) dropped 1.3% and the Shenzhen Composite Index slid 0.7%, a day after the People’s Bank of China raised both the one-year lending and deposit rates by a quarter-point, to 5.56% and 2.5%, respectively. In Hong Kong, the Hang Seng Index /quotes/comstock/08s!i:hsi (HK:HSI 23,619, -144.55, -0.61%) lost 1.9%.

China’s rate hike is a positive signal for global growth, investment strategist Michael Yoshikami tells MarketWatch’s Laura Mandaro.

The drop came amid fears that more rate hikes could come later on down the line. Several economists, including those at Deutsche Bank, Barclays and Standard Chartered, said the rate increase likely marked the beginning of a tightening cycle in China.

And the Wall Street Journal’s China Real Time blog gets bankers’ perspectives on the move.

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Post tags: interest rates, stock market
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China’s accelerating economic recovery without signs yet of a surge in inflation may give the government some leeway in making two crucial decisions: raising interest rates and revaluing the Chinese currency.

But the government cautioned that risks remained, like high unemployment and booming real estate prices.

China’s gross domestic product jumped 11.9 percent in the first quarter, the government said Thursday. That growth rate, the highest in three years, not only surpassed most economists’ forecasts but it also handily beat the 10.7 percent expansion recorded for the final quarter of 2009.

China’s National Bureau of Statistics also reported that the consumer price index rose 2.4 percent in March from a year earlier and that the producer price index was up 5.2 percent. Those figures were generally in line with analysts’ expectations.

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Post tags: currency revaluation, economic recovery, inflation, interest rates
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To give a deeper understanding of China’s up-and-coming role on the world stage, CDT looks at articles, issues, and policies over the last six months that contributed to the current state of the Chinese economy. While this is not a comprehensive timeline, it will give a basic analysis of China’s reaction to the financial crisis and its role within it.

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After starting 2008 with a double-digit growth rate, substantial trade surpluses, and over a trillion dollars in foreign reserves, it took almost half the year before China fell victim to the global financial crisis. At first some believed China might be immune; however, as banks began to collapse in the United States and Europe, China quickly found itself drawn into the financial mess.

When the U.S and Europe fell into the credit crisis earlier this year, they were forced to cut back on consumption, which fueled a massive decrease in demand for Chinese imports. China was already experiencing a economic downturn, and the lack in demand from abroad meant factory closures, resulting in high job losses all over China. Guangzhou, a major manufacturing town, lost tens of thousands of workers in 2008, forcing citizens to return to their home in the countryside. Dongguan, and the southern Pearl River Delta, also lost thousands of workers. Suddenly the great engine of China was slowing.

At the same time, China also still seems poised to “rescue” the West. With $1.9 trillion in foreign reserves, a $29.3 billion trade surplus, and potentially undervalued yuan, China still seems to be one of the most influential players in the world – at least from a fiscal perspective. But China became leery. Having been burned by previous sour investments, the country is cautious in handling its $200 billion of sovereign wealth funds abroad. For example, many thought the China Investment Corporation (CIC) would use some of these funds to purchase an additional stake in Morgan Stanley earlier this year; however, Japanese bank Mitsubishi UFJ Financial Group ended up financing the investment. The West is asking China for help, but representatives from China continually answer that the best strategy for China is to focus on its own internal growth.

The Chinese government is working on this in a variety of ways. In the beginning of 2008, the CIC invested money directly into Chinese banks, giving $20 billion to China Development Bank, and $47 to Agricultural Bank of China. The latter held $100 billion of bad loans and was the country’s fourth largest state-owned lender to have to be funded by the government. Then in mid-September, China’s Central Bank cut interest rates for the first time in six years; China wanted to keep inflation levels low, but it also needed to encourage lending. The Central Bank continued to cut rates throughout the remainder of the year. Just a few weeks later, the government introduced a series of tax cuts for new homeowners, lowering the property contract tax from three percent to one percent and decreasing the down payment on certain-sized homes. Perhaps the most well known “stimulus” for China was the $586 billion stimulus package unveiled in November; the package received plenty of speculation in terms of how much “good” it would do the real economy, but many find it difficult to argue with China’s desire to invest in infrastructure.

But most recently, the Chinese government is hoping to change habits. Many Chinese take a certain amount of pride in thriftiness, and Beijing wants to encourage consumption. Consumer spending currently accounts for 38 percent of the China’s GDP, compared to somewhere like the United States where consumer spending is almost two-thirds of the country’s GDP. Part of the previously mentioned $586 billion stimulus package includes incentives for individuals to buy cellphones, furniture, washing machines and flat-screen TVs. And lastly, we can’t forget the ever-argued “manipulation” over the value of the yuan.

Right now China says it needs to focus on keeping its economy growing. With the economic outlook looking much slower for 2009, China needs to address the increasing social unrest from rising unemployment, as well as its role in the turbulent global economy. China’s projected growth for 2009 lies anywhere from 5.5 to 9 percent, and it needs a minimum of 7 or 8 percent growth to provide jobs for the estimated 20 million people that annually enter its workforce.

So what will China do? Most recently outgoing U.S. treasury secretary Henry Paulson met with officials in Beijing to discuss the global financial crisis. At the most recent convening, China’s Central Bank governor, Zhou Xiaochuan, blamed the financial crisis on “excessive consumption and high leverage” by Americans. Yet China holds over $585 billion in United States debt (along with Japan, Great Britain, and countless others), essentially helping to finance the ability of Americans to live beyond their means over the past decade.

In the coming months, it is unclear how China will welcome the new Obama administration, and aside from several small comments, it is yet to be seen how the Obama administration will interact with China. Discussions have obviously begun, as China’s Central Bank governor, Zhou Xiaochuan, met with Mr. Paulson’s successor, Timothy Geithner, earlier this month. At a time where the financial landscape is changing daily, the United States, and the world, are looking at China for its reaction.

Analysts around the world have given their perspective of China’s role in the current economic crisis. To learn more about China’s role within the crisis, here are some additional links:

China 2008: La Repubblica’s Asia Chief Correspondent and Senior Global Columnist, Federico Rampini gave a lecture on the impact of the global economic crisis on US-China relations on November 10, 2008. His speech was followed by the remarks prepared by two discussants, and a Q&A session.

Understanding the Global Financial Crisis: Blogger from The China Vortex discusses the importance, and difference, of home owernership in China and the US.

Video: China Investment Corporation: An interview by CBS’s Lesley Stahl reveals deep insight into the workings of the the CIC by interviewing CIC President Gao Xiqing. Gao discusses the funds goals and how the rest of the world feels about the CIC.

Obama’s New Deal and the fate of migrant workers: Overseas political commentator Liang Jing wrote this essay; translated by Dr. David Kelly.

Book Review: Chinese Capitalism: A new analysis on China’s political and rural economy in the 1980s compared to the 1990s.

Reflections on migrant workers and news on the recent social unrest in China

© msandgren for China Digital Times (CDT), 2008. | Permalink | One comment | Add to del.icio.us
Post tags: 2008, Barack Obama, China 2008, CIC, economic downturn, economic growth, economic growth rates, exports, financial crisis 2008-2009, interest rates, migrant workers, social unrest, U.S. exports to China, U.S. imports, Yuan rate
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