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China may lower rates as inflation stabilises


Scott Murdoch

China Correspondent

China CPI breakdown Source: TheAustralian
CHINA’S volatile inflation rate remained steady during July, raising the prospect that the central bank could ease monetary policy if the economy moderates.

The National Bureau of Statistics revealed on the weekend that the consumer price index increased by 2.3 per cent last month, compared to the same time last year.

The result matched June’s reading and met the consensus of the financial markets. Producer prices during July fell by 0.9 per cent in the 29th consecutive monthly decline, prompting concerns about deflationary risks for the Chinese economy.

The inflation results came one day after it was revealed China achieved a record trade surplus during July after an unexpected surge.

The surplus hit $US47.3 billion ($51bn), almost double the level of just one month earlier.

ANZ’s chief China economist Liu Li-Gang said the modest inflation result meant it was likely that the People’s Bank of China would prefer ‘‘accommodative’’ monetary policy settings to maintain economic growth.

The Chinese government has set a 7.5 per cent growth target for 2014.

“China’s inflation outlook remains mild. However, the deflation risks may even rise in the foreseeable future if the growth momentum weakens again,” Mr Liu said.

“The central bank should maintain an accommodative bias in its monetary policy stance.”

The PBoC recently ordered the reserve requirement ratio, the level of capital banks must hold, be cut for provincial banks and institutions that lend to the small business sector.

Before the inflation result was published, Nomura economists said the healthy trade balance could prevent the PBoC from easing monetary conditions in the next few months.

“We expect the government to maintain a loose (monetary) policy stance, the record high trade surplus and the increase in external demand raises doubts over the extent of a further policy easing in the third quarter,” the bank said.

China’s inflation rate is notoriously volatile and has almost halved since hitting a peak of 4.5 per cent in January 2012. Food makes up the largest component of the CPI measure, and prices of the most popular items have stabilised over the past few months.

The Asian powerhouse’s economic growth has slowed from double-digit rates as recently as 2010 to 7.4 per cent in the first half of this year. Some economists think the official figures overstate growth, and that the true rate may be even lower.

A once-booming housing market has slumped, with prices down 0.8 per cent in July from a month earlier, according to a private-sector data provider, the China Real Estate Index System.

In an effort to bolster the economy, the government has this year stepped up spending on infrastructure and social housing and introduced tax breaks and preferential lending policies for small businesses.

Monetary policy has stayed loose across the board, with well over 1 trillion yuan ($175bn) of new credit flowing into the economy each month. Total private and public debt is now at least 200 per cent of gross domestic product, according to economists’ estimates. That constrains monetary policy, even if inflation remains subdued.

“Inflation these days is OK,” said Larry Hu, an economist at Macquarie Group. “But the accumulation of debt today will become a problem down the road.”

The producer-price index, which tracks the prices paid to companies at the factory gate, has been stuck in deflation for more than two years, thanks to a combination of falling prices for raw materials and excess capacity in many Chinese industries. “The overcapacity problem is still there, but it’s easing a bit,” said Mr Hu. “Companies are getting some pricing power back.”

Additional reporting: The Wall Street Journal
China lifts industrial output by 9pc
AFP AUGUST 13, 2014 3:49PM

CHINA’S industrial production, which measures output at factories, workshops and mines in the world’s second-largest economy, rose 9 per cent year-on-year in July, the government announced today.

Retail sales, a key indicator of consumer spending, increased 12.2 per cent in the same month, the National Bureau of Statistics said, while fixed asset investment, a measure of government spending on infrastructure, rose 17 per cent on-year in the first seven months.

The results came after China’s economy grew a stronger-than-expected 7.5 per cent in the April-June quarter, accelerating from 7.4 per cent during the first three months of the year, which was the worst since a similar expansion in July-September 2012.

The improvement came after authorities in April began introducing steps to shore up the economy in the form of tax breaks for small enterprises, targeted infrastructure outlays and lending incentives in rural areas and for small companies. The measures have been dubbed “mini-stimulus” by some economists.

China in March set its annual growth target for 2014 at about 7.5 per cent, the same objective as last year. China’s economy grew 7.7 per cent in 2013, matching 2012’s result, which was the worst since 1999
China tipped to boost stimulus amid credit slump


China tipped to boost stimulus amid credit slump
China’s property slump and dangers from rising bad loans are making it tougher for Premier Li Keqiang to sustain the fastest growth in the Group of 20 nations. Photo: Bloomberg
Angus Grigg | Speculation surges after surprise China data
China’s plunge in credit expansion last month and unexpected slowdown in investment spending flashed warnings on growth that investors and economists bet will spur policy makers to expand stimulus.

