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Yuan to carry on climbing
HOME > PAST ISSUE > REVIEW > PunditryJanuary 2007
From "China 2007: stabilizing growth, realigning monetary conditions" by JPMorgan economist Grace Ng, December 1, 2006:
The Chinese economy has consistently delivered positive surprises this year. Despite a marked [third-quarter] slowdown in fixed investment, the overall economy continued to grow at a boomy pace, boosted by accelerating exports and strong consumption growth. JPMorgan has therefore revised up its full-year 2006 GDP growth forecast to 10.6% oya (one-year average). Next year, we expect the economy to grow at a solid, if somewhat slower overall pace. Fixed investment and export growth are expected to slow modestly, while domestic consumption growth remains strong and steady. Our forecast for China's 2007 GDP growth stands at 9.5% oya ... The current macro policy curbs, including administrative controls - especially on land use and bank lending - are likely to continue in 2007. As for the central bank's domestic monetary policy stance, we expect only modest policy rate increases; hikes in banks' reserve requirement ratios (RRR) will be the primary means to contain overall liquidity ... We look for major tightening via more significant CNY appreciation: the USD/CNY rate is seen approaching 7.0 by end-2007.
From "Land use fee hike has limited macro impact" by Deutsche Bank Chief Economist for Greater China Jun Ma, November 21, 2006:
The Ministry of Finance and the Ministry of Land and PBOC (People's Bank of China) issued a circular announcing that the central government would raise the land use fee for new projects by 100% from its previous levels, effective from January 1, 2007. The policy will be marginally negative for developers, but future negatives for developers will come from further land cost measures and government control on housing prices for mid- and low-end projects. We think investors should become more cautious on developers with limited land banks ... We believe utility and consumer sectors continue to offer value and are more defensive in nature (therefore more attractive for investors who are worried about a potential market correction after the strong rally over the past few months).
From Global Economic Comment by Morgan Stanley Chief Economist Stephen S. Roach, December 1, 2006:
I am starting to detect an important shift in the Chinese mood, with long-entrenched feelings of self-doubt now giving way to a newfound confidence. There's nothing wrong with confidence - it can be a critical element of any successful economic development strategy. But confidence must be on solid ground to fuel sustainable growth. Lacking in support from internal private consumption, the Chinese confidence factor is increasingly dependent on a powerful export-led growth dynamic and associated gains in fixed investment - both very much tied to the open-ended expansion of China's outward-looking export production platform. This could turn into a surprisingly precarious situation. What happens if the narrow underpinnings of China's growth strategy are undermined by the twin surprises of Washington-led protectionism and a sudden deterioration in the US economy? Beijing is unprepared for either of those possibilities - as is, I'm afraid, the rest of the world.
From "The sword hanging over China's banks" by UBS Chief Economist for Asia Jonathan Anderson, December 15, 2006:
How big an issue are interest rates? As it turns out, even small adjustments in administered rates can have a significant impact on profits. According to official statistics, pre-tax profits of the "big four" state banks were RMB169 billion in 2005, compared to total end-year deposits of RMB16.7 trillion in those institutions. Doing the math, a 100 basis-point increase in deposit rates (leaving all other factors unchanged) would have been enough to completely erase state bank profits last year. Now, we clearly expect 2006 profits to be higher following recapitalization and equity listings - and obviously we don't expect the government to take precipitous interest rate moves any time soon. But in our view this remains the most significant macro risk to banks' profit outlook going forward.
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