Posts Tagged ‘China’

Car Sales in China a Victim of Tightening

July 9th, 2010 Michael McDonough Comments off

In a sign of China’s slowing economy passenger car sales in the country grew at the slowest pace in 15 months, moving off historic highs stoked by the country’s unprecedented fiscal stimulus. As the attached chart highlights, the spike in car sales was highly correlated to strong consumer lending growth catalyzed by the government’s stimulus package—bad news for the sector, and expectations of Chinese economic growth exceeding 10%. The Chinese government has already started, and is expected to accelerate, implementing tighter fiscal and monetary policies, which will have an adverse impact on new lending, auto sales, and general economic growth.

Chinese Car Sales vs. New Consumer Lending

Source: Bloomberg


The IMF’s Delusions of Grandeur for China

July 8th, 2010 Michael McDonough Comments off

As everyone is aware—excluding possibly the IMF— the Chinese government has begun tapping the brakes on the country’s economic engine to prevent overheating and curtail inflationary fears.  With this in mind, the IMF surprised quite a few people yesterday increasing their 2010 growth forecast for China to 10.5% y/y from 10.0% in April; well above the current Bloomberg consensus forecast of 10.1%, which I believe holds more downside than upside risk.  Even more surprising was a downward revision to its 2011 forecast to 9.6% from 9.9%, which is likely also too optimistic, especially compared to the 9.25% Bloomberg consensus forecast.  The IMF seems to be underestimating the impact of government restrictions in the country’s real estate sector, the effect of European austerity on the country’s exports, and various other domestic lending restrictions.  Highlighting the downside risk facing the Chinese economy both this year and next, the government’s chief statistician was recently quoted as saying, “In a complex and changing world economic environment, domestic economic conditions are getting more uncertain and complex.”  The lesson here is don’t be surprised to see some disappointing numbers from China over the months ahead.  Keep your eye on the country’s weakening Purchasing Manager Indices, for clues toward future growth.

Categories: Asia/China Tags: ,

China’s Real Estate Free Fall May Not Bode Well For Commodities

June 21st, 2010 Michael McDonough Comments off

China’s plummeting real estate transactions could spell trouble for domestic steel and cement industries.  The average number of real estate transaction in China’s 15 largest cities fell 75% on an annual basis according to the most weekly June release according to Goldman Sachs.  On a ytd basis transactions have declined -29%.  The Chinese government has been attempting to cool the overheating sector, in the face of mounting inflation and a more hawkish tone on monetary policy.  According to the China Daily, quoted by Bloomberg, “Apart from one villa development, no residential project obtained a sales license last week and no new residential buildings were put on the market over the weekend.”  One of the primary reasons for the decline is more stringent government policy making it more difficult to receive a second mortgage, coupled with concerns over future policies that have buyers taking a wait and see approach.  The government relied on the domestic economy, including the real estate sector to strengthen growth during the global financial crisis. 

One potentially significant international implication of a slowdown in the Chinese real estate sector is that the country’s construction industry consumes half of the nation’s steel and 36% of its aluminum.  China’s insatiable demand for natural resources has been a major crutch for the commodities industry as demand from the remainder of the world remains tepid at best.  For example in 2009 China consumed 65% of the world’s iron ore exports.  Therefore, any slowdown in Chinese demand for natural resources could have an adverse impact on the commodities sector, and continue to depress shipping companies still at the mercy of China’s whim.  To get a visual on just how significant Chinese demand for natural resources has been please see this piece from Bloomberg’s Interactive Insight team:

Categories: Asia/China Tags: , ,

The Decline in the BDI Doesn’t Mean Much…

June 15th, 2010 Michael McDonough Comments off

The Baltic Dry Index (BDI) has fallen 28% from its recent high on May 26th, indicating to some weakness in the global economy.  The BDI tracks the prices of bulk carriers which are the life-blood of global trade carrying everything from iron ore to grain.  While the 28% decline may seem ominous, the BDI is being influenced by two outside factors that have very little to do with global economic health.  The first factor is that during shipping’s boom period, prior to the recession, a record amount of new ships were ordered that are only now being delivered creating a supply glut in the sector, while demand remains tepid at best.  Secondly, China’s unprecedented stimulus package, stoking the country’s demand for raw materials through new lending and infrastructure projects, gave the country enormous sway over the index as they were receiving the vast majority of dry bulk goods.  Further tightening in China without substantial offsetting demand increments from the remainder of the world—which are returning, but at a gradual pace—along with an armada of vessels coming online over the next several month will likely place continued pressure on the BDI, but not necessarily indicate a slowdown in the global economy. 

