Weekly Asia – China: prudent monetary policy to avoid excesses

by: Maritza Cabezas

China

Property prices in China soared in September to 9.1% yoy up from 8.3% yoy in August. Again the prices from the largest cities showed a sharp increase. For a start, prices in Beijing rose 20.6% yoy. The new leaders have been cautious to take additional measures to cool down the property market. But as the economy shows firmer footing the government is likely to reinforce existing restrictions. Amid strong capital inflows in the past few months, pressure to avoid excesses in the property market has increased. Already the central bank has adopted a more “prudent” monetary policy in providing liquidity through reverse repo operations. This was likely a response to the large capital inflows and strong credit growth. The recent tightening of liquidity has manifested itself in a rise in the 7-day repo rate in the past days. We expect that the November Plenum, will give some indication on the next steps to the capital account liberalization. Alternative investment opportunities should reduce the pressure on the property market.

 

131028 - Asia China new houses

 China II

Meanwhile, the HSBC flash PMI rebounded in October to 50.9 from 50.2 the previous month. Normally in October the PMI tends to show some gain in momentum. The composition of the flash PMI showed that output, new orders and export orders increased, while output input prices rose at a slower pace than previously. We expect that GDP growth will show a slight slowdown in momentum in the fourth quarter after a rebound to 7.8% in the third quarter. Indeed, September’s high frequency data showed that year on year growth in retail sales, fixed investment and industrial production edged down. China’s authorities, as mentioned above, will likely lead a more prudential monetary policy in the coming months. We rely on the global upturn to support China’s economic activity in 2014. Our forecast for next year remains 8%.

 

131028 - Asia China flash PMI