China's Tightening Ends: Notable Monetary Conditions Loosening Seen In March Money And Credit Data
And just in time to follow up on our previous post about the Chinese real estate bubble pop which speculated that PBoC tightening is over, here comes Goldman confirming that the tightening in the world's fastest growing economy is now over. To wit, from Yu Song Helen Qiao: "There was a clear loosening of monetary conditions in March, despite possible distortions to March monetary data because of various end-of-the-quarter examinations at commercial banks. This loosening of monetary conditions was contributed by a combination of i) more bank lending; ii) change to fiscal deposits; and iii) more FX inflows." So China, which is about to report 5.4% CPI (per a Phoenix TV leak, more shortly) is willing to take the political risk of loosening even as it has been working hard to suppress the Jasmine revolution. And yet people still believe the Fed will not recommence loosening (and with ZIRP that leaves only acronym option) as soon as the marginal credit bubble pops heard around the world (not to mention the supply chain effects from Japan crunch US margins) resonate until they hit the US ten-fold. On the other hand a Chinese loosening, no matter the political risks, is possibly Bernanke's last ditch attempt to export marginal money printing, together with Japan which will soon find that another round of QE is inevitable. Alas, with Europe tightening, the US will be the marginal variable yet again. Just like in China, Expect a few month break between QE2 and QE3 at best.
1) In terms of bank lending, because the controls on bank lending were very effective in February, the actual amount of lending was probably below what was intended by policy makers, which highlights the fact that although monetary authorities have a significant level of influence on bank lending, the control is not perfect. This lower-than-expected amount of lending in February probably prompted policy makers to tolerate a higher level of lending in March. The amount of lending in 1Q2011 of Rmb2.24 trillion might have been in line with their overall expectations set at the beginning of the year, but this nevertheless implied an incremental loosening from February to March.
2) The level of fiscal deposits fell by Rmb231 billion in March, after rising by Rmb338 billion in February 2011. This is much larger than the Rmb33 billion fall in March 2010, which contributed to an increase in M2 as these deposits are excluded from M2. We do not yet know if this larger-than-usual fall was contributed by a fall in government revenue or increase in expenditure as the Ministry of Finance has not released March fiscal data. Both causes are possible because i) part of the reason for the strong government revenue growth in January-February 2011 was the collection of overdue 2010 taxes which was one off; and ii) expenditure growth might had been slow in the first two months of the year due to the difficulties in allocating funds due to the slow start of certain investment projects which may include but not only restricted to social housing projects which have been a key focus of government financing.
3) The amount of CNY used for FX purchases increased to around Rmb400 billion, much higher than the Rmb270 billion in March 2010 and Rmb214 billion in February 2011. The disappearance of the trade deficit in March was one of the reasons but its magnitude is not large enough to explain the rise in FX positions. Other capital flows might have increased after CNY appreciation picked up its pace in the second half of March as reflected in higher expectations for appreciation in the NDF market.
This loosening of monetary conditions tend to boost domestic demand growth which is likely to raise concerns about near-term inflation pressures amid continued strength in exports growth (the latter has maintained sequential growth of 40%+ qoq ann. in 1Q2011). While 1Q2011 overall monetary conditions are still tighter than they were in 4Q2010, we believe further tightening measures should and will be implemented in 2Q2011. The State Council meeting on Wednesday made it clear that the government is still putting control of inflation as the policy priority and, equally importantly, specifically emphasised the importance of using monetary policy tools to achieve that goal which gives us the confidence that inflation will be kept under control. We continue to expect further hikes to interest rates, the reserve requirement ratio, continued relatively rapid appreciation of the currency and quantitative controls to be used in the coming months until there are clearer signs of softening inflation.
- Commercial banks extended Rmb 679.4 billion in loans in March, up from Rmb535.6 billion in loans in February (our forecast: Rmb600 billion, Bloomberg consensus: Rmb600 billion). Outstanding CNY loans grew by 17.9% yoy in March, up from 17.7% yoy in February (our forecast: 17.7% yoy, market consensus: 17.7% yoy). The mom; s.a. ann. growth fell to 10.4%, down from 17.1% in February.
- M2 growth came in at 16.6% yoy, up from 15.7% yoy in February (our forecast: 16.0% yoy, Bloomberg consensus: 15.4% yoy). The mom; s.a. ann. growth rose to 36.3%, up from 12.6% in February.
Well, China's tightening was fun while it lasted... All of 6 months or so.
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