Top news of the week
April data shows inflation risk on the rise
The April economic data released last week continued to paint a positive picture for the overall economy, but all eyes were on the critical retail and wholesale prices, which rose significantly in the month and pointed to higher inflationary pressure on the horizon. Retail prices rose 2.8 per cent year over year, and compared with 2.4 per cent in March, partly driven by rising food prices as severe weather conditions reduced supply.
Wholesale prices advanced at a much faster pace of 6.8 per cent, and compared with 5.9 per cent in March, because of higher commodity prices. As some of the production cost increases will be passed on to end users in the coming months, it looks increasingly likely that, at some point in the coming months, inflation will breach the 3 per cent ceiling set by the Chinese premier at the National People's Congress meeting in March.
Higher-than-expected bank lending in April also spelled trouble for policymakers, who have been trying to rein in lending. Banks lent out a total of 774 billion yuan in April, 263 billion yuan more than in March. Total new loans this year climbed to 3.37 trillion yuan, or 45 per cent of the 7.5 trillion yuan quota set for the whole year. We expect banking regulators to have no choice but to keep the lenders on a short leash in the coming months.
Consumers continued to spend in April, pushing retail sales up 18.5 per cent year over year. Consumers' confidence in the economy and in their earning power is certainly a key factor, but their worries about higher inflation down the road may be another underlying factor that drives their spending decisions. Real interest rates in China have been negative for the past three months, as the inflation rate exceeded the benchmark one-year deposit rate of 2.25 per cent. Industrial production and fixed-asset investment both maintained double-digit growth in April, although the pace of expansion moderated slightly.
The trade surplus returned in April, after China experienced its first deficit (US$7.2 billion) in six years in March. Exports rose 30 per cent year over year to $120 billion on the back of strong demand for machinery and electronics. Meanwhile, imports jumped 50 per cent to US$118 billion thanks to higher imports of soybeans, iron ore, and automobiles.
Compared with the first four months of 2009, the trade surplus so far this year has shown a contraction of 79 per cent. This should probably alleviate some pressure on the Chinese currency to appreciate. Also, we believe China is having second thoughts on the currency appreciation issue now that Europe, the largest export market for Chinese business, is embroiled in a debt crisis that threatens to significantly weaken demand for Chinese imports.
Market recap
China's April economic data stoked concerns about rising inflation and a slowdown in fixed-asset investment activity. This, together with worries about the proposed property tax and the sovereign debt crisis in Europe, led the stock index to plunge to 2604 last Wednesday - the lowest level since last May - before it rebounded moderately later in the week. The Shanghai Composite Index ended the week up 0.3 per cent to 2697, while the Shenzhen Index rose 1.8 per cent to 10,330.
Macro and industry updates
China to triple subway networks in five years
China plans to spend more than 1 trillion yuan to add about 2000 kilometers of subway lines in cities such as Shenyang in northeastern China and Chengdu in the southwest, according to a senior official from the National Development and Reform Commission. Major cities including Beijing, Shanghai, and Shenzhen have built extensive subway systems in the past decade, and new tracks are also under development.
Banks can withstand 30pc drop in property prices
After a round of stress tests required by banking regulators, major Chinese banks claim they can withstand a 30 per cent decline in property prices without suffering significant deterioration in their loan portfolios. According to a recent central bank report, real estate loans totaled 9.1 trillion yuan, or 20 per cent of outstanding loans, at the end of March. Mortgages accounted for 65 per cent of the property loans - the rest were mostly loans to developers.
Credit, debit cards accounted for third of retail sales
The newly released 2009 payment system annual report from the Chinese central bank showed consumers used credit and debit cards to pay for 6.86 trillion yuan worth of goods and services in the past year, up 74 per cent from 2008. By the end of 2009, Chinese banks had issued 186 million credit cards, a 30.4 per cent increase from 2008. The central bank acknowledged the role bank cards have played in facilitating consumer spending, but warned about rising default risks in credit card payments. Statistics show credit card loans overdue by six months or more grew to 7.7 billion yuan in 2009, up 127.9 per cent year over year, and accounted for 3.1 per cent of total outstanding credit card loans.
Taobao partners with Yahoo Japan in B2C market
Through a strategic partnership, Taobao and Yahoo Japan will provide a common online marketplace to showcase products from both China and Japan and to facilitate online purchases for consumers in both countries. The online platform is expected to go live in June and will open up a new market for the millions of small businessowners currently on Taobao. The new venture will test the cross-border payment and delivery systems that are critical to its success.
Contributions from Iris Tan and Zhao Hu.
This is an edited version. The article originated from Morningstar.com.au.
