Shanghai Strategic Plan in the Next 10 Years

There is a Chinese saying: To know Shanghai today is to know China tomorrow. China continues its ambitious efforts to build Shanghai as a world city and an international financial centre by the year 2020.

Subscribe or Follow Mr China

Recently we, Mr China, see a trend of increasing number of readers subscribed to get our free email updates through RSS (Really Simple Syndication) feed. This is really a good

Financial Review 2011 Q1: Rising Inflation Concerns

You may still remember our article Financial Review 2010: where had all the Hot Money gone which concerned local China news and some other important international news last year. Since we have gained great success

First RMB IPO (Hui Xian REIT Stock Code 87001.hk) Analysis

Recently we have received a few email queries from our readers after we discussed about Hui Xian REIT (stock code: 87001.hk), the first Renminbi (RMB, CNY, or Yuan) Initial Public Offering (IPO) in Hong Kong, in our previous article

How to Invest in RMB Securities Outside China

The time is now ripe for Renminbi (RMB, CNY, or Yuan) securities in Hong Kong, outside the mainland China.

Investment Guide for 12th 5-Year Plan

Needless to emphasize, China's 12th 5-Year Plan must be your investment bible in these five years. That is why we have published quite a number of articles beforehand to outline the main points of this plan to you. However, how should investors wisely respond and make decisions in face of the 12th 5-Year Plan?

Top 10 Focus Areas for Chinese Government in this Year

You may remember that in our earlier article: Chinese Government Key Targets and Work Plan for 2011, we introduced that Chinese premier Wen Jiabao has pointed out his "2011 Top 10 Focus Areas" following the Government Work Plan in his Government Work Report which was released on 5 March 2011. These 2011 Top 10 Focus Areas are now summarized as follow:

5 Key Methods to Curb China Inflation

China CPI (Consumer Price Index) has stayed at a high level of +4.9% YoY in both January and February this year. As the inflationary pressure remains high, China premier Wen Jiabao mentioned in his Government Work Report released on 5 March 2011 that there are top 10 focus areas

Chinese Government Key Targets and Work Plan for this Year

In our previous article China's 12th 5-Year Plan and Government Work Report, we mentioned that Chinese premier Wen Jiabao has outlined his Work Plan for 2011 following the 12th 5-Year Plan in his Government Work Report that released on 5 March 2011. While the 12th 5-Year Plan is only the initial part (Part I) of the Government Work Report, we are now going to introduce

12th 5-Year Plan and Government Work Report

China, as a country adopted to planned economy, is used to establishing plan for its entire country every 5-year since 1953. The latest one, which has been recently delivered on 5 March 2011 by China premier Wen Jiabao to the National People's Congress (NPC) along with his Government Work Report (also called the "Report on the Work of the Government"), is the 12th 5-Year Plan (or called "Twelve Five-Year Plan") in Chinese history and is to be effective

Internal Auditing for Quality Control

Here let us brief our internal audit system for website quality control.

Today, we write to response to a smart reader who wrote by email to ask us why there was a sudden statement "Written by: Independent Internal Audit (IIA) Team" at the end of our article An Important 2010 Internal Review for you. We promised to simply call him Mr. W, not to disclose

Beijing Restricts Foreign Property Purchases

On 15 February 2011, Beijing local government approved the so-called "Beijing 15 Articles" which restricts property purchases by foreigners. Home purchases of non-permanent residents who cannot provide tax proofs or social insurance contributions for a continuous 5-year period are now totally banned in Beijing.

Shanghai Property Tax Freezes Purchases and Boosts Rents

China's commercial capital Shanghai and the southwestern SiChuan megalopolis of Chongqing became the first in China to begin a pilot program that imposes residential property taxes starting from 28 January 2011. However, instead of reducing pressure on rising property prices, it seems the property taxes can just

How New National Eight can Cool China Property Market

On 26 January 2011, China Premier Wen Jiabao chaired a State Council executive meeting and confirmed eight new key measures to cool the China property market (the so-called "New National Eight Articles", or simply "New National Eight" or "New State Eight") amidst inflation pressure. The eight key measures are now summarized as below:

HKD Weakens as Refuge for Capitals Fades

Perhaps we have enough discussions about renminbi (RMB) recently. Today we want to switch our focus to the weakening Hong Kong Dollar (HKD) as refuge for capitals fades.