Categories: Shipping Sector Tags: ,

Chinese Government Officials May Have Leaked Key Economic Data

June 9th, 2010 Michael McDonough Comments off

“Dear all: One Chinese official apparently leaks May macro data According to Reuters, a senior Chinese government official leaked some key macro data during an internal investor conference. If confirmed, it will be one of the largest leakages in China in two years. Official numbers are yet to be released. Relevant numbers are for CPI, PPI, Industrial production, FAI, Exports, new loans, and M2. The most surprising number is the 52% export growth, though people are deeply (in our view, not so necessarily) concerned about the 3.1% CPI inflation which for the first time this year surpassed the targeted annual target at 3%.”  -Ting Lu (陆挺), Ph.D., CFA (Bank of America – Merrill Lynch)


Pressure for Chinese Tightening Continues to Build:

May 11th, 2010 Michael McDonough Comments off

As the chart below illustrates, Chinese inflation has risen above levels where over the past five years Chinese authorities reacted with significant hikes in the country’s benchmark deposit rate.  Yet, Chinese authorities may delay a hike, at least for the moment, to measure the effectiveness of targeted policies at the property sector and several increases to China’s reserve required ratio, now just below the series high of 17.5% at 17.0%.   Nevertheless, even larger gains in producer prices will provide significant tailwinds to Chinese inflation in the second half; likely resulting in higher inflation and slower growth as the government is forced to react.  This outlook will likely continue to weigh on Chinese equities, with the MSCI China index already down roughly 7% since the start of the year.

Chinese Year-Over-Year Inflation Vs. Benchmark Rate

Source: Bloomberg

In the mean time, China’s real estate sector will likely continue to face the brunt of China’s ‘targeted’ tightening policies as authorities try to avoid the type of bubble experienced here in the U.S.  The MSCI Chinese real estate index has lost 15% since its introduction on March 5th.  Given mounting cost pressure—combined with a recovery in the country’s export sector—there is also a fairly good chance that the Chinese RMB will re-initiate its course of gradual appreciation.   This may become a very sensitive topic given U.S. mid-term elections and recent rhetoric between the two countries.


China’s Tightening Tool Box…

March 12th, 2010 Michael McDonough Comments off

The wheels of tightening may be gaining momentum in China, after February’s higher than anticipated inflation release.  High inflation leading to negative real deposit rates may entice investors to withdraw deposits and invest in more speculative assets, potentially spurring what is arguably already a bubble in the country’s housing sector.  I believe that China has been avoiding an increase in its deposit rates, at least before tightening by the U.S. Fed, in order to avoid further spikes in hot-money inflows (from investors looking to take advantage of interest rate differentials and anticipated appreciation in the RMB).  But, China’s inflation may have passed a threshold forcing the government to act.

Chinese Consumer Prices on an Annual Basis:

Source: Bloomberg

So what does further tightening in China look like?  First off we will likely see China continue removing excess liquidity through open market operations, increasing the yields and issuance of PBOC paper.  As the chart below illustrates, China has already begun this process, but thus far has proven to not be enough.

China People’s Bank of China 1Y Reference Yield:

Source: Bloomberg

China will most likely continue raising its reserve required ratio (RRR), which they have already increased to 16.5% from 15.5% since the start of the year.  I expect the RRR will move to it’s historic high of 17.5% over the next several months.

Chinese RRR:

Source: Bloomberg

A recovery in Chinese exports and inflationary concerns should reignite a gradual appreciation in the RMB, which was suspended at the onset of the global financial crisis.  (For more on this please see my recent piece on the RMB NDF curve).


