Chinese Fundamentals Boost Rate Speculation, Yuan Appreciates Further

  • June 15, 2007
  • Kathy Lien


Following reports this week that showed consumer price inflation accelerating at the fastest pace in two years, Premier Wen Jiabao indicated that further monetary tightening should be implemented in order to curb pressures. Although by verbatim the premier noted “moderate tightening”, market consensus is that further measures similar to recent benchmark rate and reserve tightening in the past month will likely continue.


 



Wen Seeks Tighter Monetary Controls, Markets Decline


 


Following reports this week that showed consumer price inflation accelerating at the fastest pace in two years, Premier Wen Jiabao indicated that further monetary tightening should be implemented in order to curb pressures. Although by verbatim the premier noted “moderate tightening”, market consensus is that further measures similar to recent benchmark rate and reserve tightening in the past month will likely continue. The key here is the thinning of excess liquidity, a factor that is continually hovering over the economy and helping stock markets to rally to record levels. As such, participants are concerned that today?s statements may mean a more aggressive stance by the People’s Bank of China, helping to lead the overall equity market lower by 1 percent in the overnight. The CSI 300 Index fell 42.45 points to close lower at 4,075.82.

 


US Senate Looks At China Bill

 


Speculation churned well ahead of the US Treasury Department report early this morning in New York. Although expectations were high, the report was well in line with more conservative market proponents as policy officials steered clear of labeling China a currency manipulator. However, the report did continue to note that further revaluation is needed in the Chinese currency as the yuan continues to remain “undervalued” by most estimates. Subsequently, treasury officials reassured its staunch view of further flexibility in the country’s exchange rate regime, hopefully working towards a more fundamentally valued currency. Comparatively, however, the US legislation that was handed down in the afternoon took a more aggressive tone. Scheduled for well into the New York session, US lawmakers sought to bring life to a bill that would heighten tensions between the two trade partners, and draw slight similarities to a parallel bill that was supported last year. According to the bill, the US Treasury would be able to identify when a country’s currency was “fundamentally misaligned”, thus targeting that party for retaliatory action by the World Trade Organization. Incidentally, the bill is being submitted as a potential spark to get the ball rolling on further revaluation efforts by the Chinese. Taken as a threat, Chinese Ambassador Zhou Wenzhong stated that the decision would ultimately “hurt opportunities for healthy business activities between China and the United States.”

 


MARKET


Last


Weekly Change (Pips)


Currencies


Price

 


Chinese Yuan


7.626


310


Hong Kong Dollar


7.81955


44


Singapore Dollar


1.5424


24

 

 


Economic Fundamentals Feed Further Rate Tightening Speculation

 


Retail Sales –
Sales of consumer goods in the Chinese economy surged ahead to the fastest pace in three years for the month of May. Bolstered by rising incomes in the world’s fastest growing economy and a record acceleration in stock prices, consumers are openly more willing to adhere to spending habits than before. The penchant for consumption racked up 715.8 billion yuan in sales, rising 15.9 percent compared to the year earlier report. The figure, well above the 15.5 percent witnessed in April, is likely to stir inflationary pressures higher in the near term.

 


Industrial Production –
Surprising markets, China’s industrial output accelerated despite recent moves by the country’s central bank to cool down the economy. For the record, factory production advanced by an impressive 18.1 percent in the month of May according to the National Bureau of Statistics, following a 17.4 percent gain in April. The survey is likely to add to the overall growth rate of 11.1 percent in the first quarter, keeping the focus on the country’s managed exchange rate regime.

 


Consumer Prices –
Not surprisingly, the pace of China ?s consumer prices accelerated in the month, rising 3.4 percent on the year over year comparison. Released in the overnight, the report according to the National Bureau of Statistics shows an increase over the 3 percent witnessed in the month of April and reflects the influence of rising demand for pork products and other food items in the world’s fastest growing economy. Incidentally, demand has overrun shrinking supply in the near term as the country’s pork shortage seems to be stemming from outbreaks wiping out supplies of the staple.

 


yuan_chart