The PBOC says: "GrrrrRRR..."

Okay, this is a couple of days late, sorta, but I think it's relevant as we digest this morning's PPI figures from China and await the probably more important CPI numbers due out tomorrow. So, in reverse order:

Whisper (Chinese Whisper?) numbers suggest that May CPI will come in at 7.7% YoY (vs 8.0% currently expected, and 8.5% in April.) Whispers in China of this sort generally turn out to be quite accurate.


Meanwhile, this morning we saw the PPI numbers come in better (lighter) than expected. From CLSA:

"China reported 8.2% YoY Producer Price Index (ie the output PPI) for May, which outpacing April's 8.1% although slightly lower than market consensus of 8.3%. Meanwhile, May's Purchasing Price Index (ie the input PPI) reached 11.9%, 10bps higher than April's 11.8%, which may imply input costs are rising and only incompletely being passed on resulting in margin squeeze that we are seeing in company data."

And last Saturday, ahead of a long weekend ("take THAT, markets - hahaha...") we had the PBOC come up with not one, but two consecutive 50bp Reserve Requirement Ratio hikes. From Sherry Lin at Credit Suisse, in a note on the China banks this morning:

"We maintain that the RRR hike per se has limited negative impact on earnings of Hong Kong-listed China banks, which operate with relatively liquid balance sheets. We estimate that every 50 bps increase in RRR will reduce Hong Kong listed China banks’ earnings by less than 1%."

In other words, as I read it, the Chinese banks are not likely to be hit by this 100bp increase in the RRR (partly as the PBOC actually pays interest on it, I believe) as they are liquid - and given that they are liquid, it's unlikely to lead to a serious easing in their absolute capacity to lend. ("In the near term, China banks’ earnings will be more vulnerable to a sustained correction in local stock markets" as Sherry also notes.) The PBOC knows this and seems to be sending a message to the markets that its position continues to be that runaway inflation will not be tolerated...

BUT given softening industrial data (CS economist Dong Tao's comments here) and a massive natural disaster to cope with (and the fast approaching Beijing Olympics too) stamping hard on the brakes and driving economic growth through the floor is also clearly not the aim.

Still cautious on China consumer names, but surprise could be to the upside, especially given the sell-off post RRR/ long weekend/ Friday US tanking.


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The FT's Lex column suggests that the latest RRR move is to stem capital flows, of which a large part may be speculative, and that the next move may be to control capital inflows directly... and implicitly agreeing with my view that the PBOC is NOT trying to drive down China's growth.