China - Hard or Soft Landing?
Much debate recently has centered around whether the world's fastest growing major economy, China, is in the midst of a hard or soft landing.
Credit a good friend of mine, and CNBC contributor, Zach Karabell, with an interesting observation this week. On Monday, February 14th's Fast Money Halftime, Zach pointedly suggested "what if the anticipated China landing is neither soft, nor hard but rather there is no landing?"
Great point and something that, given the recent economic data and monetary policy moves out of China, investors must consider.
- The People's Bank of China (PBOC) raised the bank reserve requirements (RRR) on Friday, February 18 for the 8th time in a year. Four months ago, the PBOC also began raising interest rates, and I EXPECT that process will continue throughout 2011. Both measures are in place to fight domestic inflationary pressures.
- The Hang Seng Index responded positively to the monetary policy measures advancing +3.36% for the week of February 14-18. Year to date the Index is +2.43%
- The yuan (Fig 1.1 below) traded to its highest level since 1993 @ 6.5732 per U.S. dollar - favorable for cooling domestic inflation and supporting G-3 exports.
- January CPI Inflation reported at +4.9% year-on-year BELOW consensus forecast of +5.4%.
- January exports surged +37.7% year-on-year, well ABOVE consensus forecast of +22.5%, supportive of further monetary tightening.
At the beginning of 2011, I suggested that the time had come for investors to understand the global recovery potentially was in the midst of a "handoff." No longer would the emerging world be the sole driver of demand for resources and support global GDP growth. In 2011, I expect the developed economies, in particular the U.S., U.K., and Japan, to begin to participate in the advancement of global GDP growth. All that is needed from China is to "hold serve" - stable GDP growth 9.5% to 10%, and prudent monetary policy decisions. In essence to orchestrate as Zach said neither a hard or soft landing. So far, so good.
Figure 1.1 Chinese Yuan 2/23/90-2/18/11