February Economic Data Raised Expectation for Rate Hikes
Inflationary risks loomed large and rate hikes around mid-2010 looked more likely after China released higher-than-expected inflation figures. Retail prices rose by 2.7% year over year, the highest since October 2008 and higher than the consensus forecast of 2.5%, mainly due to high food prices during the holidays. The wholesale price increases also accelerated in February, rising 5.4% year over year under the pressure of commodity and energy prices, which surged 30.1% and 25.4%, respectively. The retail in
flation rate exceeds the current one-year bank deposit rate of 2.25%, eroding the purchasing power of Chinese households. The market is worried that the negative real rate may push many investors to chase better returns by deploying their savings to purchase real estate or stocks, further aggravating the asset bubbles in those markets.
Further tightening is now widely anticipated to bring inflation under control and prevent the economy from overheating, but deft balancing acts are required on the part of the Chinese government, which just pledged to maintain a moderately loose monetary policy at the annual national people's congress. Increases in bank reserve ratio are likely in the coming months, and rate hikes are a distinct possibility around mid-2010. Previously, analysts forecast rate hikes to take place in the second half of this year at the earliest.
Expectations of tighter monetary supply are also supported by bank lending data. Banks extended CNY 700 billion loans in February, down from CNY 1.39 trillion in January and CNY 1.1 trillion in the year-ago period. But when you add up the bank lending in the first two months, the total already accounts for 28% of the CNY 7.5 trillion full-year lending quota. This indicates that loan growth will be tightly controlled for the rest of the year as banking regulators keep lenders on a short leash.
Overall, February economic data point to robust growth in China, which witnessed double-digit year-over-year expansion in industrial output, fixed asset investment, and consumer spending. The strong rebound in exports is particularly encouraging, as the traditional engine of growth was reignited by improving demand from major export markets. Exports rose by 46% year over year in February, a sharp contrast to the 26% drop in the year-ago period.
Market Recap
Despite strong economic data in February, higher-than-expected inflation data and bank loans rattled the market toward the end of the trading week, erasing earlier gains. The Shanghai Composite Index closed the week down 0.6% at 3,013 points, while the Shenzhen Composite Index dropped 1.4% to 12,169.
Macro and Industry Updates
February Housing Prices in 70 Major Cities at Highest YOY Pace in Two Years : In February, housing prices rose by 10.7% year over year, compared to 9.5% in January 2009. This is the first double-digit year-on-year increase recorded in the past two years, despite a series of tightening measures launched by the government in the past three months to cool down the housing market. Haikou and Sanya, two cities both from China's southernmost tropical Hainan province witnessed the fastest year-over-year price appreciation of 58.4% and 56.1%, respectively. Favourable government policies aimed at turning Hainan into an international tourist destination triggered rampant speculation in the local property markets, pushing prices up at record speed. Other cities that saw sharp increases in the past month include the southern trading hub of Guangzhou, the coastal cities of Wenzhou and Jinhua, and the Chinese capital of Beijing, where property prices jumped by 17% in February.
New Policies to Regulate Land Auction and Supply : China's Ministry of Land and Resources, which oversees land sales, tightened control of land auctions by demanding interested developers pay 20% of the minimum auction price as deposits before they can enter their bids. According to media reports, previous deposit requirements were as low as 3%.
The ministry further required developers to sign the formal purchase contracts within 10 days of the auction, pay 50% of the land price as a down payment in the next 30 days, and pay the rest within a year. Developers that violate the rules will have their land contracts terminated and may be banned from future auctions.
In an effort to steer land supply away from luxury properties and to support housing for average consumers, the ministry banned land sales for villas and required that a minimum 70% of the land sold in a year should go to development projects of midrange and affordable housing.
Air China and China Southern Airlines to Raise CNY 17 Billion : China's flag carrier and second-largest airline by fleet size, Air China this week said it will raise CNY 6.5 billion by selling shares to 10 institutional investors in the local A-share market as well as to another subsidiary of its state-owned parent company in the Hong Kong market. The capital will help reduce Air China's debt load and finance its fleet expansion plans. The carrier said it plans to add 26 new planes in 2010 and another 33 in 2011. Earlier in the week, China Southern Airlines, the country's largest, also announced plans to raise up to CNY 10.7 billion through private placements to pay down its debt.
JP Morgan to Form Joint Venture in China with First Capital Securities : According to media reports, J.P. Morgan will partner with Shenzhen-based First Capital Securities to tap the huge Chinese market of stocks and bond offerings, which currently exclude wholly foreign-owned underwriters. J.P. Morgan negotiated with two other small securities firms before inking the deal with First Capital, which ranked 33rd among underwriters in 2009 and arranged about CNY 7 billion in stocks and bond sales in the year.
Contributions from Lun Lu, Iris Tan and Zhao Hu.