Source: Bloomberg

Finally, the coup de grâce in Chinese tightening will be any hike in the country’s reference deposit/lending rates.  This would be a clear indicator that Chinese authorities mean business, and the country’s tightening cycle is approaching full swing.  Many analysts suspect we could see a hike in this rate within the next three weeks. possibly as early as next week.  Reverberations from this move would be felt globally, especially in the material and global transport sectors.  Easy money and large increments in new lending spurred almost insatiable demand from the country for raw materials for both final use and speculative purchases.  But, let us not forget, despite creating short-term volatility, these moves are necessary to guarantee China’s future economic growth.  Therefore, China’s tightening cycle will likely lead to quite a few buying opportunities both inside and outside of the country going into the future.

Chinese 1Y Deposit Rate vs. Fed Funds Target:

Source: Bloomberg


Chinese RMB Appreciation Always Seems Six Months Away (But It’s Coming)…

March 9th, 2010 Michael McDonough Comments off

Since the start of this year I have been a proponent of the belief that China will once again begin to gradually appreciate their currency as exports recover, and inflation begins to creep back into the Chinese economy.  As the chart below illustrates,  investors in the CNY NDF market appear to share this view.  But, excluding the curve from 3/10/09, significant RMB appreciation always seems to be six months away.  The magnitude of the appreciation has grown from September, but is still six months off.  In addition to inflationary fears, speculative capital inflows have buffeted China due to interest rate differentials and the expectations of eventual RMB appreciation, placing further pressure on the currency.  What I believe this data shows is that appreciation in China is inevitable, while the actual timing and magnitude remain in question.  But, I do expect we will see the Chinese government reinitialize the RMB’s gradual appreciation within the next six months.  This move will be expedited if export growth remains robust, while inflation continues to rise.

RMB NDF Curves

Source: Bloomberg


China’s Surprises on Timing, But Not Action

February 12th, 2010 Michael McDonough Comments off

Judging by the market’s reaction, investors were blinded sided today when Chinese officials increase their reserve requirement ratio for the second time during its renewed tightening cycle.  But, really the only surprise was that the hike occurred just prior to the Chinese New Year, which is a week long holiday.  I have been stating for weeks, and I believe the market has widely anticipated that that another RRR hike was imminent, so today’s strong sell-off on the news comes as a bit of a surprise to me, and highlights the fragility to markets and their sensitivity to negative news, even if anticipated.  I should note this action came right after Chinese data pointed to lower than expected consumer inflation.

To help put things into perspective magnitude of this RRR will be far smaller than the country’s open market operations in removing liquidity from the market–so far this year open market operation have likely removed over 4x the liquidity than this move will total.  The market can anticipate additional RRR hikes over the months ahead.  The RRR presently stands at 16.5%, versus a historical high of 17.5%.  I also anticipate the central bank will continue to remove additional liquidity through open market operations via additional issuance and higher yields on its 1Y paper.  Keep in mind so long as China’s reference rate remains at 2.25%, 1Y yields can not move above this level; regular auctions are held on Tuesday and Thursday.

Categories: Asia/China Tags: , ,

Lending Spikes in China, Confidence Falls, & Consumer Prices Remain Tame for Now…

February 10th, 2010 Michael McDonough Comments off

According to the China Securities Journal, Chinese banks lent almost CNY1.4 trn in new loans during January–third-largest monthly total on record. This was less than the CNY1.6 trn some outlets has been speculating on, but far more than what I expect the government would have liked. But, considering that it was reported that CNY1.1 trn had been lent by the middle of the month, it would appear government controls began to suppress lending in the latter part of the month.

Consumer inflation unexpectedly slowed in China to 1.5% in January from 1.9% in December. The consensus forecast was for a 2.0% increment. Food inflation, which is a key component to consumer prices in China rose 3.7%, compared to 5.3% in December. I expect consumer prices will continue to accelerate in February, likely moving above 2.0%. Despite the slowdown in consumer prices, wholesale prices jumped 4.3% from 1.2% in December.

Consumer confidence in China fell to a five month low on the back of the government’s tightening and poor stock market performance.  The indicator from to 97.2 in January from 99.1 in December.  The index bottomed in November of 2008 at 88.6.  Any reading below 100 implies pessimists out number optimists.

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