Chinese stocks closed higher on Wednesday on speculation the government will take steps to support its 7.5 per cent expansion target, after initially falling when the People’s Bank of China reported the lowest level for its broad financing measure since 2008. Barclays Plc is forecasting two second-half interest-rate cuts, while Australia & New Zealand Banking Group Ltd. said a reduction in banks’ reserve requirements is imminent.

A property slump and dangers from rising bad loans are making it tougher for Premier Li Keqiang to sustain the fastest growth in the Group of 20 nations. Any stimulus would build on measures this year to expedite railway spending, free up money for loans for small businesses and channel funds toward building low-income housing.

“The top concern right now is to make sure the economy can be reasonably smooth in its growth, rather than controlling the risks,” said Li Daokui, a former PBOC academic adviser who’s a professor at Tsinghua University in Beijing.

The benchmark Shanghai Composite Index of stocks fell 0.3 per cent on Thursday morning AEDT, after dropping as much as 0.9 per cent on Wednesday following the credit numbers. The Hang Seng China Enterprises Index jumped 1.2 per cent, rebounding from a drop of as much as 0.5 per cent.

Aggregate financing was 273.1 billion yuan ($US44.4 billion) in July, the central bank said yesterday, contrasting with a Bloomberg LP gauge that showed China loosened monetary conditions last quarter at the fastest pace in almost two years. The PBOC measure includes bank loans, corporate bonds and shadow-finance categories such as entrusted loans.

The credit number compared with the 1.5 trillion yuan median estimate of economists, while new local-currency loans of 385.2 billion yuan were half of projections. M2 money supply grew a less-than-anticipated 13.5 per cent from a year earlier.

“It is important for both monetary and fiscal policy easing to continue in the coming months,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in an e-mail.

Tools include programs such as pledged supplementary lending that can direct credit to the economy, cuts in reserve requirements or interest rates, and fiscal spending on railways and affordable housing, Shen said.

Fixed-asset investment excluding rural households expanded 17 per cent in the January-July period from a year earlier, the statistics bureau said yesterday, compared with a median estimate for 17.4 per cent expansion. Industrial production rose 9 per cent in July from a year earlier, slowing from a 9.2 per cent pace in June and also missing projections, while a decline in property sales accelerated in July.

Other pressures on growth mean the government and the central bank “are unwilling to allow a full credit unwind now,” George Magnus, a senior independent economic adviser to UBS AG in London, said in an e-mail. “The property market is in a structural fade, and the anti-corruption campaign is in full swing with no signs of an end.”

Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, said July’s credit number is “just a single-month blip, not a fundamental change in direction.” The increase in money supply is outpacing nominal gross domestic product growth by four or five per centage points, helping to support the economy, Ding said.

New yuan loans have been running at 30 billion yuan to 50 billion yuan a day in the first 10 days of August, the PBOC said in a statement on its website. The direction of monetary policy isn’t changing and major financial indicators in July remained in a reasonable range, the central bank said.

“Money supply, credit and aggregate financing are expected to maintain stable growth in the future,” the PBOC said.

The PBOC’s decision to issue a statement suggested that it was concerned the data would spark a “market panic,” Liu Li-Gang, ANZ’s chief Greater China economist in Hong Kong, said yesterday.

Without a quick policy response, “probably all economic indicators will deteriorate, the property sector will face more downward pressure, investment will drop further and third-quarter GDP could fall to probably around 5 per cent,” he said.

Chinese publications reported last month that the PBOC extended a 1 trillion yuan, three-year loan to a state development bank under the pledged supplementary lending program to support government-backed housing projects.

“The softer July activity and credit data suggests that mini-stimulus measures will remain in place,” Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney, said in an e-mail. “We may even see more growth-boosting measures in the months ahead.”

The Australian Financial Review
After 10 days investigating wayward provinces, the teams submitted a 1,000-page report with a simple conclusion: local leaders, looking out for their own financial interests, were consistently ignoring directives from Beijing

The Enforcers Beijing Uses to Keep Local Leaders in Line
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China's power consumption slows in July
PETER CAI AUGUST 15, 2014 12:00PM

Chinese electricity consumption has slowed to a three per cent increase in July, marking the lowest growth rate in 16 months and a further sign of significant downward pressure on the world’s second largest economy.

