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Further PBOC Easing is Needed

08/09/2012

Overnight economic data from China looks soft once again. Rather surprisingly, U.S. weather conditions that have lifted grain prices to yearly highs have yet to negatively affect food prices in China. The muted food price data is favorable for the People’s Bank of China (PBOC) to continue its monetary easing path. In fact, given the weakness in China’s industrial production, retail sales, and fixed asset investments data, I expect further easing measures from the PBOC before month’s end.
 
Further easing should come in the form of another interest rate reduction or, at a minimum, another reserve requirement ratio (RRR) cut. The PBOC lowered interest rates in each of the past two months for the first time since 2008 and has lowered the reserve requirement ratio three times since the fall of 2011. However, the improving European sovereign debt crisis suggests that Chinese policy makers will, unfortunately, hold back on a mini 2008-style fiscal stimulus plan, which may be needed given the evidence.
 
Investors should expect continued soft economic data to have a negative impact on global capital markets. It appears that the China “pause” is not “refreshing” as expected. More aggressive policy measures are needed to resurrect demand and prevent deflation. The PBOC needs to operate more aggressively in the near term;  the data suggests they are behind the curve. I also expect it would be a mistake for the PBOC to operate with caution on the belief that elevated U.S. grain prices will sharply increase food inflation in the coming months. The evidence doesn’t support that fear.  Pork prices, which are the most affected by rising soybean and corn prices, were actually down 19% year on year.
 
Within the next 24 hours, China’s trade balance figures, as well as exports and imports, will be released. These are figures that investors should pay attention to.
 
LAST NIGHT’S CHINA ECONOMIC DATA
 
•   Industrial Production for July reports at +9.2% year on year, below last month’s +9.5% and expectations for a +9.7% rise this month.
•   Fixed Asset Investments for July reports at +20.4%, below expectations for +20.6% and unchanged from June.
•   Retail Sales for July reports at +13.1% year on year, below last month’s +13.7% and expectations for a +13.5% rise this month.
•   CPI (Figure 1.1) for July reports at +1.8%, down from last month’s +2.2% — a favorable condition for further easing.
•   PPI for July reports at -2.9%, down from last month’s -2.1%.
 
TONIGHT’S CHINA ECONOMIC DATA
 
•   Exports year on year last month were +11.3%; estimates for July are +8.0%.
•   Imports year on year last month were +6.3%; estimates for July are +7.0%.
•   Trade Balance last month was a $31.72 billion USD surplus; estimates for July are for a $35.05 billion USD  surplus.
 
 
Figure 1.1 China CPI, 2008 to PresentC

Source:  Bloomberg

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