Thursday, July 19, 2012

Economic Insights


Economic Insights

Shanghai Interbank Offered Rate (SHIBOR) swap signals further reserve requirement ratio (RRR) cut; China’s economy to hit bottom in near term could be expected
China might cut banks’ reserve requirement to encourage corporate lending. The 3-month SHIBOR dropped to 3.7860% towards a 20-month low.
 
 
 
 
 
 
 
 
 
 
 
 
Source: Bloomberg
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The swap market indicated further RRR cut in the near term and it will probably happen as early as end of the month. Besides the swap market, the housing market also gained more support from the data yesterday with property prices rose in 25 cities in China, much higher than the 6 cities in the previous month. The demand was mainly due to the monetary policy easing. The rising property price may bolster the domestic economic growth but it will also limit the personal consumption in the current scenario in China.
Source: Bloomberg
Click the image to enlarge
Since last month, China’s government has been trying to avoid a hard landing by utilising many kinds of instruments, mainly from investment and monetary easing. In the last 30 days, the government has injected 393 billion Yuan (around USD64 billion) to the sales of 7-day and 14-day repo and the 7-day repo has gained sharply, currently at 3.56%.
Source: Bloomberg
Click the image to enlarge
 
Source: Bloomberg
Since the repo and reverse purchase have very limited impact in the long term, I might foresee further interest rate and RRR cuts. Near term growth could be expected, however, the struggle between the balance of high housing price and low personal consumption would be a main challenge for the Chinese economy in a long run.
Significant recovery in US housing market, less pessimistic tone in “Beige Book”
The Federal Reserve (Fed) expressed that the US economy in June and July were from “modest to moderate” and the general economy still expanded in a tepid pace.
Overall, the quantitative easing (QE) speculation was trimmed at this time since the economy has not reached a deteriorating stage. The jobs market still lacking of the energy to expand in a faster pace although it shows signs of stabilisation; housing rose 6.9% in June to an annual pace of 760,000 which is the fastest rate in almost four years, the near term downside risk would be a possibly weaker Q2 Gross Domestic Product (GDP) because retail sales contracted for a third consecutive month in June.
I predict that further asset purchasing speculation could rise again before the coming Federal Open Market Committee (FOMC) meeting in 2 weeks. However, less evidence supports the view that Fed will do so.
Instead of those high-yield assets investments, the US Treasury bills are still favoured. With the continuous increase in inflows of portfolio investments due to the Euro-area’s prolonged recession, the QE speculation offers a better position for the US money market. With that said, the spread may widen further in the near term.
Source: Bloomberg

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