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.


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