Category: China

China’s Uncertain Future

Posted by Winflow – July 13, 2011

Is China going to be the next largest economy in the world?

At this point it is difficult to tell. If they can increase their standard of living, based on population numbers, they should be able to grow to the largest economy. There are number of challenges that China must face in order to stimulate continued economic growth. These challenges include:

  • Changing demographics. A large aging population in China will soon reach retirement, which means China will have to pay out unprecedented healthcare and pension costs.
  • A labour force that is becoming more expensive. With an expensive labour force, outsourcing manufacturing and production duties to China is becoming less attractive. Neighbouring countries like Thailand have a more cost-efficient labour force and countries like Japan are more efficient and have a  reputation for higher-quality products.
  • With no rule of law, ample corruption and a lot of red tape to get through, making reforms to continue economic growth is extremely complex.
    Read the rest of this article

China Against American Debt-Default Plan

Posted by Winflow – June 8, 2011

Republicans in the American government are backing a debt-default plan to reduce the country’s projected US$1.4 trillion deficit. Going ahead with the debt-default plan would mean potentially destabilizing the economy and worsening relations with foreign creditors like China. China, the largest foreign creditor, holds over US$1 trillion in Treasury debt. Some information regarding the debt-default plan includes:

  • Going into default could weaken the US dollar.
  • A debt-default would mean delaying interest payments for a few days.
  • The US Treasury Department believes there will be no more room to borrow by the beginning of this August.
  • The US Congress is against increasing government spending.
  • If the US were to default on their payments, it could create a global reaction.
  • If interest payments aren’t made the economy could be pushed back into a full-blown recession.
  • Republicans believe foreign creditors would be content with a default if it means a better chance of paying government debts off later on.
  • US Treasury debt is still one of the safest forms of liquid investments.

For the full story, read this article in the Financial Post.

To prepare your business for tough economic times or any other business need, contact the Winflow Financial Group. We can reached at 1.800.956.6897 or request a free consultation today.

Tighter monetary policies in emerging economies

Posted by winflowfinancial – May 4, 2011

The Fed meeting last week announced no change in monetary policy.  At the same time, many central banks, especially those of developing countries, have criticized the US Federal Reserve’s policy and have started tightening their monetary policy.

China

Despite the People’s Bank of China (PBoC)’s tightening monetary policy (benchmark rate and reserve ratio) and reduction in notes and coins earlier in the year, M2 money supply has increased. Headline inflation rate rose to 5.4% YoY in March, up from 4.9% in February. And many Chinese citizens feel the hike in consumer prices hits their wallets and bank accounts faster than what’s reported by the state media. PBoC has raised both the benchmark interest rate and the reserve ratio, 5 and 7 times respectively in the past year.

The central bank officials in china have made many hawkish comments to the media, hoping to cool down the rising inflation expectations in the People’s Republic. In the first-quarter monetary policy report published on May 3, the PBoC re-emphasized that “stabilizing prices and managing inflation  expectations are critical”, and bank reserve requirements have no “absolute ceiling”. Similar hawkish statements were given in speeches by Governor Zhou Xiaochuan and Deputy Governor Hu Xiaolian earlier in April.

The yield of 1-year Chinese governmnet bond is currently 2.84%

Update: China raised reserve requirement by 0.5% again on May 12 2011.

India

The Reserve Bank of India has just announced another 50bp raise in interest rate on May 4. But the real interest rate is still far below zero due to high inflation, which was reported 8.9% in March. That’s the 7th rate hike by the central bank since July 2, 2010.

The monetary policy report clearly stated that “Over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence.”

The yield of 1-year Indian governmnet bond is currently 8.28%

 

Brazil

Brazil increased its benchmark interest rate to 12% on April 20 following a series of rate hikes from the lowest rate of 8.75% before April 28 2010. Brazil had traditionally very high interest rate. In 1999, the interest rate was once reached 45%, and remained in the 10% to 20% range until the recent financial crisis. That said, the central bank uses interest rate very actively as a tool to curtail inflation and will likely not to hesitate raising it to a higher level, which the economy is already used to.

The central bank president Alexandre tombini said on May 4 that “It’s not a 100-meter sprint, it’s a long process. Obviously, the monetary policy instrument that will get inflation back to its 4.5 percent target in 2012 is the conventional instrument that is being used, and will continue to be used for as long as necessary.” The latest inflation rate is 6.44% and is expected to continue rising.

The yield of 1-year Brazil governmnet bond is currently 12.58%

A number of other central banks also decided to tighten monetary policy since the beginning of this year:

Country Date Action Central Bank’s Comment
South Korea 13-Jan Interest
rate up 0.25%
1-year gov bond 3.46%		 …expects inflationary pressures to persist and inflation expectations to increase as the economic upswing continues and international commodity prices rise.
Hungary 24-Jan Interest
rate up 0.25%
1-year bond 7.29% as of Mar		 I would caution everyone from saying that ‘because they raised rates in the previous month they will raise them again next month
Chile 17-Feb Interest
rate up 0.25%		 It’s necessary to continue reducing monetary stimulus in the coming months, and that the pace of the process “will depend on the unfolding of domestic and external
macroeconomic conditions.” They also said inflation has “behaved as expected.”
Thailand 9-Mar Interest rate up 0.25%
1-year gov bond 3.08%		 although core inflation was in the target range, the central bank would monitor it to ensure economic
stability
Peru 1-Apr Reserve
ratio up 0.5%		 “We’re very worried by inflation,” Peru’s Finance Minister Ismael Benavides told reporters in Lima today. “We’re working together with the central bank to ensure inflation remains at manageable levels.”
Poland 5-Apr Interest
rate up 0.25%
1-year bond 6.27% as of Mar		 The rate panel described today’s move as “continuing the monetary tightening cycle” in a statement after the meeting.
Columbia 29-Apr Interest
rate up 0.25%		 …suggests that the adjustment toward a less expansive monetary policy should continue,” policy makers said in their statement that accompanied today’s decision. “The rate increases will help to maintain inflation within the target range this year and next and contribute to avoiding future financial imbalances.”
Malaysia 5-May Interest rate up 0.25%, Reserve ratio up 1%
1-year gov bond 3.015%		 Today’s decision to further raise the statutory reserve
requirement is a “pre-emptive” measure to manage a
“significant” build-up of liquidity, the central bank said.

Not only emerging markets, central banks of the developed world also tightened policies amid rising commodity prices.