China Watch

PBOC's move earlier this month to increase interest rates for its standard Open Market Operations (OMO) and Standing Lending Facility (SLF) has sparked speculations of monetary tightening. On February 3, the central bank announced to raise interest rates of 7-, 14- and 28-day reverse repos by +10bps each to 2.35%, 2.5% and 2.65% respectively. At the same, the overnight SLF rate was lifted to 3.1% from 2.75% previously. It was also reported that SLF rates for those banks that fail Macro-prudential Assessment (MPA) requirements is increased by +100 bps.

China's trade surplus narrowed to US$40.8B in December from USD44.6B a month ago. From a year ago, exports contracted -6.1% y/y, deteriorating from a -1.6% drop in November, while imports growth decelerated to +3.1%, from November's expansion of +13%. Both contraction in exports and expansion in imports came in worse than expectations. We are concerned that rising oil prices would continue to weigh on the country's balance of payment given China's huge crude oil imports. Released last week, the country's FX reserve was reported to have dropped -US$41B, to US$3.01 trillion, in December. Similar to the past 5 months, the decline was driven by government's selling of foreign currencies to moderate renminbi depreciation

Recent releases in China's November macroeconomic indicators suggest that growth continue to stabilize. Yet, weakness in renminbi means that capital outflow should remain a headache. China's growth in industrial production (IP) improved to +6.2% y/y in November, from +6.1% a month ago. This came in better than consensus of +6.1%. Retail sales expanded +10.8% y/y in November, compared with expectations of +10.2% and +10% in October. Indeed, this is the fastest pace of consumer spending growth so far this year. A key contributor to the upside surprise was auto sales, thanks to government tax incentives. Meanwhile, 'single's day earlier in November also helped boost sales of electronics and telecom products. Urban fixed assets investment gained +8.3% in the first 11 months of the year, unchanged from the year through October. This came in line with expectations.

The official manufacturing PMI for China climbed +0.5 point higher to 51.7 in November, another month of big increase after October's 0.8-point gain. The non-manufacturing PMI (services and construction activities) soared +0.7 point to 54.7. The services PMI added +1.1 points to 53.7, while the construction PMI slipped -1.4 points to 61.4. The Caixin/Markit version of manufacturing PMI, by contrast, fell to 50.9 in November from a 27-month high of 51.2 a month ago. Despite the fall, Markit noted that it remains the second-highest reading in 2 years and indicates that 'the manufacturing industry continued to pick up steam'. Moreover, although index readings for both output and new orders declined, those 'tracking input and output prices rose at a faster pace to hit their highest levels in 5 years, pointing to further intensification of inflationary pressure'.