China-watching

飞雪寒冰

As the bunting comes down on the third session of the 11th National People's Congress, what do China-watchers know now that they didn't know a week ago? Not a lot. Unlike the year-end Central Economic Work Conference, probably held in the shadowy compound of Zhongnanhai, the NPC is not a forum for debate or decision-making. This annual conclave in the Great Hall of the People, drawing almost 3,000 delegates from all corners of the country, is basically a rubber-stamp legislature.

飞雪寒冰

Remarks throughout the week echoed already-familiar objectives: a mild slowdown in growth, from 8.7 per cent last year to 8 per cent; public spending to focus on healthcare and housing; nods to rising property prices and local government debt; no movement on the currency. One new nugget, however, was Premier Wen Jiabao's full-year consumer price inflation target of 3 per cent, down from 4 per cent last year. That put Thursday's monthly data dump in a new light. For every item that might have pleased Mr Wen – new bank lending cut in half from January, consumer price inflation a modest 2.1 per cent over the first two months – there was another to give him pause. Industrial output increased by more than a fifth year-on-year in the first two months, while factory-gate prices were up by 5.4 per cent in February; both stronger than expected.

飞雪寒冰

Further, February's CPI reading of 2.7 per cent meant that real interest rates are negative for the first time since 2008, encouraging savers to chase assets higher. Already, M1 growth is consistently outpacing M2, suggesting that tightening measures so far have pushed more liquidity into speculative activities than longer-term investment. So, while Mr Wen was emphasising continuity in his closing comments yesterday, investors are positioning for higher one-year deposit rates and one-year loan rates – perhaps as early as today.

飞雪寒冰

Further, February's CPI reading of 2.7 per cent meant that real interest rates are negative for the first time since 2008, encouraging savers to chase assets higher. Already, M1 growth is consistently outpacing M2, suggesting that tightening measures so far have pushed more liquidity into speculative activities than longer-term investment. So, while Mr Wen was emphasising continuity in his closing comments yesterday, investors are positioning for higher one-year deposit rates and one-year loan rates – perhaps as early as today.