International | Feb 20 2008
By Chris Shaw
Much has been made of the impact of the recent heavy snowstorms in China, DBS Group estimating the economic impact is in the order of US$15 billion to date.
While the extent of the damage incurred is likely to see a temporary easing in monetary policy as banks will be encouraged to lend in hard hit regions, the group doesn’t see any permanent change in monetary policy as the big picture issues of high liquidity and credit growth and rising inflationary pressures are unchanged despite the poor weather.
These issues highlight the need to tighten monetary policy further, as does the fact a slowing in the US economy has had little impact on China’s export performance as the reduced importance of trade with America is occurring at the same time as trade with Europe and the rest of Asia is growing.
As a result the Chinese trade surplus remains high, leading DBS to suggest the People’s Bank of China will have little choice but to continue its policies of open market operations and increases to reserve requirements.
Figures for January show PPI inflation increased for the sixth consecutive month and this ongoing inflationary pressure means there is little scope for any easing in monetary policy.
DBS takes the view the inflationary outlook is now becoming a bigger threat than is the potential for economic growth to slow, particularly as any slowdown from the recent poor weather and Chinese New Year celebrations is unlikely to reduce inflationary pressures significantly.
With the US Federal Reserve cutting rates aggressively in recent months it is now somewhat harder for the Chinese central bank to lift rates, DBS noting the widening interest rate spread could result in more speculative capital flowing into China.
But at the same time real negative deposit rates have been a major contributor to asset inflation as the general population has looked for higher yielding assets for their savings, so the group suggests bringing the real deposit rate to a neutral level should be a minimum target for the central bank in China over the course of the year.
