KUALA LUMPUR: Standard Chartered Global Research said China's macroeconomic targets for 2011 appear to have been leaked (they would have been discussed/announced at the Central Economic Work Meeting over the weekend).
The research house said on Monday, Dec 13 that according to newswire reports, they are much less contractionary than the market assumed ' and send a clear message out to the provinces that economic growth is still the priority.
Below is the research report:
'China's 8% GDP growth target is unchanged. This eliminates the theory that we would get a lower target (e.g. 7%) to create some space for some economic restructuring. The new CPI inflation forecast is to be 4%, compared with 3% in 2010 and previous years.
'The authorities are thus moving the goalposts for an important target, just at the point when CPI inflation is running some 60% above their current 3% target. This suggests they are happier to inflate their way out of their problems than tighten policy significantly,' it said.
Standard Chartered Global Research said the bank loan quota is reported to be 'at least CNY 7trn', compared with an official quota of CNY 7.5trn for 2010. Actual loan growth for 2010 will more likely be around CNY 10trn, once offbalance sheet loans are included.
Despite the fact that off-balance sheet lending will be constrained, this target is not very tight, particularly when speculation of CNY 6-7trn, and even lower, had been common. The 16% M2 growth target is also above the historical average. After the credit feast of 2009-10, there is to be no diet in 2011.
In short, this is a very pro-growth set of targets, short-term bullish for commodity currencies and commodities. But it also suggests that inflation will be an issue in 2011.
The authorities claim that their approach to combating inflation is working. Xinhua, the official news service, is carrying an interview with an unnamed National Development and Reform (NDRC) official (http://news.xinhuanet.com/fortune/2010-12/11/c_12870000.htm) which outlines the policy and its claimed successes so far.
The main points are:
The State Council's #40 document issued on 19 October has had 'an obvious success' in bringing down/stabilising prices.
The measures include local governments introducing price 'supervision' and controls, removing road fees for food in carriage, subsidising low-income groups, etc. Vegetable prices have fallen some 15% in 36 cities from end-November to the beginning of December. The wheat flour price has fallen moderately.
On 22 November the government released 17mn tons of grain, and grain prices are stable. Cooking oil prices are stable (the NDRC has decreed that no one can raise cooking oil prices until March). The government released 300,000t of beans and supply seems adequate. Pork prices have fallen slightly in recent days, the NDRC official claims.
Why then has y/y CPI inflation still risen to 5.1% in November? The NDRC spokesman says that (1) it is a seasonal effect and (2) these policies take time to implement. The spokesman also says the NDRC expects November to be the year high for y/y CPI, with December CPI tentatively forecast for below 5%. However, he admits Q1-2011 CPI inflation will remain high.
These claims contrast with our seasonally adjusted data. According to our estimates, SA annualised CPI accelerated in November to 14% (from 12% in October), non-food CPI to 7% (from 3%), and PPI to 20% (from 15%).
Thus, allowing for any 'base effects', there was a surprisingly strong resurgence of price pressure across the board in October-November. The last two months have seen m/m SA inflation at around 1%; we would need it to decelerate to 0.5% m/m in December if the y/y number is to fall below 5%. Reviewing recent weekly food prices, it appears that apart from vegetables, all other prices are continuing to push up, including grains and meat.
If there were obvious signs of economic slowing, this might be a reason to delay rate hikes, but the macro data looks robust. Recent PMI readings are strong, import growth has bounced, and money supply is still expanding above its historical trend. Even our China Freight Index is running above trend. This suggests that overall demand will maintain the pressure on prices.
We still look for a rate hike before year-end, as we think inflation will surprise the authorities and we still hope for a clear signal before January of their willingness to curb demand. However, given the lack of any substantial change in policy since the announcement of a 'stable' monetary policy, onshore sentiment seems to have turned against expecting another hike soon. Instead, only more reserve requirement hikes are expected, in order to drain liquidity before banks start lending again in earnest in January.
If our analysis of the underlying robustness of the economy and the strong price pressures building is correct, then the central government's unwillingness to tighten demand meaningfully now, and its willingness to set aggressive growth targets for 2011 (and send that message out to the provinces clearly at the weekend meeting) suggest that we are in for more inflation in 2011; and more aggressive tightening at some point in 2011. We look for three rate hikes in H1, although the key will be how aggressively the People's Bank of China can limit bank lending via quantitative controls.
In the short term, then, China is going to be constructive for risk sentiment (especially if the CPI does somehow manage to fall below 5% y/y in December) and for commodity prices. But there will be growing nervousness about China overheating in 2011, particularly if the US continues its recent recovery and global commodity prices rise again.
