Another month, another record trade surplus in China. June’s $14.5 billion outturn has once again focussed international attention on China’s closely guarded currency but a number of analysts say that the authorities are already winning their own battle against excess liquidity and won’t risk a potentially destabilising exchange rate adjustment.
Specialist Asia fund Atlantis today expressed confidence that feared tightening measures won’t derail the China story.
“It is possible that more tightening measures could come out and foreign investors may adopt a wait-and-see attitude,” said Yang Liu, manager of Atlantis’ China Fortune Fund. Nevertheless, in the medium term “we believe it inevitable that more liquidity will come to China looking for better assets in a much improving market environment, supported by sensible policies in the coming years.”
Chinese stocks, Asia’s best performers in the first five months of the year, joined other emerging markets in June by suffering an abrupt reversal. The central bank raised interest rates at the end of April to 5.85%, has boosted bank’s reserve requirements and issued warnings to lenders about the rate of credit growth.
Stephen Green, senior economist at Standard Chartered, says that increased open market operations have mopped up excess liquidity and that targeted actions including limits on foreigners buying property and further increases in reserve requirements are much more likely than a near-term rate rise or currency revaluation.
“It’s far to early to declare victory in the fight to control liquidity, but ramped up sterilization, moderately slower lending growth and now signs of falling M2 growth suggest that the People’s Bank of China is fighting back effectively enough,” Green wrote in a research note.
“Things have not yet come to the crisis that is needed before a sea change on currency policy can occur,” Green concluded.
Dong Tao, an economist at Credit Suisse, does expect an increase of as much as 54 basis points in the lending and deposit rates this year. He also predicts the Chinese authorities won’t take drastic action
“All the measures so far have been, and will likely be, very mild and not enough to change current flush liquidity conditions in the near future,” Tao said.