IS A RATE HIKE(S) COMING DOWN THE PIKE IN CHINA?

Takeaway: No change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth.

SUMMARY BULLETS:

 

  • Chinese home prices continue to get away from the Communist Party’s political agenda and we think we are getting close to seeing Beijing issue a new round of macroprudential tightening measures – with perhaps a better plan for local implementation this time around.
  • Additionally, if the PBOC falls behind the curve with respect to draining liquidity, we think they’ll then be forced to tighten RRRs or potentially worse – hike interest rates – in order to combat what is clearly excessive house price appreciation in the context of China’s plans to accelerate urbanization over the intermediate term (think: affordability).
  • All told, there is no change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth. If you’re looking for a more detailed analysis of China’s pending economic trends and the risks embedded across the country’s banking system, we encourage you to review the hyperlinked research notes at the conclusion of this note.

 

Chinese home prices continue to get away from the Communist Party’s political agenda and we think we are getting close to seeing Beijing issue a new round of macroprudential tightening measures – with perhaps a better plan for local implementation this time around.

 

According to data released by the China Index Academy today, the average price of homes in 100 monitored Chinese cities increased in MAY by +0.8% MoM, in line with the SouFun Holdings data yesterday and down slightly from APR’s +1% MoM pace. Both indices registered a twelfth consecutive MoM gain.

 

From a YoY perspective, the SouFun data showed a +6.9% increase in MAY, up from a +5.3% pace in APR and good for the sixth consecutive YoY increase. Looking to the most bubbly markets, the average home price in the ten major cities including Beijing and Shanghai was CNY 17,202 per square meter in MAY, up +1.1% MoM and +9.7% YoY.

 

IS A RATE HIKE(S) COMING DOWN THE PIKE IN CHINA? - 1

 

Amid these growing asset bubble risks, the PBOC has accelerated its draining of liquidity of late,  but a total of CNY202 billion in central bank bills and repos will mature on the open market this week, representing a significant increase of CNY172 billion from the prior week, and good for the highest weekly maturity amount in the YTD.

 

IS A RATE HIKE(S) COMING DOWN THE PIKE IN CHINA? - 2

 

If the PBOC falls behind the curve with respect to draining liquidity, we think they’ll then be forced to tighten RRRs or potentially worse – hike interest rates – in order to combat what is clearly excessive house price appreciation in the context of China’s plans to accelerate urbanization over the intermediate term (think: affordability).

 

IS A RATE HIKE(S) COMING DOWN THE PIKE IN CHINA? - 4

 

Either or, we suspect that participants in the Chinese iron ore and rebar markets (down -9% and -3.4% MoM, respectively) are increasingly sniffing out what we were out front labeling as 2H13 growth headwinds for the Chinese economy.

 

IS A RATE HIKE(S) COMING DOWN THE PIKE IN CHINA? - 3

 

All told, there is no change to our dour view of China’s TREND-duration growth outlook or the pending bifurcation of FAI and consumption growth. If you’re looking for a more detailed analysis of China’s pending economic trends and the risks embedded across the country’s banking system, we encourage you to review the following research notes. As always, we are available to follow up offline as well.

 

Darius Dale

Senior Analyst

 

  • IS THE RECENT RALLY IN CHINESE EQUITIES SUSTAINABLE? (5/17): We do not think the recent strength in the Chinese equity market is sustainable, as China’s 2H13 growth outlook appears dicey at best.
  • WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? (5/8): Chinese firms are goosing exports to drive incremental liquidity into the banking system – a phenomenon that appears set to slow from here.
  • TWO CHINAS? (5/1): Financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy.
  • REPLAY: Will China Break? (4/30): The Party’s use of state owned banks to drive economic growth through fixed asset investment has left the financial system loaded with bad assets.  The bad assets mirror bad investments in the real economy.  They also can limit the ability of Chinese banks to make new loans.  Following the financial crisis, the Chinese government pushed too hard on the FAI growth lever, building infrastructure projects “for the next 10 years.” It has also left the banking sector choked with bad debts that may limit future lending.  Those factors should slow Chinese FAI growth and slower Chinese FAI growth should be negative for commodity prices and resource-related profits, all else equal.
  • CAN CHINA AVOID FINANCIAL CRISIS? (4/26): The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.
  • REPLAY: EMERGING MARKET CRISES (4/23): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. China is particularly vulnerable to experiencing a financial crisis.
  • IS CHINA CAREENING TOWARDS FINANCIAL CRISIS? (3/28): Systemic risks are present across China’s financial sector – as is the political will and fiscal firepower needed to avert a crisis.

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