China’s bond market is starting to show renewed inflation concerns before a report that will probably show the economy grew 10.2 percent last year, the fastest pace since 2007.
Ten-year debt yielded 71 basis points more than two-year notes yesterday, up from 48 on Jan. 4, a steepening of the so- called yield curve that followed a record decline last month. December’s inflation cooled to a 4.6 percent pace, from a 28- month high of 5.1 percent in November, according to the median forecast in a Bloomberg News survey of 27 economists before the Jan. 20 report. The economy expanded 9.4 percent in the fourth quarter, the poll showed.
President Hu Jintao, who arrives in Washington for a summit today, rejected U.S. Treasury Secretary Timothy F. Geithner’s argument that higher prices in China require a stronger yuan, saying over the weekend that inflation is “moderate.” China’s yield curve flattened by 72 basis points in December, even as that for U.S. bonds widened 36 to 270 because of optimism the global economy is recovering.
“Yields will rise across all terms because inflation will accelerate and the central bank may continue raising interest rates,” said Lin Hongjun, a fund manager in Shanghai at Bank of Communications Schroders Fund Management Co., the London-based asset manager’s Chinese joint venture that oversees 57.1 billion yuan ($8.7 billion).
Rebounding Inflation
The yield on China’s 3.77 percent government bond due December 2020 rose four basis points to 3.95 percent yesterday, according to data compiled by Bloomberg. It climbed to 3.98 percent today and is up seven basis points this year. The two- year yield fell 16 basis points this year to 3.24 percent as of yesterday’s close, reflecting an easing credit crunch. A basis point is 0.01 percentage points.
The median forecast for growth is near to the 9.6 percent pace of the previous three months. Inflation may rebound to as fast as 6 percent during the first half of this year, according to HSBC Holdings Plc and Citigroup Inc. Food costs climbed 11.7 percent in November from a year earlier and property prices rose 6.4 percent in December.
“2011 will be the year of inflation,” said Qu Hongbin, co-head of Asian economic research at HSBC in Hong Kong. “China’s key task in the first half would be to tackle inflation by tightening monetary policies, along with measures to ensure supply of agricultural products and curb the property market.”
Reserve Requirements
Policy makers may raise lenders’ reserve ratios by 150 basis points in the next six months, according to HSBC. Benchmark one-year lending and deposit rates may increase 50 basis points from 5.81 percent and 2.75 percent, the bank estimates.
China’s benchmark money-market rate rose for a third day after the central bank lifted reserve requirements for the fourth time in three months on Jan. 14. The proportion of deposits the biggest banks must set aside as reserves will increase by half a percentage point to 19 percent starting Jan. 20, excluding any extra requirements for individual lenders.
The seven-day repurchase rate, which measures lending costs between banks, advanced 16 basis points to 2.74 percent. One- year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repo rate, climbed three basis points to 3.43 percent.
Bets on Yuan
Following Hu’s comments on the yuan, twelve-month non- deliverable forwards declined 0.32 percent to 6.4668 per dollar yesterday, reflecting bets the currency will strengthen 2 percent in a year, according to data compiled by Bloomberg. The yuan traded at 6.5887 today and the forward contract was also little changed.
Premier Wen Jiabao’s government aims to tame inflation and limit the risk of asset bubbles after M2, the broadest measure of money supply, surged by 53 percent over the past two years as the nation flooded the financial system with money to drive a recovery. Foreign-exchange reserves climbed by a record $199 billion in the fourth quarter and 2010 domestic lending exceeded the government’s target.
“Too rapid growth and overheating” are the biggest risks this year, Yao Jingyuan, chief economist at the National Bureau of Statistics, said Jan. 16.
Economic Momentum
China’s quarter-on-quarter expansion may have accelerated in the October-December period as credit growth supported investment, according to Mark Williams, a London-based economist at Capital Economics Ltd. who worked at the U.K. Treasury as an adviser on China from 2005 to 2007. “With bank lending still apparently strong at the beginning of 2011, we would expect the momentum to carry over.”
Lending may have reached 1 trillion yuan in the first two weeks of this year, Goldman Sachs Group Inc. said last week, citing checks with commercial banks. In comparison, the latest increase in reserve requirements may lock up about 360 billion yuan, according to Barclays Capital.
China International Capital Corp., the top-ranked brokerage for China research in Asiamoney magazine’s annual survey, yesterday raised forecasts for China’s growth and inflation. Consumer prices may rise 4.5 percent this year and the economy may expand 9.5 percent, economists led by Peng Wensheng said in an e-mailed note to clients.
‘Soft Landing’
The World Bank forecast last week that the economy will expand 8.7 percent this year. Exports have bounced back to record levels, with the nation reporting a $183 billion trade surplus for last year. Monetary easing in the U.S. may add to inflows of speculative capital or so-called “hot money” that the nation’s currency regulator is seeking to block.
“The big concern is whether the Chinese authorities can administer a soft landing, that is they are able to bring down inflation in the country without significantly reducing the rate of growth,” Vikram Nehru, the World Bank’s Washington-based chief economist for East Asia and the Pacific, said last week in Beijing.
The cost of insuring the government’s dollar debt for five years was 76 basis points at the end of last week, up from a 2 1/2-year low of 52 on Oct. 13, according to CMA prices in New York. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to debt agreements.
December’s inflation rate may be restrained by the comparison with a higher year-earlier level than in November. In January and February, price gains may be boosted by household purchases for the week-long Lunar New Year holiday which starts Feb. 2, economists said.
Beijing increased its minimum wage 21 percent to 1,160 ($175) from Jan. 1. Yum! Brands Inc., the owner of the KFC restaurant chain, said last month that it expects “higher than normal” increases in labor costs in the first half of this year.
“Inflation is likely to remain elevated into at least mid- year,” said Patrick Bennett, a Hong Kong-based strategist at Standard Bank Group Ltd. “Pressure is for some further bond weakness and further curve steepening until inflation is seen to be in check.”
--Zheng Lifei. With assistance from Kevin Hamlin in Beijing, Luo Jun and Judy Chen in Shanghai, and Jay Wang in Singapore. Editors: Paul Panckhurst, Sandy Hendry
To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net; Kevin Hamlin in Beijing on +86-10-6649-7573 or khamlin@bloomberg.net
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