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Tuesday, August 21, 2007

China Raises Rates for Fourth Time to Cool Inflation

From Bloomberg today:

China Raises Rates for Fourth Time to Cool Inflation (Update1)

By Nipa Piboontanasawat

Aug. 21 (Bloomberg) -- China raised interest rates for the fourth time since March to cool the world's fastest-growing major economy after inflation surged to a 10-year high.

The benchmark one-year lending rate will increase 0.18 percentage point to 7.02 percent tomorrow, the People's Bank of China said on its Web site. The one-year deposit rate will rise 0.27 percentage point to 3.6 percent.

China's economy grew at the fastest pace in more than 12 years in the second quarter on investment and exports. Consumer prices climbed 5.6 percent in July as the cost of food soared, while the central bank later cautioned that inflationary pressures were broadening.

``This is a reflection of the central bank's concern about inflation and asset bubbles,'' said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. ``We can't rule out another interest rate hike this year.''

It's the second time this year that deposit rates increased more than lending rates. The government is trying to make bank savings more attractive to stem the flow of money into property and stock speculation and curb asset bubbles.

The increase is to control ``money supply and loans and stabilize inflation expectations,'' the central bank said.

`Bigger' Bubble

Inflation has outstripped returns on bank savings. The government reduced a tax on interest income last week to 5 percent from 20 percent to make deposits more attractive.

``This is targeted at slowing the money flowing into the stock market,'' said Liao Qun, chief economist at Citic Ka Wah Bank in Hong Kong. ``As the bubble gets bigger, the chance of it bursting is also bigger.''

The key CSI 300 Index has climbed 144 percent this year after more than doubling in 2006. Property prices have also surged. In July, housing prices jumped 19.4 percent from a year earlier in Shenzhen and 10.4 percent in Beijing.

Wang Qing, chief China economist at Morgan Stanley in Hong Kong, said the central bank may raise interest rates again in the fourth quarter.

China is easing controls on money leaving the country to reduce the build-up of cash in the financial system. Yesterday, the government said Chinese investors will be allowed to put money into Hong Kong stocks.

Trade Tension

A stronger yuan would also help to curb the inflow of money and reduce tension with trading partners including the U.S. The currency has gained 9 percent versus the dollar since a revaluation in July 2005. U.S. manufacturers say the yuan is kept weak to make China's products cheap.

Besides raising rates, the People's Bank of China has ordered lenders to set aside larger reserves on six occasions this year. It has also sold bills to soak up cash.

The top priority is to prevent the economy from overheating and keep prices tamed, the central bank said in a quarterly monetary-policy report released Aug. 8.

Consumer-price increases aren't solely the result of ``temporary factors,'' the People's Bank of China said then, highlighting energy and labor costs and people's expectations for inflation.

Economists are split on whether the acceleration in consumer prices is temporary and limited to food or ``getting out of control,'' a term used last month by Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong.

Non-food inflation slowed to 0.9 percent in July from at least 1 percent in each of the previous five months.

China's economy, the world's fourth largest, expanded 11.9 percent in the second quarter from a year earlier.

The trade surplus surged 67 percent in July from a year earlier to $24.4 billion, the second-highest monthly total. Money supply climbed 18.5 percent, the biggest increase in more than a year.

Fixed-asset investment in urban areas increased 26.6 percent in the first seven months from a year earlier, close to the 26.7 expansion in the first half.

Also the Financial Times:

Chinese central bank raises interest rates

By Reuters, August 21, 12.13 BST

China raised interest rates on Tuesday for the fourth time this year to stabilise inflation after consumer prices rose in July at the fastest pace in more than a decade.

The People’s Bank of China (PBOC) said it was raising the rate that banks pay for one-year deposits by 27 basis points, to 3.60 per cent, and the corresponding benchmark for lending rates by 18 basis points, to 7.02 per cent from 6.84 per cent.

The increases go into effect on Wednesday.

Although the timing was a surprise, the action itself was not despite turbulence in global markets that has prompted the Federal Reserve to cut its discount rate and hold out the prospect of a reduction in the federal funds rate.

Most economists had forecast an increase, both to anchor inflationary expectations and to reduce the incentive for savers to take their money out of the bank – where real deposit rates are deeply negative – and pile into the surging stock market.

”The PBOC is concerned about falling real deposit rates spurring the flow of funds out of deposits into equities. We don’t think this is a response to strong growth,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.

Although the economy expanded 11.9 per cent in the second quarter from a year earlier, Lin Songli, an analyst with Guosen Securities in Beijing, agreed that, by raising lending rates less than deposit rates, the central bank was signalling it was not intending primarily to slow the pace of growth.

”The move is mainly targeting inflation, and the authorities might have reached a consensus that investment growth is not a big problem now,” Lin said.

