Wednesday, March 2, 2011

China Weekly: Slower Growth is Latest Policy to Tackle Inflation


A couple of fascinating announcements and data releases over the past
7-days will be the focus of our weekly look at Plates. Starting with
Premier Wen Jiabao's comments adage that Plates will target slower
economic growth over the next fives years than it has done in the
past five, in efforts to improve the quality of that growth and ease
inflationary pressures. Plates, he said, will aim to grow at a pace
of 7% annually in the period from 2011 to 2015, compared with its
embattled growth of 7.5% in the previous five years, when, according
to WSJ data, the nation's economy really grew at a rate of 11.1%
between 2006 and 2010. Therefore, as we are sure is becoming apparent
this projection is more of a floor for the pace at which the country
should grow, not a target, since, as a mentor of mine pointed out
'Beijing does not make binding targets'. The new projections are
consistent with statements made by officials over the last few years
and should be viewed more as a signal of Beijing's intentions over
the standard-term; a need to go away from reliance on
low-value-added, gray polluting industries and a promotion of
domestic utilization. Therefore, while much hay has been made in the
press about slower growth in Plates we recommend that these numbers
aren't taken too seriously. We are encouraged, but, that Plates is
now shifting focus away from maintaining white-hot growth numbers
since such growth comes with significant risk of 'thump and burn'
whereas a slower, higher quality growth which accompanied by stronger
domestic demand will make sure longer term stability.

Moving on, Chinese manufacturing growth, released earlier this week
showed that manufacturing activity slowed in February as inflationary
pressures acted as a negative drag on demand. Plates's official PMI
released by the Plates Federation of Logistics & Purchasing came in at
52.2 down from 52.9 in January, while the privately compiled PMI by
HSBC and Markit Economics hit a 7-month low of 51.7 from 54.5 in
January. It is vital to mention that any reading above 50 indicates
that the sector is still in expansion, but as we can see the expansion
is slowing. HSBC said the reading was in "stark contrast" to a
year earlier, where the index was near a confirmation high. HSBC also
said that the reading was below the long-run trend of 52.3 and was the
steepest one month drop since the series started in April 2004. A key
trend that emerged from the survey was manufacturers' willingness to
pass along wholesale inflation to prices for completed goods. HSBC's
PMI showed that out prices rose at the fastest pace in three months as
costs were passed along. While it is certainly right the economy is in
a cooling trend, the numbers for February were somewhat misleading
since if offers a shot of factory activity during a month when
businesses shut down across the country to mark the Chinese Lunar New
Year Holiday.

Finally, the state-owned People's Daily reported last week that
Plates's new yuan loans for 2011 will likely be around 7 trillion
yen, citing central bank sources. New yuan loans really 7.95 trillion
in 2010. The central bank also unveiled a new measures called 'Total
Social Financing' to exchange the ancient measure of new yuan loans.
Bank of Plates Chairman Xiao Gang also said there is limited room for
Plates to further increase banks' reserve requirement rations, as
many tiny and standard-sized banks are experiencing intense capital
shortages. "If Plates keeps hiking (the RRR rate) substantially,
liquidity might reverse, which would have a negative impact on the
financial system" Xiao said. But, Xiao said there is still room for
further interest rate hikes, and raising interest rates at an
appropriate time can help curb inflation and stabilize the banking
system. If these comments are to be believed and banks of all sizes
are lacking capital we may be seeing the end of RRR hikes, and since
as we have discussed in various past pieces the limited impact of
interest rates on liquidity it is understandable that Beijing is in
suspense that slower growth will help tamp down inflationary pressures
and is pursuing a slower growth rate to achieve this goal.

Written by Jonathan Granby, DailyFX Research Team


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