1、1Yu, GeoffreySubject: UBS FX Talking Points: Charts China (and the world) Cannot IgnoreAttachments: Picture (Enhanced Metafile); Picture (Enhanced Metafile); Picture (Enhanced Metafile); Picture (Enhanced Metafile)Good Morning,Data released overnight can somewhat explain Chinas somewhat earlier-than
2、-expected required reserve ratio hike this week. The economy felt the benefits from the post-bubble credit expansion, but the side effects are now far too severe too ignore and the state council must surely question whether expansionary policy should be maintained. Several aspects of the economy are
3、 now approaching extremes and if the authorities value social stability more than asset prices, more aggressive moves may be in store on all fronts and wrong-foot the market. If the process proves disruptive, emerging markets in Asia and commodity bloc currencies could also face difficulties, not to
4、 mention the global recovery, much of which is predicated on sustainable and strong growth in China.(1) The Housing Market - calm before a storm?The following story was widely syndicated this week by Chinese news wires, below is a directly translation from S - Chinas largest internet portal.“Despite
5、 six consecutive housing market control measures launched by the central authorities and a combined deterrence efforts by six state council ministries, Beijings housing prices are rising without pause. As of January 13th, 2010, 15 new projects have already entered the market, with 36 still scheduled
6、. Of the 51 combined, 35 have already been priced, with an average of CNY21919.66/sqm, an increase of CNY1352.42 on December prices, a monthly rise of 6.58%. This is the 9th consecutive monthly gain.The 6.58%m/m figure is already lower than the double-digit monthly gains registered previously, but p
7、rices in Beijing have almost doubled in April - in just 10 months. For comparisons sake, San Diegos housing market - which typified the housing bubble in the US, took close to four years to register gains on a similar level, according to the Case-Shiller Index. When looking at price to income ratios
8、, the figures look even more absurd. In a survey of 5000 households in Beijing, the average income for the first 3 quarters come to CNY20041, this gives an implied annual average disposable of close to CNY27000. Assuming an average construction size of 100 square meters, the price-to-income ratio co
9、mes in at above 80. London house prices look like a bargain comparatively.There is no denying that demand for housing far outstrips supply, simply due to Chinas large population base and scarce housing stock. The problem is that most housing constructed has been skewed towards sectors and prices con
10、sidered “luxury“, which provide real estate developers with fatter margins. Further up the chain, prices are forced up by the cost of land - owned/controlled by local authorities. Land sales are now the main source of revenue for governments hard hit by the crisis and under pressure to deliver fisca
11、lly. Again, returning to Beijings example, in 2009 there were 247 transactions involving 19.51 million square metres of land sales - totalling CNY93bln, or 45.9% of total government revenue. Land sales are one-off and governments may be incentivised to maximise sales prices - with the end-user beari
12、ng the consequences. As such, this raises the question of whether local authorities are blocking central efforts to control prices. Easy credit has not helped matters either.The level of discontent is rising and the government has acknowledged the imbalances. The PBoCs RRR hike was intended as a sig
13、nal to the housing sector, and also to show the populace that problem is addressed. There are already cracks emerging and the question up ahead is whether a soft landing can be engineered, or will prices soar further, making an ultimate crash even more painful.I would encourage clients read the foll
14、owing story which has already been widely reported: Censors ban soap opera that was too much like reality TVhttp:/www.timesonline.co.uk/tol/news/world/asia/article6965671.ece2Beijing House Prices0500010000150002000025000Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec
15、-09 Jan-10-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%Average Price/sqmm/m growth rate(2) InflationM2 figures released overnight came in at 27.7%y/y. Assuming a firm 11% nominal GDP growth for the fourth quarter, monetary overhang (nominal M2y/y - nominal GDPy/y) will still come in at above 15%, well above hi
16、storical highs. More worryingly, new loans have begun to tick up again, at levels above historical (pre-crisis) averages though well off the highs last year. As we have stressed, there is often a 12-18 month lag between a sharp rise in monetary overhang and a notable uptick in headline CPI, and 2010
17、 will be a year where these pressures come through. In addition there will always be questions regarding the accuracy of Chinas CPI basket - residential items account for 13% - but crudely assuming that housing is up only 25%y/y (in Beijing this figure is 64%y/y), this should contribute a full 3% al
18、one to headline CPI - the November print came in at 0.6%, market expectations for December is 1.4%. Chinas strong import figures of late suggest that imported inflation could become an additional burden, and if the government chooses to avoid disrupting asset markets, an early CNY is possible.-10%-5
19、%0%5%10%15%20%25%30%Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09-0.70.00.71.32.0CNYBLNNew LoansCPIMonetary Overhang3Chinas CPI BasketFood, 34%Service Products, 14%Residential Costs, 13%Communications and Transport, 10%Health, 10%Clothing, 9%Home Appliances, 6%W
20、ine & Tobacco Items, 4%(3) Another $127bln slipped inChina also released reserve numbers overnight and SAFE will not be impressed. Another 127bln growth which takes full year reserve growth to $453bln - a new record. Overseas investors are already being attracted by the prospect of an eventual CNY r
21、evaluation and adding strong asset performance and yields on top of the picture makes inflows hard to stop. Regardless of the percentage of inflows actually heading into Chinese asset markets, the inflows put further pressure on the PBoCs monetary policy as it needs to sterilise consistently to cont
22、ain liquidity. Sterilisation, done through bill issuances would drive up yields even further. In the short term, this creates a vicious cycle as this increases CNY appreciation expectations often rise as a result, encouraging further inflows. On the domestic front, now that rising bill yields alread
23、y point to the prospect of tightening, local markets will start to struggle - though this would be part of the rebalancing process to deter inflows. In short, in current trends, something has to give. After the lunar new year and the National Peoples Congress in early March, investors should look ou
24、t for policy surprises, especially if the political will is mustered during the political sessions.Asset gains attracting inflows01000200030004000500060007000Feb-00 Apr-01 Jun-02 Aug-03 Oct-04 Dec-05 Feb-07 Apr-08 Jun-09ShanghaiComposite-40-20020406080100USDBLNShanghai Composite IndexReserve Growth4Kind regardsGeoff
