March 11,2011

Zhou Xiaochuan Hints Robust Growth and Rate Hike

By Lu Ting,Hong Kong

Zhou Xiaochuan, the governor of People's Bank of China, has just answered questions from media at a news conference of Lianghui. Here are some relevant market moving details and Zhou's comments on policy

聽聽聽聽聽聽 Because retail sales data were distorted by auto sales, many clients are asking for non-auto retail sales data. According to our rough estimates, non auto sales growth actually accelerated to 17.5% YoY in Jan-Feb from 17.0% YoY in Dec. After adjusting for inflation, non-auto retail sales growth could be at 12.9% YoY in Dec and 13.4% in Jan-Feb.

聽聽聽聽聽聽 Power output has been always a focus for many investors, especially those doubting China's data quality and speculating on slumping growth. Here is the data: power output growth surged to 11.7% YoY in Jan-Feb from 5.2% in Dec and 6.2% in 4Q10. Last year power output growth slumped from 17.8% in 2Q to 11.8% in 3Q and to 6.2% in 4Q due both to base effect and govt power cuts.

聽聽聽聽聽聽 Property investment impacts many sectors. Housing starts (floor space) jumped to 27.9% in Jan-Feb, up from 5.2% in 4Q10, suggesting social housing might be truly started. Property FAI growth (nominal in RMB) picked up to 35.2% YoY in Jan-Feb from 26.4% in 4Q10. This can explain strong data on steel. Cement output (volume) was 9.1% YoY in Jan-Feb, down from 14.2% in 4Q10. But note the 4Q10 data was boosted by good weather.

聽聽聽聽聽聽 CPI breakdown: Food up 1.2% mom and 11.0% yoy in Feb (up from 10.3% YoY in Jan), while non-food inflation fell to 2.3% YoY in Feb from 2.6% in Jan. Residence costs rose 6.1% in Feb, down from 6.8% in Jan. Food inflation is still the dominant driver despite the falling weight in CPI basket. We maintain our inflation view that CPI inflation will remain around 5.0% in 1H11 and March CPI inflation could be at 5.5%. CPI inflation could decline in 2H11 if oil prices could be under control.

聽聽聽聽聽聽 On Policy, Zhou Xiaochuan, the PBoC governor, just said interest rate is an important policy tool which needs to be highlighted. This means that the chance of a rate hike could be quite high in the second half of March or early April. Since overnight SHIBOR rates are now as low as 1.7% and 7-day is at only 2.2%, interbank liquidity is ample and the room for another 50bp RRR hike is also quite big. So the market should be prepared for a RRR and rate hike in the next couple of weeks.

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