Saturday, January 14, 2012

China news

1)National Financial Work Conference

I have been following news reports of the above conference held more than a week back on the new directions that China may take in the financial sector.

Past Conferences & Outcomes

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.
The conference is held once every 5 years. A brief recount shows the signifcance.
The first conference was held in 1997, in the wake of the Asian financial crisis------  led to a plan to remove billions of dollars in bad debt from the balance sheets of the major banks.
The 2002 meeting led to hastening the reform of those banks----  resulted in the eventual overseas listing of Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
The 3rd 2007 conference led to the establishment of China Investment Corp., the country's sovereign wealth fund.
 From 2006 to 2011-------Banks's NPLs fell to 0.9 % (2011) from 7.1 % (2006);  Banks' overall CAR  increased to 12.3 & (as of Sept 30 2011)  from 7.3% (at the end of 2006).
Recent concluded 2012 Conference
One of the key outcomes of this conference could be the manner in which China policymakers will move towards allowing the free market to set interest rates.
Following three interest rate hikes in 2011, the one-year benchmark deposit rate stands at 3.5 percent, while the loan rate is 6.56 percent, yielding an interest margin of 3.06 percent. These rates are at the moment, all determined by the PBoC and are highly biased by giving a very good margin which is protective of the Big Banks.
That high margin did much to lift banks' total assets to 119 trillion yuan ($18.84 trillion) by the end of last year 2011.
How would China move towards market driven setting of interst rates?
Deposit Insurance
One proposal eyed is deposit insurance---- which would reduce potential default risks and help drive market-oriented interest rate reform for commercial banks.
Once bank interest rates can float freely on a market basis, the interest margin is expected to contract under competition, and it may shrink the bank's profits.
Bankruptcy is normal in a competitive situation, so an insurance system is necessary to protect depositors' assets.
Market forces are expected to play a more important role in fund allocation, and the government's role will be more clearly defined, Premier Wen Jiabao said on the Saturday after the end of the two-day National Financial Work Conference.

Competition would also help SMEs who are the ones suffering most under the tight monetary policies ( after the series of RRR rises last year) get cheaper loans and increase their profit margins.

2) CPI and PPI

Looking at the CPI and PPI Plots U would have noted that China's CPI growth has somewhat moderated at 4.1% yoy , a 15mth low. The PPI plot shows an even more pronounced downward sloping trend for growth, suggesting a possible inprovement in the CPI if producer input price increase continues to abate.
Overall for the year ended 2011, CPI was up 5.4% vs 2010 says NBS.
Remember the CPI target  inflation rate set by Premier Wen was 4%. Many in the local provinces are feeling the pinch of the high inflation and remains high on the agenda of policymakers.

China's CPI

China's PPI

While the overall CP growth is somewhat moderating, food prices remains a prime concern as it forms a massive 1/3 of the CPI basket. Overall Food prices were up 9.1% yoy in Dec. That rise contributed 2.8 percentage points, or more than two-thirds of the general price increase.

China's CPI  Food Components

All Graphics courtesy of China Daily
Food Prices are largely cost driven ----- dependent much on weather conditions (floods etc)  and the agricultural population. In other words supply rather than demand driven.
China policymakers must continue to have policies that favor the agricultural population and promote productivity in grain products as well as animal husbandry.
As China is at an early stage in the economic development path, food will constitute a big portion of the basket but will decline with urbanisation and accompanying income growth.

Lewis Point
Many economists believe China may have already crossed the so-called Lewis turning point, meaning that all excess rural labor has already been absorbed by urban areas and that structurally higher wages -- and inflation -- lay ahead.

Many provincial authorities have rushed to increase minimum wages, in line with central government plans to boost spending power and domestic consumption, despite warnings of tightening labor supply from factory bosses.

High Frequency Economics' Mr Weinberg, estimates non-farm workforce growth of 2-4 per cent a year.

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.

3) Forex Reserves

China's forex reserves unexpectedly declined ---- to $3.18 trillion, down $20.6 billion from the previous quarter.
In breakdown, PBoC data showed that foreign exchange reserves increased by $72.1 billion in October, but decreased by $52.9 billion and $39.76 billion respectively in November and December.

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."