Much of the commentary following China’s announcement of an11.9 per cent GDP growth rate for the first quarter of this year has dwelt on the spectre of dangerous overheating. However, alternative readings support the thesis that a cooling process is already underway.
A China Confidential survey of 50 auto dealerships in more than 10 cities across the country shows that new vehicle orders, especially for smaller models with less than 1.6 litres in capacity, were down considerably in the first half of April from the 71.78 per cent year-on-year sales growth recorded in the first three months.
The cooling of the auto market, if it persists for several months, would have a palpable effect on the wider economy because the extraordinary car bonanza of 2009 – when 13.6m vehicles were sold, outpacing the US – was a key catalyst of China’s rebound from the financial crisis. Inventory at dealerships in several parts of the country is now mounting as pent-up demand from last year dissipates and the effects of a tax hike on vehicles smaller than 1.6 litres take their toll, several dealers said.
Incipient trends in the real estate market also challenge the sense of a bubble that is wobbling before it pops. Data compiled from the filings of city land bureaux showed that residential property prices were mixed in different cities in the first half of April, while transaction volumes have moderated in the second half of the month in Beijing, Shanghai and Shenzhen. Such evidence contrasts with the news that home prices rose 11.7 per cent in March, their highest monthly year on year rise since records began in 2005, according to the National Bureau of Statistics.
Meanwhile, land prices – a barometer of the enthusiasm of developers for future projects – fell 31 per cent in 70 cities in March over February, according to the China Land Surveying and Planning Institute. Beijing, however, remains keen on cooling the market further, announcing this month that it will boost the area of land supplied for residential development or redevelopment this year to 180,000 hectares, up 135 per cent from last year.
The biggest source of concern for bears such as Jim Chanos, a US hedge fund manager who declared at the start of this year that China was “Dubai times 1,000”, has been the pace of new lending by Chinese banks. Not only has this pace eased from the frenetic levels of 2009, but real constraints on credit expansion loom.
The first of these is that the China Banking Regulatory Commission (CBRC) appears set for now on enforcing a de-facto capital adequacy ratio (CAR) of 11.5 per cent, forcing the “big three” state-owned banks to seek upto around Rmb270bn from capital markets this year, while other smaller banks are likely to try and raise roughly a further Rmb300bn. Without these infusions to their capital bases, banks may slip below the CAR requirement and be constrained from lending. Yet it is far from certain that capital markets can satisfy such a high demand for capital this year.
Another credit constraint comes in the form of deposits. With the one-year benchmark 2.25 per cent deposit rate falling below consumer price inflation for two consecutive months, deposit growth is decelerating, prompting concerns that Chinese banks may start to risk losing a safe level of deposit cover for their lending.
These constraints make it unlikely that China will see anything approaching a repeat of 2009’s Rmb9,600bn splurge in lending. In fact, if the CBRC maintains its currently stringent attitudes, new loans may fail to reach the consensus forecast of between Rmb7,000bn and Rmb7,500bn in this year. In March, local currency loans were Rmb511bn, down sharply from Rmb700bn in February and Rmb1,400bn in January.
Inflation remains a source of overheating concerns, but here too the prices of consumer goods show a somewhat moderating trend. The consumer price index, a leading measure of inflation, rose 2.4 per cent year on year in March but the all-important month-on-month reading fell back 0.7 per cent in March compared to February.
The respite here may be only temporary, however, as rising producer prices convince many analysts that inflation has become structural in nature and may well stage a resurgence later this year. The producer price index, an indicator of industrial input prices, rose 5.9 per cent year on year in March, up 0.5 per cent month on month.
Though it is too early to call time on Beijing’s battle to tame its hot economy this year and forestall overheating, several trends suggest that the outlook for the second quarter is one in which cooling forms the dominant direction. This does not mean that the People’s Bank of China, the central bank, will avoid raising interest rates during the quarter but it does suggest that any monetary tightening that takes place may be rather mild in nature.
A China Confidential survey of 50 auto dealerships in more than 10 cities across the country shows that new vehicle orders, especially for smaller models with less than 1.6 litres in capacity, were down considerably in the first half of April from the 71.78 per cent year-on-year sales growth recorded in the first three months.
The cooling of the auto market, if it persists for several months, would have a palpable effect on the wider economy because the extraordinary car bonanza of 2009 – when 13.6m vehicles were sold, outpacing the US – was a key catalyst of China’s rebound from the financial crisis. Inventory at dealerships in several parts of the country is now mounting as pent-up demand from last year dissipates and the effects of a tax hike on vehicles smaller than 1.6 litres take their toll, several dealers said.
Incipient trends in the real estate market also challenge the sense of a bubble that is wobbling before it pops. Data compiled from the filings of city land bureaux showed that residential property prices were mixed in different cities in the first half of April, while transaction volumes have moderated in the second half of the month in Beijing, Shanghai and Shenzhen. Such evidence contrasts with the news that home prices rose 11.7 per cent in March, their highest monthly year on year rise since records began in 2005, according to the National Bureau of Statistics.
Meanwhile, land prices – a barometer of the enthusiasm of developers for future projects – fell 31 per cent in 70 cities in March over February, according to the China Land Surveying and Planning Institute. Beijing, however, remains keen on cooling the market further, announcing this month that it will boost the area of land supplied for residential development or redevelopment this year to 180,000 hectares, up 135 per cent from last year.
The biggest source of concern for bears such as Jim Chanos, a US hedge fund manager who declared at the start of this year that China was “Dubai times 1,000”, has been the pace of new lending by Chinese banks. Not only has this pace eased from the frenetic levels of 2009, but real constraints on credit expansion loom.
The first of these is that the China Banking Regulatory Commission (CBRC) appears set for now on enforcing a de-facto capital adequacy ratio (CAR) of 11.5 per cent, forcing the “big three” state-owned banks to seek upto around Rmb270bn from capital markets this year, while other smaller banks are likely to try and raise roughly a further Rmb300bn. Without these infusions to their capital bases, banks may slip below the CAR requirement and be constrained from lending. Yet it is far from certain that capital markets can satisfy such a high demand for capital this year.
Another credit constraint comes in the form of deposits. With the one-year benchmark 2.25 per cent deposit rate falling below consumer price inflation for two consecutive months, deposit growth is decelerating, prompting concerns that Chinese banks may start to risk losing a safe level of deposit cover for their lending.
These constraints make it unlikely that China will see anything approaching a repeat of 2009’s Rmb9,600bn splurge in lending. In fact, if the CBRC maintains its currently stringent attitudes, new loans may fail to reach the consensus forecast of between Rmb7,000bn and Rmb7,500bn in this year. In March, local currency loans were Rmb511bn, down sharply from Rmb700bn in February and Rmb1,400bn in January.
Inflation remains a source of overheating concerns, but here too the prices of consumer goods show a somewhat moderating trend. The consumer price index, a leading measure of inflation, rose 2.4 per cent year on year in March but the all-important month-on-month reading fell back 0.7 per cent in March compared to February.
The respite here may be only temporary, however, as rising producer prices convince many analysts that inflation has become structural in nature and may well stage a resurgence later this year. The producer price index, an indicator of industrial input prices, rose 5.9 per cent year on year in March, up 0.5 per cent month on month.
Though it is too early to call time on Beijing’s battle to tame its hot economy this year and forestall overheating, several trends suggest that the outlook for the second quarter is one in which cooling forms the dominant direction. This does not mean that the People’s Bank of China, the central bank, will avoid raising interest rates during the quarter but it does suggest that any monetary tightening that takes place may be rather mild in nature.
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