So, China triggered speculation a few days ago that the yuan may rise when policy makers dropped a pledge from their monetary policy report to keep the currency “basically” stable.
http://www.youtube.com/watch?v=kInoeTycY60&feature=related
J J Cale’s refrain keeps popping into my head, since the notion struck the other day that the feet have slipped off the pedals, and the runaway rickshaw’s flying off on monetary cocaine in the form of high powered credit creation.
And, when the monetary fuel’s burned out, what kind of cold turkey – or perhaps in this case, cold Peking duck – might be served up in China?
It’s worth thinking about, given the macro-monetary data released in Beijing last week, that revealed the smallest credit, money supply and bank deposit growth of the year – in many cases, October’s figures were the lowest in several years.
This is as much an exercise in collating some data here, which I started a few days ago – and my eyes frequently glazed over whilst I attempted to finish it – so apologies in advance of boredom factor 25.
On a nominal basis, money supply, credit and deposits are all posting new record highs.
The path of China’s M1 monetary aggregate reached yet another all-time high, while posting its 3rd consecutive month above 20 trillion yuan. The 12 month growth in China’s broad money supply M2 has spiked to another new record high, at 13 trillion yuan – more than double the growth posted at the previous record peak set in the middle of last year, and more than six times as fast as the high posted during 2000-01.
However, looking at the month to month change in China’s broad money M2 aggregate, October posted the lowest monthly increase of the year, and the second lowest since May 2005.
A quick snapshot of the actual monthly increase in M2 money supply since Dec 08 shows that, starting then at 1660 bn, the figure was at its highest in March this year at 2350 bn with another blip in June at 2070 bn. The October figure is by far the lowest, a mere 80 bn. So, from an annualised growth rate of +55.6% in March, broad money M2 growth has been scuppered after October’s mega-slow +1.6%.
Similarly, new yuan loans rose by only +0.87% during October, a steep decline relative to the +4.7% single-month nominal growth posted in June, which equates to an annualised rate of +6.0% growth in October, down from +56.4% posted in June.
In just one month new loans have nominally fallen by -51% to 253 bn yuan from 516.7 bn. June had posted an expansion of 1.53 trillion, so in 4 short months Chinese credit has plopped by -83.4%.
Banks are seeing less growth in deposits too, as October’s increase of 300 bn yuan was the smallest of the year, and the smallest since January 2008.
http://www.forbes.com/forbes/2009/1130/opinions-china-asia-economy-heads-up.html
State banks are funding projects that aren’t economically feasible – a dynamic exposed if you look at the supply/demand situation, for example, in the cement market.
Apparently China consumes more cement than the rest of the world combined, at 1.4 bn tonnes per year. Thanks to a parabolic expansion in domestic cement output capacity, China is now squatting on a surplus of 340 million tonnes equal to ¼ of annual consumption; and yet output reached a record high of 160 million tonnes in October.
And so rising domestic output, slowing credit-growth driven demand and thus, rising inventories have led to a deep decline in China’s October commodity imports.
Monthly rolled steel output, which also hit a record high during October, drove the year to year rate of growth to +41.6%, having expanded almost 6 times as fast as May’s +7.4%. No surprise then that steel imports plunged by -22.5% from September.
Pig iron output posted its second largest single-month total in October, giving a year to year growth rate of +49.3%, whilst imports were down -22.6% from September.
Copper imports fell by 135,940 tonnes in October, representing a single-month decline of -34.1%; imports of copper scrap fell by 150,000 tonnes, or -36.7%.
Shanghai Exchange warehouse inventories of deliverable copper rose yet again, reaching a new multi-year high. In fact, warehouse supplies of copper have soared by 488.8% since the beginning of the year, albeit from exceptionally low levels.
Imports of aluminum have plunged by -55.8% in October alone, with a nominal decline of -80.0% in just six months.
The headline monthly export decline of -4.5%, and the year to year contraction of -13.8% masks a broader erosion, defined by the fact that exports to 12 out of the 17 major export destinations – 71% of major trading partners – posted a decline in October; however, because imports fell even faster, China’s trade surplus almost doubled from September to $23.99 billion.
Subsequently, the pressure on the USD/CNY continues to build. At the current forward implied rate of 6.5848 yuan per buck, the market is pricing in a 3.5% appreciation relative to the current spot rate of 6.8270. This would appear to be cheap, relative to the peak rate of year to year appreciation posted by the yuan in July of last year, pegged at +9.95%. But it also sounds expensive relative to the depreciation of 0.7% posted by the CNY vs. USD over the last 12 months.
Nonetheless, technically, the forward yuan rate is currently trending towards an intensifying rate of appreciation.
By the way – did you know that Peking and Beijing are similar approximations of the Chinese pronunciation, not dissimilar to pay-cheeng
