Friday, December 31, 2010

More Interest Rate Hikes against Inflation in 2011

What a Christmas gift!

On 25 December 2010, the Chinese central bank, People's Bank of China (PBoC), decided to raise domestic interest rates by 0.25% against inflation. It perfectly matches with our expectation stated in our article No More loose Monetary Policy.
Sunday, December 26, 2010

Merry X'mas and Happy New Year

We, Mr China, wish all our readers a Merry Christmas and Happy New Year!

Although this greeting
Friday, December 17, 2010

Real Deposit Rate Exceeded -2%

On 11 December 2010, China reported that CPI in November continued to climb up rapidly to +5.1% YoY.

As expected, this time inflation was not only driven by soaring food prices and has spread over much broader categories like residence, household facilities, healthcare etc.

It might be something that Ben Bernanke, chairman of the US Federal Reserve, is happen to see as China has started to export inflation to the world. He might also want the Chinese central bank to raise interest rates immediately, so as to extend difference in interest rates between RMB and USD, attract additional hot money inflows to China, and therefore achieve a more rapid renminbi (RMB) appreciation.

However, quite unexpected to the market, the Chinese central bank did not raise interest rates but only increased again the reserve ratio on bank deposits by 0.5% to 18.5% just one day prior to this latest CPI announcement. It is already the 6th increase this year in reserve requirement ratio to mop up excess liquidity in the monetary system but, it still leaves the problem of negative real deposit rate unresolved.

Actually the China real benchmark 1-year deposit rate has exceeded our warning level of -2% (now it is 2.5% - 5.1% = -2.6%).

The question is: why the Chinese central bank still not to raise interest rates?

The official answer is the National Development and Reform Commission (NDRC) predicts that CPI had peaked in November and will fall to less than +5% YoY in December because of the recent government administrative measures.

This lowers our original expectation that the Chinese central bank will raise interest rates in the short term.

While the market is still hot in debating on the next inflation trend, we choose to stay calm and think about the prediction of NDRC this time.

Remember Chinese officials also predicted in October that CPI might had already peaked at +3.6% YoY in September, price pressures will ease later this year and so their annual CPI target of +3% might still meet. It is obviously not true.

Nevertheless, we cannot assume Chinese officials are making wrong predictions all the time.

In fact, quite a number of new administrative tightening measures to prevent price hikes, such as cracking down on hoarding and speculation, have just started in late November. For this reason, CPI in November definitely cannot tell the degree of effectiveness of the latest government measures.

Due to this technical problem, we may at least have to wait until December CPI to see any representable data, no matter NDRC is correct or not.

In order to protect the interest of all our readers, even we will have to adjust our 2011 CPI target, we cannot do it purely by guess and without knowing the data representing the impact of the government administrative measures.

We hope you can understand, as a responsible site, we can never set our target in this way and we believe this data insufficiency is also a reason why the Chinese central bank did not raise interest rates immediately. Avoid additional hot money inflows to China is apparently another reason.

In any case, it appears that poor people in China will need to stand a bit longer time for the excessive negative real deposit rate.
Friday, December 10, 2010

No More loose Monetary Policy

The Political Bureau of the Communist Party of China Central Committee, chaired by President Hu Jintao on 3 December 2010, decided that it will switch its monetary policy stance from moderately loose to become prudent next year to curb the rising inflation and also to maintain economic growth at sustainable pace.

However, China will still continue its proactive fiscal policy in the year 2011.

In order to increase the focus, flexibility and effectiveness of macroeconomic regulating policy in 2011, China has to set two goals: keeping economic growth and also curbing the drastic increase in inflationary pressure.

Keeping economic growth needs a policy of fiscal expansion while fighting inflation needs a tighter monetary policy. The existing economic situation in China requires a combination of the two.

The Chinese Political Bureau also stated that more measures will be in place to ensure sufficient market supplies, to stabilize prices level and to regulate market order in next year.

The Chinese central bank, which is under high political pressure due to recent criticisms for the delayed action on raising interest rates until 19 October 2010, fear that the so-called QE2 (Quantitative Easing) will really become "kill me too".

In fact, the Chinese central bank already raised the reserve requirement ratio for banks twice to 18% later in November, indicating its concern about rising inflation expectation as liquidity from abroad grows.

On 17 November 2010, the China premier Wen Jiabao also further confirmed the direction of harsh administrative tightening measures, including temporary price controls when necessary, and has cracked down on hoarding and speculation to prevent price hikes.

