It looks like the conditions in China are set for tighter monetary policy? Why?
Well, this January the overall trade surplus China is down US$25bn, to its lowest level since Jan 2006. How has this happened? Domestic consumption in Jan grew much faster than exports.
Trade data in January illustrates a very strong recovery in both the domestic and export driven economies – in fact I would say it is in danger of overheating.
Exports were up 21% -, reaching at US$109.5bn (marginally below the record of US$109.64bn set in Jan 08). Thus one can comfortably consider the export economy out of the danger zone.
Simultaneously, imports jumped a phenomenal 85.5% year-on-year to a new record this January, reaching US$95.3bn (from the previous record of US$90.2bn also set in Jan 08). Even if one accounts for the contribution made to domestic consumption by an earlier than usual Chinese new year, this data point is huge.
The difference gives the Chinese authorities an incentive to consider tightening their monetary policy.
Shanghai closed down for a 4th consecutive trading day – the longest negative trend in 2009. The index is down 6.4% from its peak a few days ago on the 4th August.
The biggest losers were real estate and energy companies, as investors became concerned that loan growth would slow, and reduce power demand (see https://ravendragon.wordpress.com/2009/08/09/electricity-consumption-vs-gdp-growth/) and building.
As discussed in previous posts, first-half lending in China grew 300% yoy to a massive CNY7.3bn. Too much liquidity opens the risks of an asset bubble. In my opinion investors are correct to be prudent at this stage, and wait to see how the government continues fine-tuning monetary policy and flows before expecting upside in real estate and related names.
In addition, I would not characterize the market as a bubble, and feel the Government is correct in its ‘fine tuning’ policies and attempts to calm lending in 2H09 – i.e. this should prevent a bubble from fermenting
[Note- the the Hang Seng ended on an 11 month high, with mainland banks recouping some of their recent loses on expecatations of earnings upgrades by analysts].