At MM we try to avoid giving undue attention to extreme viewpoints, because there are always those for whom the world is about to end and likewise those for whom the garden is always in full bloom even when it’s patently obvious it’s winter outside. The reality is human beings are remarkably inventive and generally manage to muddle through between extremes of “boom or bust” most of the time. So while we have reported opinions on the Chinese economy and market conditions that suggest bubbles are developing in the property market and inflation could be a problem in the future, we have also reported on the robustness of the automotive sector and continued strong investment climate. So it takes several data points to align before we report on a number of negative trends that have us concerned. Some are shorter term, some are longer, but all are pointing towards a slowing in the Chinese economy that may be good for metals buyers, but bad for global growth.
The first is a report by Legal & General Investment Management reported in the Telegraph newspaper late last week. LGIM believes the threat of inflation is underestimated in China and warns that rising prices there are set to export inflation to the world. March inflation came in at 5.4 percent according to the National Bureau of Statistics, and annual growth at 9.7 percent in the 1st quarter, only fractionally down on the 9.8 percent recorded for the 4th quarter of 2010, suggesting the economy is still powering ahead despite attempts to cool the pace. While food inflation risks bringing the population out into the streets, wage inflation is what will put them out of work as Chinese products are priced out of world markets. While papers often report increases to reserve ratios as credit tightening, Brian Coulton, an emerging markets strategist at LGIM, argues that China’s 3 percent increase in banks’ reserve ratio requirements over recent months upping the amount of money they must sit on in proportion to deposits should not be viewed as monetary tightening. He believes the strategy is only just managing to offset the impact of China’s interventions to keep its currency weak to support its exporters. The PBC recycles the RMB funds released from imports by the use of sterilization bonds, with interest rates so low there is no appetite for these bonds unless banks are forced by Beijing to buy them which they do by raising reserve requirements. The central bank has been relying on reserve ratios to mop up this excess liquidity for much of the last year.
(Continued tomorrow in Part Two.)