Although these actions mostly addressed worries stated earlier in our inflation warning, China inflation remains a risk as the real benchmark 1-year deposit rate is approaching our warning level of -2% (now it is 2.5% - 4.4% = -1.9%).

Deposit level has started to fall because Chinese savers see the value of their holdings eroded. This encourages them to look for better places to put their money and, as long as the trend of negative real deposit rate continues to extend, it will eventually fuel asset-price bubbles forming.

As the chance of real deposit rate to exceed -2% remains high in the near future, we therefore still expect Chinese Central Bank to raise interest rates soon, hopefully before the end of 2010.

Last but not least, we also decide that stocks of utilities, electricity and coals will not be our picks in 2011 owing to the risk in government price controls.
Saturday, December 4, 2010

Special Stamp Duty signals the End of High-land-price Policy in HK

Starting from 20 November 2010, the Hong Kong Government has started charging an extra Special Stamp Duty (SSD) up to 15% for individual who resales any local property flat within a 2-year period.

This extraordinary measure is cooling down the Hong Kong property market as the short-team investment demands are now greatly reduced. The Hong Kong Financial Secretary John Tsang, in his remarks, said that the SSD is to reduce the risk of asset bubbles forming and to fight against the hot money impact of the US quantitative easing monetary policy.

The question is: why it happened, and why so suddenly?

The official answer is the Hong Kong Government has data showed that more and more speculators extended their target in recent months from luxury flats to cheaper flats, including starter flats for first-time buyers.

That was true but, we believe there had another important factor that initiated this policy change announced on 19 November 2010. Just 5 days prior to the announcement, China premier Wen Jiabao told Macau officials that high housing price is a major concern that affecting the livelihood of the population.

There is no reason that the same concern is not applicable to the neighborhood of Macau: Hong Kong, where its high-land-price policy obviously violated what the premier had said on 14 November 2010.

This explained why the Hong Kong property policy was changed so suddenly. Before that, the Hong Kong Government even criticized any extra stamp duty would be unfair to those who have genuine needs to sell their properties within the specified period of time, would cause additional hardship to those in financial difficulties, and would also amount to double taxation for those already subject to profits tax.

This latest policy did have a real and immediate impact on the market. The number of transactions in the secondary property market dropped 80% the first weekend after the SSD announcement.

We, Mr China, therefore decide that Hong Kong property-related stocks will not be our pick, at least in the year 2011. Quantitatively, we expect an average of -5% stock price correction for the property sector in 2011.

To ensure the healthy and sustainable development of the Hong Kong property market, however, Mr China is a supporter of this latest policy which can help reducing the risk of asset bubbles, protecting the Hong Kong banking system and thus reducing the possible risk of it ever needing a taxpayer-funded bailout.

We expect the latest policy will continue to reduce liquidity in the property market and will probably slow the surge in property prices, but should not cause a sharp correction (not likely more than 15% of course), as we see limited impact on the fundamental supply/demand conditions (actually both the supply and demand will decrease).

In reality, we do expect there will be an increased supply in rental market because the SSD encourages speculators to hold properties for over a 2-year period.

In the long term, the Hong Kong Government will have to guarantee an adequate supply of land and also to provide sufficient non-luxury starter flats for first-time buyers since the private market has only concentrated on supplying luxury flats in recent years.


In case you want to know more about the latest policy, here are the details (Source: Hong Kong Government):

An extra Special Stamp Duty (SSD) has been introduced, on top of the current property transaction stamp duty, for properties acquired on or after 20 November 2010 and resold within 2 years, as follows:

  • 15% if the property is resold within 6 months;
  • 10% if the property is resold after 6 months but within 1 year;
  • 5% if the property is resold after 1 year but within 2 years.

  • The Hong Kong Monetary Authority (HKMA) also issued on the same day a set of new guidelines to banks requiring them to further strengthen their risk management standards for mortgage lending business by adopting the following measures:

    (i) for residential properties valued at HKD$12 million or above, the maximum Loan to Value Ratio (LTV) for mortgage loans should be lowered from 60% to 50%;

    (ii) for residential properties valued at or above HKD$8 million and below HKD$12 million, the maximum LTV ratio should be lowered from 70% to 60%, but the maximum loan amount should be capped at HKD$6 million;

    (iii) for residential properties valued below HKD$8 million, the maximum LTV ratio should be maintained at 70%, but the maximum loan amount should be capped at HKD$4.8 million; and

    (iv) for all non-owner-occupied residential properties, all properties held by companies and all industrial/commercial properties, the maximum LTV ratio should be lowered to 50%, regardless of property values.

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