Thursday, January 13, 2011

An Important 2010 Internal Review for you

2010 was an important year for Mr China and our readers. We have our own website begun in 2010 - read more about Big day of Mr China.

2010 was also a difficult year for us. Although we are full of Chinese economy experts, we were new to site marketing at the start. We even did not know how to get our website quickly indexed by search engines like Google, Bing and Yahoo. It was until we solved all the basic site marketing issues then we could go back to concentrate on writing quality contents for our readers.

Congrats especially to those readers who could locate our website in the internet when we just started up. Though our site has not been started for a long time, our 2010 internal review indicates we still can have a few issues that proved to be predicted correctly afterwards.

The first issue was about inflation.

Our article 2011 CPI target in October already wrote:

Although the Chinese government already sets her CPI upper limit as +3% annually, our calculated target indicates that this upper limit will no longer be met in 2011. The main reasons are ..... the delayed action of the Chinese central bank who decided not to increase any interest rate against inflation before 19 October 2010. Here in real China, even normal people could start to feel the pressure of inflation since early 2010. This situation was, however, already reflected in CPI figure which started to go over +3% YoY in mid 2010 but the Chinese central bank still delayed until 19 October 2010 to increase the domestic interest rate by 0.25%.

At the time our article was issued, many analysts and even some Chinese officials predicted that CPI might had already peaked at +3.6% YoY in September 2010, price pressures would ease later this year and so their annual CPI target of +3% might still meet.

It was obviously not true. After that, as you may also know, our view was widely supported in the mainland China and criticisms for the delayed action of the Chinese central bank led to further tightening measures, after the public realized later in November that the October CPI climbed up rapidly to +4.4% YoY.

In fact, the market always consider starting to raise interest rates as a key signal of the end the loose monetary policy, and the delayed action to confirm this signal to the market was clearly escalating the risk of asset bubbles forming. Delay in raising interest rates until October was indeed too late as we believe the inflationary risk was already confirmed on 11 Jun 2010, when China reported CPI in May breached the +3% level.

The second issue was about inflation expectation.

Our article inflation warning, which was issued immediately after the US so-called QE2 (Quantitative Easing), already stated in early November:

Our existing China CPI target of +3.5% in 2011 basically assumed that the Chinese Central Bank would quickly react to the impact of this QE2.

Fortunately our assumption, at least, was correct. After that, as you may also know, the Chinese central bank did react quickly to lift up the reserve proportion on bank deposits by 0.5% for 3 times to 18.5% since November in order to mop up excess liquidity in the monetary system.

On 17 November 2010, the China premier Wen Jiabao also further confirmed the direction of administrative tightening measures by taking temporary price controls for consumer staples and food items into consideration to ensure price stability.

Both actions clearly intended to compensate for the inflation expectation driven by the hot money effect of QE2.

The final issue was about interest rates.

Our article No more loose monetary policy already wrote:

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.

On 25 December 2010, the Chinese central bank really raised domestic interest rates by 0.25%. It was the second increase in interest rates in 2010, however, we expect this trend will continue in 2011. Read more about our article: More interest rate hikes against inflation in 2011.

People may wonder why we are so concerned about accuracy of our predictions. It is not simply because we want to promote our site but, most importantly, we care about our accuracy as we truly do not want to give false investment signals to our readers.

For the year to come, Mr China will continue to provide first-hand and 100% original source information about the real Chinese economy for all of you.

Written by:
Independent Internal Audit (IIA) Team

Next article (for 2011): Important 2011 Internal Review

More Internal Review Article(s): Table of All our Internal Review Reports


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