Electricity consumption is an important gauge of economic activity in China and had been growing at 4.9 per cent for the first seven months of 2014.

Chinese industry accounts for 70 per cent of overall electricity consumption in the country and high energy intense sectors are responsible for 50 per cent of the total industrial electricity consumption.

Industrial consumption only increased 2.9 per cent in July compared with 5.1 per cent in June.

A slew of surprisingly bad data has sparked speculation that Beijing could unleash a stronger easing policy in the second half of the year to support growth.
The biggest global impact of the crackdown will be felt in real estate. Chinese buyers have buoyed property markets from Sydney to Vancouver to London. Given the high prices of the homes involved, the buyers are certainly moving more than $50,000 out of the country.

Leaky Borders: China Cracks Down on Wealthy Moving Cash Abroad
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Investment into China slumps in July
AAP AUGUST 18, 2014 2:45PM

Foreign direct investment (FDI) into China dropped by more than a sixth year-on-year in July, the government says but it denies any link to Beijing's multiple probes into foreign companies.

FDI -- which excludes investment in financial sectors -- fell 16.95 per cent in the month to $US7.81 billion ($A8.45 billion), the commerce ministry said.

The fall saw FDI in the first seven months decline 0.35 per cent to $US71.14 billion ($A76.97 billion), eliminating a small increase at the half-year stage.

Chinese authorities have in recent months launched anti-monopoly, pricing and other inquiries into foreign companies in sectors ranging from auto manufacturing and pharmaceuticals to baby milk.

The probes have raised concerns among investors that Beijing is targeting overseas companies.

But commerce ministry spokesman Shen Danyang denied any connection between the investigations and the fall in FDI.

"It is only normal that there is volatility of FDI in individual months when China steps up efforts to balance the economic structure," he told reporters.

"It is not sufficient enough to reflect the general trend. It must not be linked to the anti-monopoly probes into some foreign invested companies or be associated with other baseless speculations."

"All market players should operate their business according to the law," he added. "They should be punished according to the law and be subject to appropriate legal penalties if they violate the law."

In the first seven months of the year, investment from Japan crashed 45.4 per cent to $US2.83 billion ($A3.06 billion), with that from the EU slumping 17.5 per cent to $US3.83 billion ($A4.14 billion) and from the US down a similar 17.4 per cent to $US1.81 billion ($A1.96 billion).

But investment from South Korea -- which has been enjoying closer diplomatic ties with China -- rose 34.6 per cent to $US2.92 billion ($A3.16 billion), and from Britain, the home of troubled pharmaceutical giant GSK, soared 61.2 per cent to $US730 million ($A789.83 million).

China's own overseas investment in non-financial sectors leaped 84.9 per cent year-on-year in July, to $US9.21 billion ($A9.96 billion), the ministry said.

For the first seven months of the year it was up 4.0 per cent to $US52.55 billion ($A56.86 billion).

"This is the first growth since February this year, after the impact of big projects last year waned," the ministry said.

Chinese investment into the EU leaped by 293.1 per cent year-on-year for the period, and into Japan by 160.9 per cent, the ministry said, without giving totals.

Investment into the US was up 12.8 per cent to $US2.82 billion ($A3.05 billion).

China's economy expanded 7.7 per cent in 2013, the same as 2012 -- the worst pace since 7.6 per cent in 1999.

Beijing's official growth target for this year is 7.5 per cent, also the same as last year's.

Gross domestic product grew 7.4 per cent in the first half of this year.
China seeks to rein in executive pay at state-controlled companies
DOW JONES AUGUST 19, 2014 11:15AM

China said it will curb executive pay and perks at major state-controlled companies as part of an austerity program intended to curb government largess.

The official Xinhua News Agency said Monday that President Xi Jinping called for the government to more tightly regulate executive salaries at state-owned enterprises and to make adjustment for "unreasonably high" compensation. He also called on SOEs to rein in other compensation such as spending on cars and accommodations, Xinhua said.

The report didn't provide further details on how the effort would be carried out. It said Mr. Xi was addressing a committee of officials focused on economic reform.

