2015-08 Interest Rate Trends

In August, both the short-term, interbank rate and private lending rate increased, despite looser monetary policy throughout the summer.

The Shanghai Interbank Offer Rate (Shibor) ended August at 1.80%, which was a 33 basis point increase from July. However, that is still 45 basis points lower than the trailing average for August. That gap has been declining from 156 basis points in June, to 108 basis points in July, and now 45 basis points in August. Despite central bank intervention, the cost of borrowing is increasing for the state-owned banks.

The Wenzhou Comprehensive Index shot up to 19.21% at the end of August, up 113 basis points from July. That rate is still lower than the trailing average for August, which stood at 19.79%. August’s number told us two things. First, the collapse in real estate and equity prices may not have explained the fall in July’s interest rate. Second, even though the Wenzhou Comprehensive Index is declining, volatility is increasing.

2015-08 Relative Price Trends

Consumer prices in China increased 2.0% in August from a year earlier. Purchaser prices declined -6.6% over the same period. The divergent trends in China’s structure of production that began at the beginning of 2015 accelerated in August. Two additional surprises came out of August’s numbers. First, although the Consumer Price Index is at the highest point it has been at in a year, because of the devaluation against the U.S. dollar in August, consumer prices have dropped for overseas Chinese. Additionally, although the devaluation should have hit producer prices harder than consumer prices, the drop in producer prices was the largest since the Global Financial Crisis. The devaluation itself spooked commodity markets into lower territory.

2015-08 Stock Market Valuation

In August, the gold price of the Shenzhen Composite fell for a third straight month. Despite tumbling from 0.38 gold ounces at the end of May to 0.25 gold ounces in August, the gold price of the index is still up 62.4% over a 12 month period. August was especially brutal for international investors in Chinese equities. The valuation of the stock market fell, the renminbi depreciated against the dollar, and the dollar price of gold went up. Any central bank activity to halt the first trend will only accelerate the latter two trends.

2015-08 Relative Equity Performance

In August, CHIQ, an exchange traded fund that follows the consumer goods industry in China, fell -20.19% over the last twelve months. It was the largest drop seen since August, 2012. The materials sector equivalent, CHIM, also fell -15.42% over the same period. It was the largest drop seen since March, 2014.

Public Comments for Future Review, 2015-08-24

"It's totally premature to speak of a crisis in China," [Carlo Cottarelli, an IMF executive director representing countries such as Italy and Greece on its board] told a press conference. 

He reiterated an IMF forecast for a 6.8 percent expansion in the Chinese economy this year, below the 7.4 percent growth achieved in 2014.[1]

2015-07 Interest Rate Trends

In July, the state-sector and private-sector interest rates showed divergent trends, for the benefit of the private sector.

 

The Shanghai Interbank Offer Rate (Shibor) ended July at 1.47%, which was a 43 basis point increase from May.  However, that is still 108 basis points lower than the trailing average for July.  The cost of financing for state-owned banks is increasing, despite the amount of new money that is being created by the central bank.

 

By comparison, the Wenzhou Private Finance Index ended July at 18.08%, the lowest rate in the series.  It may be that as private lending is liberalized more financial capital is being allocated to the private sector.  Or, it may be that financial repression by the central bank and the collapse in equities and real estate prices has led an unsustainable amount of funds seeking yield into riskier assets.  Probably both.

2015-07 Relative Price Trends

Consumer prices in China increased 1.6% in July from a year earlier.  Purchaser prices declined -6.1% over the same period.  Two divergent trends are occurring for China's structure of production.

The rate of increase in consumer prices is accelerating.  The rate of increase hit a most recent low point of 0.80% in January, 2015.  Since then, the growth rate has mostly been accelerating, especially over the last three months.  In May, the rate was 1.20%, but has gained twenty basis points every month since then.

The rate of decrease in purchaser prices is also accelerating.  The extent of the decline in July was the largest since October, 2009.  Even though the central bank is pumping money into the economy to increase overall economic activity, the only effect it seems to be having is to make life more expensive for everyday people.

It will be interesting to see how the recent devaluation affects these prices.  China does not import many consumer goods, so the devaluation will not affect the Consumer Price Index much.  China does import most of the world's commodities, so they devaluation should be directly reflected in the Purchaser Price Index.