''
The research house said on Monday, Dec 13 that according to newswire reports, they are much less contractionary than the market assumed ' and send a clear message out to the provinces that economic growth is still the priority.
Below is the research report:
'China's 8% GDP growth target is unchanged. This eliminates the theory that we would get a lower target (e.g. 7%) to create some space for some economic restructuring. The new CPI inflation forecast is to be 4%, compared with 3% in 2010 and previous years.
'The authorities are thus moving the goalposts for an important target, just at the point when CPI inflation is running some 60% above their current 3% target. This suggests they are happier to inflate their way out of their problems than tighten policy significantly,' it said.
Standard Chartered Global Research said the bank loan quota is reported to be 'at least CNY 7trn', compared with an official quota of CNY 7.5trn for 2010. Actual loan growth for 2010 will more likely be around CNY 10trn, once offbalance sheet loans are included.
Despite the fact that off-balance sheet lending will be constrained, this target is not very tight, particularly when speculation of CNY 6-7trn, and even lower, had been common. The 16% M2 growth target is also above the historical average. After the credit feast of 2009-10, there is to be no diet in 2011.
In short, this is a very pro-growth set of targets, short-term bullish for commodity currencies and commodities. But it also suggests that inflation will be an issue in 2011.
The authorities claim that their approach to combating inflation is working. Xinhua, the official news service, is carrying an interview with an unnamed National Development and Reform (NDRC) official (http://news.xinhuanet.com/fortune/2010-12/11/c_12870000.htm) which outlines the policy and its claimed successes so far.
The main points are:
The State Council's #40 document issued on 19 October has had 'an obvious success' in bringing down/stabilising prices.
The measures include local governments introducing price 'supervision' and controls, removing road fees for food in carriage, subsidising low-income groups, etc. Vegetable prices have fallen some 15% in 36 cities from end-November to the beginning of December. The wheat flour price has fallen moderately.
On 22 November the government released 17mn tons of grain, and grain prices are stable. Cooking oil prices are stable (the NDRC has decreed that no one can raise cooking oil prices until March). The government released 300,000t of beans and supply seems adequate. Pork prices have fallen slightly in recent days, the NDRC official claims.
Why then has y/y CPI inflation still risen to 5.1% in November? The NDRC spokesman says that (1) it is a seasonal effect and (2) these policies take time to implement. The spokesman also says the NDRC expects November to be the year high for y/y CPI, with December CPI tentatively forecast for below 5%. However, he admits Q1-2011 CPI inflation will remain high.
These claims contrast with our seasonally adjusted data. According to our estimates, SA annualised CPI accelerated in November to 14% (from 12% in October), non-food CPI to 7% (from 3%), and PPI to 20% (from 15%).
Thus, allowing for any 'base effects', there was a surprisingly strong resurgence of price pressure across the board in October-November. The last two months have seen m/m SA inflation at around 1%; we would need it to decelerate to 0.5% m/m in December if the y/y number is to fall below 5%. Reviewing recent weekly food prices, it appears that apart from vegetables, all other prices are continuing to push up, including grains and meat.
If there were obvious signs of economic slowing, this might be a reason to delay rate hikes, but the macro data looks robust. Recent PMI readings are strong, import growth has bounced, and money supply is still expanding above its historical trend. Even our China Freight Index is running above trend. This suggests that overall demand will maintain the pressure on prices.
We still look for a rate hike before year-end, as we think inflation will surprise the authorities and we still hope for a clear signal before January of their willingness to curb demand. However, given the lack of any substantial change in policy since the announcement of a 'stable' monetary policy, onshore sentiment seems to have turned against expecting another hike soon. Instead, only more reserve requirement hikes are expected, in order to drain liquidity before banks start lending again in earnest in January.
If our analysis of the underlying robustness of the economy and the strong price pressures building is correct, then the central government's unwillingness to tighten demand meaningfully now, and its willingness to set aggressive growth targets for 2011 (and send that message out to the provinces clearly at the weekend meeting) suggest that we are in for more inflation in 2011; and more aggressive tightening at some point in 2011. We look for three rate hikes in H1, although the key will be how aggressively the People's Bank of China can limit bank lending via quantitative controls.
In the short term, then, China is going to be constructive for risk sentiment (especially if the CPI does somehow manage to fall below 5% y/y in December) and for commodity prices. But there will be growing nervousness about China overheating in 2011, particularly if the US continues its recent recovery and global commodity prices rise again.
''
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