Retiring gracefully

From “China: Economy firing on all cylinders” by JPMorgan China research head Frank Gong, June 15 2007:

On the back of the stronger than expected economic activities … we raised our interest rate forecast and now expect a full chance of a 27 basis points hike in both the lending and deposit rate during the rest of the year (previously, we assigned one-third chance of a 27 basis points hike). In addition, we continue to expect a 50 basis points hike in reserve ratio requirements this year. It is the unexpectedly strong economic activity, especially investment spending, rather than inflation, that is behind our upward revision of the rate forecast. In this context, it is the lending rate that needs to be hiked to prevent the economy from overheating … In our view, before the rate hike, the government is more likely to cut or remove the 20% tax on the interest income from deposit to help keep funds within the banking system, given the zero-to-negative real interest rate, and recent sharp decline of household deposits. Removing the tax entirely would be equivalent to more than a 60 basis points rate hike for savers who currently earn a deposit rate of 3.06%.

From “China PMI report on manufacturing” by CLSA Chief Economist Jim Walker, June 1 2007:

The pick up in the CLSA China Purchasing Managers’ Index (a composite indicator designed to provide a single-figure snapshot of manufacturing operating conditions, rose from 53.3 in April to 54.1 points, its highest level since April 2005, indicating robust expansion of China’s manufacturing sector) comes as no surprise on the back of increased bank lending activity in the first quarter of the year. Despite all Beijing’s monetary tightening efforts, China’s commercial banks continue to ignore pleas to restrain lending just as its local governments ignore pleas to restrain spending. Accelerated monetary tightening measures should be expected over the next six months as Beijing fights to regain control of its overheating economy. Overheating is also appearing in Chinese export activity. There has been a gradual pick up in export price rises over the last six months with over 12% of manufacturers reporting export price rises in May. The implications for global monetary policy are none too positive: The age of disinflation being exported from China looks to be well and truly over.

From “China Export Shock: ASEAN 1, North Asia 0” by ING Asia Chief Economist Tim Condon, June 4 2007:

The ‘China Export Shock’ (the post-2004 surge in China’s trade surplus) has unleashed powerful forces … all of Asia will become more closely economically integrated with China. Members of ASEAN (The Association of Southeast Asian Nations), especially poor Cambodia, Indonesia, Philippines and Vietnam, are better positioned than North Asia. Within ASEAN, richer Malaysia and rich Singapore face the restructuring of their electronics sectors. We see Singapore’s transition from being a big producer of hard disk drives to producing disk media … as evidence of the restructuring. Based on GDP growth Singapore is outperforming, which we attribute to policies to increase competitiveness … Countries that adopt policies to accommodate the restructuring pressure unleashed by the China Export Shock will experience strong growth and high returns to capital. Singapore is a good example. In the short run, however, they are also likely to experience a widening income gap. To retain the buy-in from the man in the street Asian politicians will have to use some of the gains accruing to capital to increase the feel-good factor.

From “Old and rich” by UBS Asia Chief Economist Jonathan Anderson, June 11 2007:

China can afford to lose a lot of savings without seeing any real impact on investment and growth.  Let us explain what we mean … By 2020-25 China should be settling in to a sustainable real growth rate of 7% year-on-year. How much of the economy will China need to invest to generate that growth? According to historical statistical relationships, the answer is between 32% to 35% of GDP … The bottom line is that based on current productivity and investment trends, over the next 20 years China could afford to lose nearly half of its national savings and still grow at per-capita rates that would let its citizens get rich faster than any of its East Asian neighbors did … In other words, even after accounting for the effects of aging, China is still left with a very large savings buffer to weather any additional ‘saving shocks’ such as pension reform, corporate dividend reforms, improvements in the social safety net, etc., before we would even begin to talk about a negative structural growth impact. And this is in the worst case scenario. We’re not saying that China will automatically get rich, of course. But the above analysis should help explain why we don’t spend much time worrying about the macroeconomic effects of an aging society.