Wish your Investments Achieve Better Returns in the New Chinese Year

Today is the first day of this new Lunar year, and hence marks the beginning of this new Chinese calendar year.

Gong Xi Fa Cai (in chinese: 恭喜发财)!

We, Mr China, wish you a Happy Chinese New Year! This year is going to be propitious

Financial Review 2010: where had all the Hot Money gone

As mentioned in our first article Big Day of Mr China, one of the purposes of our site is to dictate the rapidly changing economy in China.

Chinese Bank Declares RMB Business War Around the World

China continues to expand the global reach of renminbi RMB (also called CNY, or simply Yuan) amidst allowing direct RMB trading in Russia.

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.

Direct RMB Trading in Russia

China has taken an important and symbolic step in renminbi RMB (also called CNY, or simply Yuan) internationalization, a move that in the long term can make the USD less relevant to businesses between the two countries.

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.

Merry X'mas and Happy New Year

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

Although this greeting

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.

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.

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.


Remark:

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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2011 Trade Balance Target

We, Mr China, release our own China global trade balance target as USD$192.1 billion in the year

Inflation Warning

We, Mr China, issue our first inflation warning for China in this site.

On 3 Nov 2010, the US Federal Reserve decided to print an additional USD$600 billion dollars by mid 2011 against the possible risks of slow economic recovery, continued unemployment, and also domestic deflation.

Together with the US Federal Reserve's previous decision to re-invest principal from current holdings of agency debt as well as agency Mortgage-Backed Securities (MBS) since 10 August 2010 by restarting purchase of the longer-term government bonds that originally intended to avoid the upward pressure on longer-term interest rates which might result if those holdings were allowed to decline, this so-called QE2 (Second Round of Quantitative Easing) package will print up to a total amount of USD$900 billion dollars and will eventually increase the inflation pressure to a warning level here in China.

According to the US Federal Reserve, since the decision on 10 August 2010 to begin re-investing principal from such current holdings, asset purchases were concentrated on US government bonds with maturities of 2 to 10 years, though some shorter-term or longer-term securities were also purchased along with some Treasury inflation-protected securities (TIPS).

While asset purchases would continue to be concentrated on US government bonds with remaining maturities between 2 and 10 years, newly purchased government bonds would be expected to have a duration of 5 to 6 years on average. The additional USD$600 billion asset purchase of longer-term government bonds by the end of the second quarter of 2011 would be processed at a pace of around USD$75 billion per month in order to avoid disruptions in normal market functioning.

In fact, Ben Bernanke, Chairman of the US Federal Reserve, already gave hopes for additional rescue to the market earlier on 21 July 2010 by starting to describe US economic outlook as "unusually uncertain".

Since then, the market already expected that there would be some kinds of easing policy to be released by the Fed, and just not sure about the amount of money it would involve. Now the QE2 policy has come out, and it seems there are even more questions remain unanswered.

The main uncertainties are, of course, that whether the QE2 can really boost the US economic recovery, improve the employment market situation and also get rid of the possible deflation. In a broader view outside the US, people are also wondering how serious the QE2 will impact the rest of the world, especially for the emerging markets that have inflationary pressure already reached or going to reach their warning levels.

We believe, however, the key of success for QE2 is whether US can find ways to effectively keep hot money inside its own country.

Japan is a good real example - money kept flowing out through carry trade and therefore failed to create domestic inflation expectation.

We trust that, unavoidably, hot money will continue to flow into emerging markets including China.

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. If the action of the Chinese Central Bank is not quick enough, certainly we will have to lift up our 2011 CPI target.

That is why we have to issue this urgent inflation warning.


Related article(s):
2011 CPI target
2011 GDP target
Setting our own targets

About us

Who is Mr China?

We are a Chinese economy expert team formed by a group of volunteers.

We provide, in particular, an independent commentary on China financial markets in both Shanghai and Hong Kong.