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Chinese Stats Suggest that Activity Is Accelerating

After a very weak H1 2013, several data confirmed that Chinese activity is recovering and this trend could be sustained in the coming months thanks to a global recovery, an increase of government spending and an accommodative monetary policy.


1/ The price of basic materials shows that demand has become stronger since the end of June which suggests an improvement of industrial production:
- Imported Iron Ore Prices rose 14% since the end of June while Domestic steel prices increased by 9.5%.
- Copper prices is still up 3.2% on the same period.


Source: Bloomberg


2/ This move was confirmed this morning by the rebound of imports in July:
- Imports Y/Y: +10.9% v -0.1%e (-0.7% prior).
- Jul Iron Ore imports record 73.1M tons, +26.4% y/y, record high > June Iron Ore imports 62.3M tons, +6.8% y/y.
- Jul Copper, Product imports 410.7k tons v 380.0K tons m/m, +12% y/y > June Copper, Product imports 379.9k tons, +9.7% y/y.


3/ Exports also rose in July thanks to the recovery in EU and acceleration in US:
- Exports Y/Y: +5.1% v +0.5%e (-3.1% prior).
- Exports to US: 5.2% y/y in July > -5.4% y/y in June.
- Exports to EU: 2.8% y/y in July > -8.3% y/y in June.


4/ The main indicators (Baltic Dry Index, Global PMI) suggest that global growth is also accelerating:
- On a Y/Y basis (MM-20 days), Baltic Dry index turned positive in July and rose 18% yesterday.
- JPMorgan’s Global Manufacturing PMI edged up to 50.8 in July from 50.6 in June.


5/ Government spending will accelerate in H2. As an example, State-owned railway giant China Railway Corporation (CRC) has announced a plan to raise fixed-asset investment to 660 billion yuan (106.5 billion U.S. dollars) this year to boost railway development.


6/ Since the end of June, PBOC has adopted a more accommodative policy and could cut RRR in the coming months:
- Today: PBoC to issue CNY15B in 14-day reserve repos in today’s session; For the week, injecting CNY20B v CNY136B in prior week.
- On August 2: China PBoC Q2 Monetary Report: Reiterates to continue to implement monetary policy and fine-tune action when necessary via numerous tools (including RRR).


Chinese Credit Data Give Room for PBOC to be Proactive in Q3

Yesterday, PBOC released data which show a credit slowdown in June. Aggregate financing, the PBOC’s broadest measure of credit that includes bond sales, entrusted loans and bankers’ acceptance bills, was CNY1.04 trillion in June (the lowest figure since 14 months). That was down from CNY1.19 trillion in May and CNY1.78 trillion a year earlier.


The decline was matched by slower growth in money supply. M2 money supply rose 14% YoY (the slowest pace in six months) and was below forecasts of 15.2% YoY. Yet, it still exceeded the government’s 2013 target of 13%.


Even if Premier Li Keqiang has indicated he won’t boost credit to support the economy even as the pace of expansion slows, these figures give more room for PBOC to intervene in the money market and avoid another significant rise of short term interest rates.


As a reminder, short-term interest rates briefly shot as high as 30 per cent late last month after the central bank declined to add cash to an interbank market gripped by tight liquidity conditions, which were caused in part by a seasonal rise in demand for cash. At least five companies canceled or delayed scheduled bond sales of some CNY32.1 billion last month amid the cash squeeze.


Moreover, if PBOC manages to limit M2 growth in the coming months and push it below the threshold of 13% YoY, PBOC could adopt a more accommodative stance in a context where inflation remains contained (2.7% YoY in June against a target of 3.5% YoY).


As a consequence, at the end of Q3, coupled with more public investment (railways, public housing…) and a recovery of global demand (US, UK, Eurozone), Chinese growth could accelerate.

PBOC Governor Tries to Reassure Markets

Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), promised Friday to ensure there is enough money in financial markets to maintain stability after a credit crunch sparked fears of a possible crisis, his first comments since a record cash squeeze hit the world’s second-largest economy.


Addressing a financial forum in Shanghai, Zhou said:


“The PBoC will use all sorts of instruments and measures to adjust the overall liquidity level, so as to ensure the overall stability of the market.”


More from Bloomberg:


China’s growth slowdown remains in a “reasonable” range and the economy is stable, Zhou, head of the People’s Bank of China, said today in a speech at the annual Lujiazui Forum financial conference in Shanghai.
Zhou is trying to soothe concerns that the credit crunch will harm growth, saying today that he’s fully confident in the nation’s economic prospects and financial system. He reiterated points in the central bank’s June 25 statement that it will use tools to safeguard stability in money markets, after the overnight repurchase rate surged to a record high last week.
The PBOC “will use all kinds of tools to appropriately adjust liquidity in the market and maintain the overall stability of the market,” Zhou said in his first public remarks since the liquidity squeeze that sent money-market rates to the highest in at least 10 years.
The central bank will “create good monetary conditions for stable operation of financial markets and economic development,” Zhou said. Markets are “very sensitive” and will have a “fast response to any signals,” he said.
He made the points on the economy and markets at the end of a 30-minute speech devoted mostly to discussing how Shanghai can develop into a global financial center.


PBOC Will Use Tools to Stabilize Money Markets

Issuing its second statement in two days, the People’s Bank of China said it would offer liquidity to banks to ease investors’ fears of a cash crunch. The People’s Bank of China has provided liquidity to some financial institutions (though did not specify the amount or the banks) to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets.


“If institutions have problems in managing their liquidity, the central bank will apply appropriate measures under the circumstances to maintain the overall stability of money markets”


In its statement, the central bank said money markets were already on the mend after interbank rates rose to double digits last week. It noted that the overnight bond repurchase rate had fallen to 5.83%. It also reiterated its view that a series of temporary technical factors, including tax collection and end-of-quarter regulatory deposit requirements, had exacerbated the market’s tightness.


“With the elimination of seasonal and emotional factors, interest-rate fluctuations and the tight liquidity situation will gradually ease”


The statement is the first public confirmation of central bank action to ease a crunch that sent China’s overnight repurchase rate to a record last week and stood in sharp contrast to one issued the day before in which the PBoC took a much harder line, declaring that liquidity was at a “reasonable level” and telling lenders to manage their balance sheets.