Beijing has been cracking down on state extravagance as part of an anti-corruption campaign carried out under Mr. Xi. Communist Party leaders have acknowledged that perceptions of corruption threaten their grip on power. The austerity program has targeted everything from official cars to lavish banquets to delicacies such as shark fins and bird nests.

The anti-corruption campaign in recent months has focused on SOEs, which dominate crucial sectors of the economy such as energy and resources. Last year, anti-corruption officials focused on top executives at state-run China National Petroleum Corp., accusing them of "severe disciplinary violations"--words typically used by Chinese officials when investigating corruption cases. The executives haven't been available for comment.

Earlier this year, Chinese officials removed Song Lin, then chairman of conglomerate China Resources, after accusing him of unspecified "suspected serious violations of discipline and law." Mr. Song, who has also been unavailable, earlier called accusations against him in the local media of abuse of power groundless.
Fears mount as China manufacturing activity slows

ACTIVITY in China’s manufacturing sector hit a three-month low in August, according to a private survey.

The HSBC flash China manufacturing purchasing managers’ index (PMI) fell to 50.3, a moderate drop from 51.7 in July and below expectations of a print of 51.5.

The indicator is a closely watched gauge of the health of the Asian economic powerhouse and key driver of global growth.

A reading above 50 on the survey points to expansion, while a reading below 50 indicates contraction.

HSBC chief China economist Hongbin Qu said both domestic and external new orders rose at slower rates compared with the previous month.

“Meanwhile, disinflationary pressure returned as input and output prices contracted over the month,” he said.

Mr Qu said the data suggested the country’s economic recovery was still continuing but its momentum had slowed again.

“Therefore, industrial demand and investment activity growth will likely stay on a relatively subdued path,” he said.

Mr Qu said more policy support was needed to help consolidate the recovery.

“Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity,” he said.

China’s economic growth accelerated to a higher-than-expected 7.5 per cent in the second quarter, up from 7.4 per cent in the previous three months, which was the worst since a similar 7.4 per cent expansion in July-September 2012.

But concerns remain over whether the rebound can be sustained in the face of an unruly slowdown in the housing market and risks in the banking sector.

With AFP
China under pressure to cut rates

Scott Murdoch

China Correspondent

Monthly overall credit Source: TheAustralian
CHINA could be forced to cut ­interest rates in the next few months to kickstart the economy and ensure the country reaches its official growth target this year.

The People’s Bank of China has already ordered Reserve Requirement Ratio reductions, the level of capital banks must hold, for provincial banks and financial institutions that lend primarily to the agricultural sector.

However, HSBC chief China economist Qu Hongbin believes the central bank could be forced to cut the official cash rate to ­ensure that China’s volatile economy remains on track to reach its growth objective this year.

The Xi Jinping administration has put in place a 7.5 per cent ­target and it would be the first time in almost two decades that the objective was not hit if China grows below that rate.

The most recent lending data shows demand for credit is falling, which proposes a risk to future economic growth.

New loans during July fell to 385 billion yuan, down more from more than 1 trillion just one month earlier, while aggregate ­financing fell from 2 trillion yuan just 273 billion yuan. “The latest data flow from China suggests that the growth recovery is losing momentum,” Mr Qu said.

“A reflection of the weaker than expected economic activity is sluggish inflation and low ­capacity utilisation. These are all symptoms of a negative output gap.”

The interest rate now stands at 6 per cent, but the PBOC has introduced a range of rates for ­individual sectors of the domestic financial system.

The interbank lending rate, the rate at which banks borrow and lend money to each other and the most closely watched monitor of liquidity, is now at 4.27 per cent.

HSBC estimates that most local government and private sector companies have lending rates between 100 and 300 basis points above the benchmark rate.

“We believe the PBOC needs to lower the borrowing costs for private sector companies; this is an essential ingredient of the ­multiplier effect,” Mr Qu said.

“Given there is such a high-level cost of capital and with the average return on the economy slowing to the economic growth rate of 7.5 per cent, it is easy to understand why most investments are deemed not worth it.

“Companies can’t justify that high cost of capital and they probably also need to use the surplus demand to pay for higher interests on their existing liabilities.”

Concerns over China’s future economic growth were renewed this week when the HSBC Flash Purchasing Manager’s Index, a key barometer of the manufacturing industry, slipped sharply.

The result came in at 50.3 for this month, down from most expectations of at least 51.5. A reading above 50 indicates the sector is expanding.

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