China Wants World To Believe Inflation Jumped By 4.4%, In Line With Shadow Expectations, Fastest Fake Price Growth In Two Years
That China somehow magically pulled a 4.4% inflation number for October out of its hat is not surprising. After all this is precisely the number that the "local market" was expecting as there are no secrets in China, even if the Bloomberg surveyed Keynesian fundamentalists-cum-economists end up being "pleasantly surprised." Yet none of this is at all relevant: now even Credit Suisse's Sean Keane (see below) is openly ridiculing the magic 8-ball that the Chinese department of truth is. The only open question is whether this acceleration in the economy to a two year high will lead to a rate hike. And the answer, as Bank of America says, is no. Which means a whole of nothing is about to happen as a result of this latest non-news which just confirms that China's economy is telegraphed to be overheating at precisely the rate that its politburo has determined is just right.
First, the hilarious observations from Credit Suisse on the random number generator that China's economy is:
It’s worth noting that the local market is now expecting tomorrow’s October inflation print to come in at 4.4% [TD: we have a bingo], above the Bloomberg consensus of 4.0%. As the local Chinese market has a very good track record of correctly “predicting” data before it is officially released the reaction to a 4.4% number may be less of an outlier than it appears. When looking at this data its always worth remembering that somehow China is able to assemble data from around the country at a speed that defeats most better equipped statistical agencies around the world, and it does so across a geographical space many times as large, and with a sample set that should be hundreds of times bigger. How exactly this is done with such remarkable speed (given the lack of electronic payment data) remains a mystery.
All one can do is LOL at this definition of GIGO. And yet this very bullshit is what drives trillions in capital flows around the world based on a fact point that is totally devoid of any factual significance. EMT indeed.
As for whether China will actually hike rates based on this news, the short answer is no. Last night's RRR hike was purely a tightening to placate the US modestly, but more importantly to neutralize 9% of the Fed's QE2 (more below). As for an actual outright rate hike: forget it. BofA's Ting Lu explains:
How about rate hike? Difficult to guess
See more from A framework for data and policy at a confusing time. Frankly speaking, to make calls on rate hikes in the very short term (this week or this month) is extremely speculative. Unlike RRR hikes, which are determined by the PBoC itself, rate hike decisions are made by the premier or vice premiers. Actually, even most senior PBoC officials could have been surprised by the rate hike last month. That’s why we prefer to make rate forecasts for a longer time horizon. By expecting a 3.6% average CPI inflation in 2011, we expect three hikes before end-2011.
But let’s guess anyway: The art of central banking….
In the short term, we believe the art of central banking is more relevant than scientific calculations. Let’s assume CPI inflation in Oct rose to 4.4% [TD: funny how everyone guessed the precise number] from 3.6% in Sep, and if the PBoC hikes rates right after the data release (11 Nov), the market will likely believe the PBoC is not well prepared and lacks confidence. Instead, if we predict a decline (even a small decline) in headline YoY CPI inflation in Nov (released on 11 Dec), then it makes much more sense for the PBoC to hike rates after the release of Nov CPI inflation. Hiking rates when CPI inflation declines shows determination, good preparation and confidence on the part of the PBoC. With a view of inflation numbers for the rest of the year (down a bit in Nov and Dec), we believe the chance of a rate hike in Nov is quite low, while the probability of rate hike in Dec (especially after mid-December) will be significantly higher.
As to last night's 50 bps hike across the board in the Reserve Requirement Ratio, BofA's take is that this is merely an attempt at neutralizing the fast money entering its own economy, by offsetting some of the impact of QE2 (and why not: after all most of China's IPO are done in the US, exporting any capital markets derived inflation to the US - Bernanke welcomes it openly).
Impact on liquidity; further room for RRR hikes
This universal RRR hike will drain about RMB360bn or US$54bn (or 9% of the US$600bn of QE2 if put in perspective). According to the PBoC Governor Zhou Xiaochuan’s speech last Friday, China will build a “pool” to contain money inflow as a result of US’ QE2. With this 50bp hike, RRR will be 18.0% for the big four banks, 16.0% for Minsheng and Merchant, and 15.5% for other banks (smaller for rural credit unions). We believe RRR will continue to be hiked by another 100-150bp before end-2011.
Bottom line: whole lot of noise, absolutely no signal. Which means the idiot market will certainly react violently on this non-news. And judging by the 100 pip swing in the AUDJPY, the idiot market does not disappoint, and continues with the charade.