Top News of the Week
First Mention of Price Stability in Central Bank Report in More than a Year
In a quarterly economic report posted on the website last Friday, the central bank listed "maintaining price stability" as one of its main goals in the coming months. This is the first time in over a year that the central bank touched on this topic in the closely followed report, indicating a subtle shift in its main focus as China now tackles a set of challenges vastly different from last year's. Analysts have taken this to mean that the likelihood of interest rate hikes is on the rise.
Statistics from the central bank show that inflationary worries are not overblown. In a sign that the economy is overheating, industrial output gap (measured by the central bank) widened to 3.06% in March, the highest point since 1998, after expanding for seven consecutive months. Moreover, the central bank report pointed to a 12.2% sequential growth in the Chinese GDP in the first quarter of 2010, on a seasonally adjusted annualised basis. The national bureau of statistics last week reported that the Chinese economy grew by 11.9% year over year in the first quarter.
The central bank now has to juggle two mandates: keeping the economy humming along and cooling inflation expectations. There are real risks of accomplishing one at the expense of the other. On the one hand, the recovery is still fragile, especially in the private sector, which benefited less from the government stimulus spending and massive lending last year. A premature withdrawal of the accommodative monetary policy may choke off growth. On the other hand, tight labor supply and soaring commodities prices continue to push up prices and the real interest rate is already in negative territory. Given such a complex situation, the central bankers probably should not be blamed for being indecisive, but they might not be able to drag their feet for much longer.
Market Recap
Tighter home mortgage policies sent the stock index tumbling to 2,940 points at the beginning of last week. The markets rebounded midweek, boosted by strong performance of the commodities, alternative energy, and high-tech sectors, only to fall again towards the end of the week on rumours of property taxes in four major cities. The stock market suffered the steepest weekly loss in the past five months, with the Shanghai Composite Index down 4.7% at 2,984 and the Shenzhen index off by 5.8% to 11,703.
Macro and Industry Updates
Chinese Banks Required to Assess Property Loans Quarterly
Following a series of tightening measures aimed at cooling the feverish property sector, banking regulators this week requested large lenders to assess their exposure to the real estate sector on a quarterly basis to avoid any "ugly surprises." The banks are required to set aside sufficient provisions to cover potential losses by this September. Bank exposure to mortgage loans and to highly leveraged developers are obviously a concern, but the regulators seem equally worried about bank lending to local government investment vehicles, many of which used future land auction revenue as collateral to borrow from the banks.
Encouraging Results from First Week of Major Export Trade Fair
The first week of Guangzhou Trade fair, the largest for exporters in China, showed 31.2% year-over-year growth in the value of export contracts, and a 13.3% increase from the numbers posted during the first week of the fall trade show in 2009. Household electronics and appliances were the most sought-after products at the fair, and contracted sales of machinery equipments also grew significantly from last year.
Closer Ties between Netease and Microsoft?
China's cyberspace is abuzz with rumours of a potential tie-up between leading portal and online gaming operator Netease and Microsoft through MSN China. MSN China is a joint venture set up between Microsoft and Shanghai Alliance Investment in 2005 to bring MSN Messenger to China. MSN Messenger quickly gained popularity among office workers in major Chinese cities but failed to dent the dominance of home-grown giant Tencent in the instant messaging market. Various reports indicated that Netease is in talks to acquire the stakes currently held by Shanghai Alliance. Beyond messaging, Netease and Microsoft can also complement each other in areas such as search, gaming, and online communities.
Contributions from Iris Tan and Zhao Hu.
