Analysis – China has multiple choices to avoid hard landing risk

BEIJING (Reuters) – China faces what could be its worst year of growth in a decade with policy firepower that developed nations can only dream of.
A record-breaking tax take expected to top 10 trillion yuan ($1.6 trillion) in 2011 gives Beijing fiscal scope to support growth and financial system liquidity, while monetary policy is perfectly poised for easing after a near two-year tightening cycle.
Contrast that with deep deficits across Europe and the United States and the orthodox policies forced upon central banks on both continents in a desperate bid to avoid a slide into economic depression.
It adds up to China having every chance to steer its economy safely from its slowest quarter of growth in 2- years, and still avoid a hard landing that would reverberate globally.
“There are caveats, but compared to its counterparts, China has plenty of policy flexibility,” Tim Condon, head of Asian economic research at ING in Singapore, told Reuters.
The release of some 1.2 trillion yuan of fiscal deposits in December signals how roomy China’s policy pockets are.
That injection was the single biggest factor behind a jump in money supply and bank credit in December, according to analysts at China International Capital Corp, China’s biggest investment bank.
Chinese banks extended 640.5 billion yuan in new loans in December, up from 562.2 billion yuan in November, while M2 accelerated to 13.6 percent from November’s 12.7 percent.
CICC reckons the odds of a January cut in the ratio of deposits that commercial banks are required to hold as reserves (RRR) have been dramatically reduced as a consequence.
SYSTEMIC LIQUIDITY
The implications of China’s fiscal strength are crucial for money markets. An outflow of government deposits from the balance sheet of the People’s Bank of China (PBOC) can boost systemic liquidity far in excess of an RRR cut.
“It’s getting increasingly important as the size is getting bigger,” Xu Hong, an analyst with Daton Securities in northern Chinese city of Dalian told Reuters.
Government deposits fell 891 billion yuan in the last month of 2010, 954 billion yuan in December 2009, and 1,045 billion yuan in 2008, whereas a mere 350 billion yuan was estimated to have been injected into the system by the 50 basis point cut in RRR to 21 percent announced on Nov 30, 2011.
Economists polled recently by Reuters forecast a further 200 bps of RRR cuts to come in 2012, but the impact of that would far less than the 1.7 trillion yuan of injections implied if the government has turned an estimated 800 billion yuan surplus in 2011 into the 900 billion yuan deficit originally budgeted.
Released fiscal funds are a key factor underlying accommodative liquidity in the interbank market, according to Zhou Binglin, an analyst with Guosen Securities.
“That’s possibly why fund supply is not too tight despite capital outflows for two consecutive months and the absence of central bank liquidity injection,” he wrote in a client note.
China’s foreign exchange reserves, the world’s largest, fell $20.6 billion in the fourth quarter to $3.18 trillion as the trade surplus shrank and capital flows reversed.
That fall reinforced the views of many analysts and investors that a PBOC policy move was imminent, but a closer reading of fiscal deposit data would have been a better guide.
“It’s a key fact to pay attention to, particularly at the end of a year, and it’s role is becoming more visible,” a bond trader in the interbank market, who declined to be identified, said.
CHANGING DYNAMICS
China’s surging tax flows are also changing credit dynamics at the local government level, with regional banks being cajoled into providing loans to pet projects in return for the promise of a share of soaring fiscal deposits.
A notice on the website of the Rugao government in China’s eastern Jiangsu province said that the allocation of fiscal deposits would be linked to the credit offered by banks.
“Many small banks are in desperate need of deposits, and fiscal deposits are too big to miss, for which they have to make concessions,” a regional banker in Zhejiang province said.
Banks need the deposits because monetary policy settings were tightened so sharply over the last two years to fight the inflationary side-effects of massive stimulus that Beijing launched in 2008 to cushion the economy from the impact of the global economic crisis.
Twin bubbles in real estate and local government debt are still being battled by Beijing, and are arguably the only — if significant — policy constraint faced as the world’s second-biggest economy faces another economic slowdown.
It’s certainly a factor preventing the government using well-stocked fiscal coffers for outright economic pump-priming, or allowing explosive growth in still elevated leverage levels.
But relatively speaking, China has plenty of room to move.
“Every country has constraints. China was almost as unconstrained as it could have hoped for in 2008 when the crisis hit. The response to that has reduced the flexibility they have now, but they have far more than their counterparts in the West have,” ING’s Condon said.
(Editing by Kim Coghill)
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Bank doubles profit from home loans

Commonwealth Bank ATMs. Picture: Alan Pryke Source: The Sunday Telegraph

AUSTRALIA’S biggest bank has more than doubled the money it makes on home loans since the height of the global financial crisis.

And, while the Commonwealth Bank and its peers complain of having to pay depositors higher rates for the funds they lend out, Reserve Bank figures show the gap between deposit rates and the RBA cash rate is narrowing. In fact, the gap is at the narrowest point in more than four years – evidence that bank lending is not entirely as expensive as they make out.
Of particular note, figures from the recent Commonwealth Bank profit announcement show net home loan incomes jumped more than 130 per cent since the height of the global financial crisis, to more than $2.6 billion.
Despite the income growth, the nation’s top lenders have drawn widespread criticism for suggesting future Reserve Bank rate cuts may not be passed on in full due to “higher lending costs”.
Speaking to reporters after Westpac’s annual meeting last month, boss Gail Kelly warned global money markets, a key source of funding for Australian banks, had “effectively closed”.
“As a direct result of the turmoil going on around the world, funding has become a more difficult issue,” she said.
“And when they open up, our estimation is that the cost of raising money will actually be more than it was at any point during the global financial crisis.”
The World Bank yesterday slashed its global growth forecasts, warning the world is on the edge of a new financial crisis, more damaging than the one that followed the collapse of Lehman Brothers in 2008.
Meanwhile, some analysts have suggested the impact of rising wholesale funding costs have been overstated by the banks, particularly as the sector can tap other sources for cheaper funding.
Deutsche Bank analyst James Freeman said he believed none of the major banks had yet to experience pressures on pricing. “While offshore wholesale funding costs have risen materially over recent months, the impact on banks margins and hence profit will be contained,” he said.
Matt Levey, head of campaigns at consumer group Choice, is another cynic of banks “crying poor”.
“We’ve seen from bank profits that they’re obviously very profitable,” Mr Levey said yesterday.
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Curtailed by property crash

Killultagh Estates is a large Northern Ireland-owned company engaged in managing property for rental and investment. This company is only one of a number of closely related property companies controlled by the related shareholders.
As a property investor, the main notable features of the profit and loss account, and the balance sheet, until 2008 were the increase in the value of its fixed assets and investments and their impact on borrowing and interest charges.
More recently, particularly in the year to March 2010, the accounts reflect the impact of the large reduction in property values although borrowing costs remained a large cost.
Capital spending, after large commitments in 2005 to 2008, has fallen sharply.
The balance sheet values of assets and investments rose from £155m in March 2005 to £293m in March 2008, including unrealised revaluations of over £45m.
Support for the recent expansion of the business has come from increased bank financing which grew from £101m in March 2005 to £235m in March 2008.
Shareholders’ funds, as stated in the balance sheet, were over £74m in March 2007.
Then in March 2008 the stated value was £68m and fell further (after revaluations) to £53m, by March 2009 and further to only £2m in March 2010: a fall of £72m.
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