FYI | Apr 19 2010
FNArena editor Rudi Filapek-Vandyck shares his insights and analyses on a regular basis with paying subscribers via stories labeled 'Rudi's View'. On occasion, one of these stories is shared with non-paying members and with readers elsewhere. This is one such occasion. The story below was originally written and published on Friday, April 16, 2010.
By Rudi Filapek-Vandyck
Yesterday's data releases from China have turned out a net positive for global equities and commodities, despite continued comments from economists worldwide that China should be looking at getting tougher on runaway growth in the short term.
Despite my earlier prediction this week that another batch of stronger than expected data would surely push Chinese authorities into swift action, it is now far more likely that the chances of this happening have actually reduced.
Don't expect to see a sizeable revaluation of the Chinese currency either, even though some economists are suggesting that, in light of this week's strong growth data, this looks like an opportune time for China to finally respond to outside calls for a currency revaluation.
As I pointed out yesterday, the Q1 GDP numbers look stronger on annual comparison (which everybody outside China looks at) but they are equally contrary to what is happening on a quarterly trend basis. See “Rudi's View: Yuan Revaluation Over-Hyped”.
Indeed, given Chinese fears of possibly moving too hard too fast, and with memories of ill-executed policy action in 2008 still fresh, it may well be that Beijing prefers to look at the growth trend in quarterly terms (which is slowing) while drawing confidence from the fact that inflation is still benign (though expected to rise later this year).
If these considerations translate into Chinese authorities keeping their powder dry for the time being, and only targeting excessive property speculation through tighter administrative measures, it may well turn that this week's data releases mark the sweet spot for industrial resources, and probably for commodities in general.
After all, if the Chinese don't tighten and don't revalue, this leaves financial markets with above normal growth and no imminent signs of policy barriers in sight. Note that restocking is now happening in developed economies and there are no signs that central bankers or authorities in those regions will go anywhere near policy brakes for the foreseeable future.
As such, this week's Chinese data have brought about the next wave in increased growth expectations with economists worldwide upping their numbers for this year and next on the back of the stronger than expected outcome in this year's March quarter.
A few examples: Citi economists are now forecasting 10.5% GDP growth this year and 9.3% next year. At JP Morgan, economists have even gone one leap further: they are forecasting 10.8% GDP growth for 2010, up from 10% previously.
And Chinese authorities may well have given the clearest indication about their short term intentions this very morning when they announced extra measures to reign in property speculation. Under the new rules, second-home down payments will increase to 50% from 40% previously, second-home mortgage loan rates must be at least 110% of the benchmark rate and down payments for first homes larger than 90 square metres must now be at least 30%.
In addition, the Chinese government has reiterated its target to build 3 million units of economically affordable housing units and to provide 2.8 million units to people living in temporary shelters.
Note these new requirements come on the back of accelerating property prices, with price increases recorded of 11.7% (y/y) in March, after gaining 10.7% in February. Underneath these general data sits a rather alarming rise in residential prices for new houses of no less than 15.9% (y/y).
Of course, China can elect to hold off on further tightening in the short term, at its own discretion, but it won't be able to leave interest rates unchanged forever. There seems to be a consensus among economists that two or three interest rate hikes of 27 basis points each should follow in the course of 2010 (with many anticipating additional actions on top such as higher reserve requirements for banks).
Postponing the first rate hike beyond this month, or even this quarter, is only pushing out the inevitable.
This could well translate into a different second half for commodities and demand then we have experienced in the first four months this year. Economists at Westpac, who are forecasting Chinese GDP growth of 10.9% this year, reminded investors about the potential consequences of all of the above in an update this morning.
After 11.9% GDP growth in Q1, growth may well print 11% in the second quarter, suggest Westpac economists. Assuming their 10.9% forecast proves accurate, this implies GDP figures have to come down to sub-10% by year end.
Note that Westpac is at the top of market forecasts. The projected slow down in GDP numbers is larger in case of lower expectations for the year as a whole.
Regardless, Westpac is anticipating “materially” slower growth in the second half. The positive side-effect of such an outcome is that Chinese inflation should never really become a real problem this year.
As far as the widely speculated (hoped-for?) currency revaluation is concerned, it may simply never occur. Following on from similar suggestions made elsewhere, Westpac economists suggest China is unlikely to opt for a step-revaluation of its currency, because that would be too much of a shock-approach.
Instead, suggest the economists, it is more likely the authorities will allow for a gradual widening of the trading band for the renminbi against the US dollar. Given the hyped-up possibility of a potential CNY-revaluation, such a move might well descend as an initial disappointment upon commodity markets.
In summary, the odds seem in favour that Chinese authorities might stick to their gentle-gentle approach for the time being. This would translate into a reactive rather than a pro-active stance on monetary tightening.
As such, it may well be that, unless inflation data actually start showing a rise in underlying trend, Chinese interest rates are going nowhere for the time being.
However, that won't stop authorities from tightening further through quantitative measurements. Expect more regulation changes similar to the ones announced this morning and further hikes to bank reserve requirements, alongside stricter controls on bank loans.
In the meantime, Beijing will be working on a sharp reduction in overall credit and liquidity. This, and not so much higher interest rates, might turn out the real disappointment for commodities demand further down the track.
But not now.
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