International | Jul 20 2007
By Rudi Filapek-Vandyck
Expect another Chinese interest rate hike, possibly as soon as this evening (Sydney time). That seems to be the general view among economists and China-watchers after yesterday’s release of economic data revealed the Chinese economy continues to fire on all cylinders while inflation is on the up as well.
Analysts at Credit Suisse suggest, no doubt with mixed feelings, that they may have to increase their forecasts again in a process that has remained in place for many months now. This while noting they have been sitting at the top of market consensus all along.
Higher prices for meat, and the anticipated flow-on effect from flooding in the country, are now expected to push up inflation to 5% in the coming months.
According to yesterday’s data release, the Chinese economy expanded by 11.9% compared with a year ago in 2Q07. This figure compares with market consensus of 11.0% and 11.1% growth recorded in the previous quarter of the year.
June CPI leapt one full percentage point to 4.4% (annualised). In addition, industrial production, retail sales and fixed asset investments all posted strong growth.
At Goldman Sachs, Chinese growth forecasts were raised to 12.3% for 2007 (from 10.8% previously) while the forecast for 2008 went up to 10.9% from 10.0% previously.
These are large adjustments. Analysts at Danske Bank have not changed their numbers yet but already announced their revisions will be “significant”.
As with Credit Suisse, Goldmans and other experts, Danske has been awaiting further tightening measures for some time now. The analysts maintain their belief the Peoples’ Bank of China will hike the official lending rate by 27 bp “soon”. In addition, Danske believes, the central bank will probably also abolish the income tax on interest income as this will increase the attractiveness of bank deposits.
Despite a general consensus view that further tightening measures are in the offing, the Chinese authorities have not moved in the past few weeks. As per usual, the Chinese authorities seem in no hurry to take any drastic measures, no doubt adopting the view that every journey starts with the first step but that the second, and third, do not necessarily have to follow immediately.
The authorities may still wait a little longer this time around with Danske offering the possibility that “necessary tightening measures” might be delayed until after the 17th Communist Party Congress in the fall, which is likely to take place in October.
This may not necessarily fall in line with forecasts at other experts, such as Credit Suisse, where the analysts have already penciled in three more hikes of 27 basis points this year. But they have no idea about the timing of these moves either.
Most experts seem to think that economic growth in the country is bound to slow down, but only slightly, in the months ahead. It is for this reason that Credit Suisse has left its current GDP estimate of 11.2% for 2007 and 10.6% for 2008 unchanged, for now.
