Chinese bill auction suggests another rate hike coming
China threw in a surprise trade deficit number this past month. However, It looks to be a one off. UBS’ Andy Lees in London explains:
The February trade numbers slipped to a deficit of USD7.3bn. The number is usually volatile at this time of the year due to the timing of the Chinese New Year so not a lot can be read into the figures although January and February combined showed a deficit of USD840m. Exports grew 2.4% y/y while imports were up 19.4%. The terms of trade continue to move against China. Overall the Asia ex Japan trade figures (see attached chart), which are heavily influenced by Chinese data, has also swung into a deficit of USD6.60bn which is the worst since January 1997 ahead of the financial crisis. Asia obviously has large FX reserves today in comparison to then so we shouldn’t expect anything similar, however it is worth remembering the concerns expressed over the last couple of weeks from India about it only being short term capital that was supporting its current account deficit. (China’s oil imports rose 7.8% y/y in February to 19.95m tonnes or 5.2m bpd. I have not managed to see official figures on the value of the imports, but Brent averaged USD74.89 in February last year and USD104.57 this February. That is a USD29.68bbl or 39.6% increase over the course of the year which would equate to a USD4.4bn hit to its monthly trade surplus purely due to the change in the terms of trade).
Nevertheless, it seems the Chinese monetary tightening will continue. Andy continues:
The central bank drained a net CNY10bn from money markets this week, the first such move for 4 months. Reuters suggests this is a signal that the reserve hikes are complete, at least for now. "The refocus of using PBOC bills is definitely a signal. Perhaps they want to use the bills as a liquidity mopping tool again and give RRR or the lending/deposit rate a bit of a breather. I don’t think the tightening is over yet, but perhaps not at as aggressive a pace as seen since late 2010" according to Soc Gen. So far this year the PBOC has allowed over CNY800bn to flow back into the system via maturing bills and repos, more than the CNY720bn its two RRR hikes this year are estimated to have taken out of circulation. Another CNY421bn of bills and repos are due to mature by the end of this month and close to CNY500bn in April which will have to be absorbed one way or another. The yield on 3 month bills rose 16bpts since the last auction to 2.7944% giving "a clear signal that a rate hike is coming soon….We’ll see a less aggressive tightening pace, but still hiking".
That’s what I claimed as well on Monday. Chinese economic policy is taking a mammoth shift away from easy money to prop up growth via exports. The question is whether it can pull this off without a hard landing. Property prices in markets like Shanghai are getting well out of reach for the average worker while food costs are rising dramatically. Municipal governments are known to have speculated on land prices to support their infrastructure build-out and housing development. Yesterday, Iza Kaminska at the FT pointed to another source of hidden leverage in the system in terms of commodity speculation. She provides more proof the Chinese have been using copper as collateral for trade activity. This makes sense given the widespread reports of Chinese copper stockpiling. And it also acts as an inflation hedge if copper prices continue to rise. The problem is that if copper prices start to fall, the collateral will not be sufficient and you have a mess. Iza says "be very, very afraid of further Chinese monetary tightening moves if negative copper equity is what you fear." Agreed.
Yet more reason to expect a redoubling on infrastructure build-outs if this all goes pear-shaped.
Update: Copper is now at a three-month low on lower Chinese demand. So the speculative copper trade may be unwinding as we speak.