Consumer prices surged 5.6 per cent in the year to July, the fastest pace since early 1997, because of a spike in the cost of pork, eggs and other foods.

Although non-food inflation fell to 0.9 per cent in July, policy makers are concerned that price increases are already rippling out across the economy.

”It’s also meant to curb fast growth in the stock market, which is now at historical highs and is rising very fast,” Lin said.

The main Shanghai share market is up 80 per cent this year on top of a 130 per cent leap in 2006.

Lin said bank shares were likely to fall hard on Wednesday in response to the rate rise.

Thursday, August 16, 2007

China Factory and Property Investment Rises 26.6 Percent in H1 2007

From the China Stats Office today:

From January to July, urban investment in fixed assets hit 5,669.8 billion yuan, a rise of 26.6 percent year-on-year. Of the total, state -owned and state controlled enterprises invested 2,431.7 billion yuan, surging 16.5 percent; real estate development enterprises valued at 1,213.5 billion yuan, rose by 28.9 percent.

In terms of jurisdiction of management, central investment stood at 533.2 billion yuan with growth rate of 15.4 percent as compared with previous year; that of local investment totaled 5,136.5 billion yuan, jumping 27.9 percent.

In terms of different industries, investments of primary, secondary, and tertiary industry amounted to 66.5, 2,549.8 and 3,053.6 billion yuan, expanding 46.2, 28.9 and 24.5 percent respectively, year-on-year.

In terms of different sectors, investments of mining and washing of coal stood at 76 billion yuan, a year-on-year rise of 17.2 percent; that of extraction of petroleum and natural gas grew to 94.7 billion yuan, increasing 10.4 percent; that of manufacture of non-metallic mineral products, smelting and pressing of ferrous metals, smelting and pressing of non-ferrous metals respectively valued at 139.3, 130.2 and 64.7 billion yuan, jumping 48.8, 9.2 and 34.8 percent; that of production and supply of electricity and heat, railway transport arrived at 399.4 and 77.6 billion yuan, climbing 12.6 and 5.4 percent year-on-year.

In terms of registration status, investments of domestic funds enterprises stood at 5,017.2 billion yuan, surging 26.7 percent over that in the same period last year; that of enterprises with funds from Hong Kong, Macao and Taiwan valued at 280.3 billion yuan, rising 34.4 percent; and that of foreign funded enterprises standing at 341.6 billion yuan, up 18.3 percent, year-on-year.

In terms of buildings under and new constructions, by the end of July, the cumulative number of urban construction projects over 500,000 yuan was 217,849, a year-on-year increase of 29,139; that of total investment planned in project under construction stood at 20.3484 trillion yuan, climbing 17.2 percent; that of number of project started this year valued at 132,099, a year-on-year rise of 17,168; that of total planned investment of newly projects was 4,813.8 billion yuan, a rise of 14.6 percent.

In terms of volume of positioned funds, investment in urban areas hit 6,610.4 billion yuan, a year-on-year rise of 25.1 percent. Of which, domestic loans, foreign investment, and self-rising funds rising 11.6, 16.0 and 31.0 percent respectively, year-on-year.

And just one detail, China will overtake the U.S. this year as the largest contributor to global growth, according to the IMF. The fund forecasts the nation will account for 15.6 percent of the expansion, versus 15.4 percent for the U.S.

Wednesday, August 15, 2007

China's Industrial Output, July 2007

China's industrial output rose 18 Percent in July.

China's industrial production grew 18 percent in July, slowing for the first time in three months after cuts to export incentives.

Output expanded less than June's 19.4 percent, the statistics bureau said today. China reduced export tax rebates on 2,831 types of products starting July 1.

The slowdown isn't likely to ease government concern that the world's fastest-growing major economy may be overheating. Inflation jumped in July to the highest rate in more than a decade and economists say a report tomorrow will show investment in factories and property is accelerating.

Here's the release from China Statistics:

In July, the value-added of the industrial enterprises that above designated size (all state-owned enterprises and non-state-owned enterprises with an annual sales income over 5 million yuan) increased 18.0 percent year-on-year. The sales ratio of industrial products was 98.42 percent, dropped 0.03 percentage point over the same month of last year. Industrial enterprises achieved a total export delivery value of 608.5 billion yuan, a year-on-year rise of 22.2 percent.

In terms of main sectors, the growth rate of manufacture of textile, raw chemical materials and chemical products, non-metallic mineral products, smelting and pressing of ferrous metals expanded respectively 15.8, 20.2, 22.7 and 18.8 percent; that of manufacture of general purpose machinery, transportation equipment manufacturing industry, electromechanical equipment manufacturing climbed 23.5, 26.6 and 23.2 percent correspondingly; that of manufacture of communication equipment, computers and other electric equipment increased 19.7 percent; and that of production and supply of electric power and heat power rose by 13.1 percent.

