A bit more on the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later.
Barclays Capital:
In view of the higher-than-expected inflation in February, we revise upward our projection of average CPI inflation for 2010 to 3.5% from 3.0%, which implies a rise in the headline rate to around 3.5% by mid-2010 and 4% by Q4. This is compared with the government target of 3% announced at the NPC meeting.
Consequently, we revise our call on the benchmark interest rate and now look for a hike in Q2; previously we expected rated to begin rising in Q3. We now project three increases of 27bp in the benchmark rates in 2010 – one in Q2 and the remaining two in H2. We maintain our projection of real GDP growth of 9.6%, but change from upside to balanced risks around the baseline, owing to the quickened pace of tightening
Morgan Stanley:
We continue to see multiple RRR hikes as necessary over the next few months to sterilize the liquidity impact from the BoP surplus, with the next RRR hike likely to be in the very imminent future. The first interest rate hike of 27 bps could come as early as April, in our view, followed by two more hikes in 3Q and 4Q. Nevertheless we stand by our call that Renminbi appreciation (against US$) will not resume until 2H10, although appreciation on a trade-weighted basis is already taking place given the US dollar’s recent and projected strength against other major currencies in the course of this year.
And finally, Goldman Sachs:
Although inflationary pressures remain moderate for now, we believe if there are no measures more decisive than the modest (although relatively frequent) RRR hikes, we are likely to see higher inflationary pressures. Recent comments by a number of policymakers that there are no signs of inflation yet are worrisome as it indicates a lack of willingness to take more decisive measures until higher inflation actually occurs.
Having said that, we still believe policymakers will take a combination of tightening measures in the coming months to prevent overheating. These measures are likely to be targeted at FAI-related areas given the government’s strong emphasis on stimulating private consumption and the unwillingness to fully utilize the exchange rate as a policy tool to influence exports growth. We expect these so called macro tightening measures to include a mixture of credit controls, further RRR and interest rate hikes, administrative controls on investment approvals and funding and other “industrial policies” to curb investment activities in sectors regarded as having problems such as overcapacity.
Melody's note, Comment from RBS (but its estimate for CPI, PPI n bank loan are all way wrong):
More concern about growth: property-sector FAI and export growth in 2H10
Returning to centre-stage, in our view, is the need to cement growth in 2010. While policy makers prefer stable to steadily rising property prices, these have seen nothing but extreme volatility. Combined with possible uncertainty about export growth in 2H10 and the close of the politically sensitive NPC session, we may have several months of relatively benign良性的 regulation of property, which may help property FAI. The risk is that if property prices start rising again, it may lead to greater social tension and more regulatory actions just as the supply of residential property increases in 2H10F.A slight reversal of the exit/normalisation trade for several months?
We see 2010 as a year of ‘touching the stones to cross the river’ for policies in China, with the government reducing excess liquidity as the real economy improves. The implication is negative for asset plays and positive for transportation and industrials. Ranked by top-down incremental yoy growth, we prefer export-exposed sectors to consumption and FAI-related sectors. That said, in the coming months, we may see a slight reversal of the policy exit/normalisation trade. We believe the sectors that will benefit incrementally are property, energy, materials, cement and consumer discretionary. Defensives and agriculture inflation hedge may perform less well on postponed policy exit and reduced inflationary fear. The impact on banks should be positive on low valuations and reduced tightening fears.
Over to you, Chinese policy-makers.
Related links:
Roach: Pooh-pooh to Chinese bubbles - FT Alphaville
Chinese liquidity – and stocks – go BOOM! - FT Alphaville
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