In terms of major industrial products, the output of coal and electricity respectively reached 196 million tons and 291.6 billion kilowatt-hours, increased 12.7 and 15.5 percent respectively. The output of crude oil was 15.47 million tons, dropped 1.7 percent year-on-year. The output of pig iron, crude steel and rolled steel stood at 39.67, 41.25 and 47.73 million tons, rose by 13.2, 14.5 and 23.9 percent respectively; that of cement was 117 million tons, up by 11.6 percent; that of automobiles was 679 thousand sets, up by 32.7 percent, of which, 386 thousand sets of cars with a growth of 27.9 percent over the same month of the previous year.

From January to July, the accumulated value-added of industrial enterprises above designated size achieved a year-on-year rise of 18.5 percent.

Tuesday, August 14, 2007

Chinese Retail Sales

From Bloomberg today:

China's Retail Sales Grow at Fastest Pace Since 2004

China's retail sales grew at the fastest pace in more than three years, buoyed by a stock market rally and higher wages and prices.

Spending climbed 16.4 percent to 699.8 billion yuan ($92 billion) in July from a year earlier, the National Bureau of Statistics said today, after gaining 16 percent in June. The figures aren't inflation-adjusted.

The biggest increase in consumer prices in a decade contributed to the acceleration. Stock-market gains and a 14 percent jump in urban incomes underpinned demand, aiding Premier Wen Jiabao's efforts to boost consumer spending and reduce the economy's dependence on exports and investment.

``Inflation played an important role in gains for food sales,'' said Paul Tang, chief economist at Bank of East Asia Ltd. in Hong Kong. ``But in other categories there's genuine continued gains, and overall growth is steady.''

Some Chinese retail stocks climbed. Youngor Group Co., the country's No. 1 maker of men's clothing by sales, gained 5.9 percent to 29.81 yuan after forecasting first-half profit more than tripled.

Meat, poultry and egg sales jumped 51 percent from a year earlier, the statistics bureau said. Jewelry spending rose 46 percent, automobile sales climbed 43 percent and those of furniture gained 32 percent.

Disposable urban incomes jumped 14.2 percent in the first half from a year earlier and earnings among rural households climbed 13.3 percent. McDonald's Corp., the world's biggest restaurant company, last week said it plans to raise salaries in China by 12 percent.

China will reduce a tax on interest income to 5 percent from 20 percent tomorrow, increasing returns on bank deposits to counter the effects of inflation.

China's economy, the world's fourth largest, grew 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years. Overseas sales jumped 34.2 percent in July.

And here's the data from China Statistics:

In July, the total retail sales of consumer goods reached 699.8 billion yuan, a year-on-year increase of 16.4 percent.

In terms of different regions, the retail sales of consumer goods in urban areas was 476.2 billion yuan, rose by 16.7 percent over the same period of the previous year; that of retail sales at and below the county level achieved 223.6 billion yuan, up by 15.8 percent.

In terms of different industries, the retail sales of wholesale and retail trades was 592.4 billion yuan, a year-on-year increase of 16.5 percent; that of lodging and catering services was 92.3 billion yuan, up by 18.0 percent; that of other industries was 15.1 billion yuan, up by 3.1 percent.

Monday, August 13, 2007

Inflation Creeps Up

Inflation in China is ticking up (as we can see from the chart below). In fact China’s inflation rate hit a ten-year high of 5.6 per cent in July, producing a spike which has raised expectations about further tightening measures as well as increased concerns there might be an eventual knock-on impact on the real economy.

On the other hand, as the Financial Times notes:

The rise in the consumer price index was mainly the result of higher food prices, a result of a shortage of staple meats, especially pork, following an illness which killed millions of pigs late last year, and higher feed costs.

So I think we need to be very careful before coming to any over hasty conclusions. If we look at the producer price situation for manufactured goods (see chart below), we find that, in July, the Producers’ Price Index (PPI) for manufactured goods up by 2.4 percent from the same month last year. At the same time the purchasing prices for raw material, fuels and power rose by 3.6 percent. So while there is cost pressure from inputs, there is no sign of these producing sustained inflationary upward pressure on producer prices yet.

So while the People’s Bank of China has been sounding more and more hawkish about inflation of late, and especially in its last quarterly monetary report, we still need to wait and see to what extent this passes through to monetary tightening, and even in the event that it does, to what extent - given the overarching liquidity background - to what extent this passes through to impacts on the real economy.

I cannot help feeling that what is going on in the financial markets and the international banking sector right now will be much more significant for determining the future Chinese growth path.