Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Hot money inflows lie behind the surge of FX
reserves
China’s outstanding level of official foreign reserves
rose to USD 2.85trn by the end of 2010, up by
18.7% y/y, or an increase of USD 448.2bn over the
year. It is widely believed that a large amount of the
increase in FX reserves is attributable to “hot money”.
The trade surplus and FDI together make up some
79% of the increase in FX reserves according to
official statistics. However, because a lot of hot
money came to China through legal ways via trade
and foreign direct investment, an important and
famous official economist, Wang Jian, believes that
less than 50% of foreign reserves can be explained
by trade and foreign direct investment.
Foreign capital inflows will continue in 2011. Indeed,
if the US QE2 and fiscal policy do not work effectively,
and if the eurozone’s peripheral debt crisis worsens,
the hot money inflow into China could intensify.
Market rate is on an upward trend
Market interest rates started to rise strongly from
November. 3M SHIBOR increased to 4.62% by the
end of December, 279bp higher than at the end of
December 2009. Meanwhile, SHIBOR seems to have
returned to the pre-crisis level. Likewise, the
weighted average inter-bank borrowing rate
increased to 2.92% in December, 167bp higher than
in 2009 December, while benchmark rates for both
deposits and lending were increased by only 50bp.
The rise in market interest rates well reflects the
effects of monetary policy tightening. We expect
market interest rates to remain on an upward trend
and to stay firm at the higher levels.
Chart 3: Quarterly Change in FX reserves
versus Trade Balance plus FDI (USD bn)
240
220
Incre FX Reserves Trade Suprlus + FDI
200
180
160
140
120
100
80
60
40
20
0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Source: BNP Paribas, PBOC, NBS
Chart 4: 3M SHIBOR and Interbank Borrowing
Rates (%)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
3M SHIBOR
Weighted avg interbank lending rate
0.5
Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10
Source: BNP Paribas, CEIC
Table 1: Major Financial Indicators in China
(in RMB) 2009 2010 change
M2 (% y/y) 27.7 19.7 (8.0)
M1 (% y/y) 32.4 21.2 (11.2)
M0 (% y/y) 11.8 16.7 4.9
Outstanding RMB loans (% y/y) 31.7 19.9 (11.8)
Outstanding RMB deposits (% y/y) 28.2 20.2 (8.0)
New RMB loans (RMB trn) 9.6 8.0 (1.7)
- household 2.5 2.9 0.4
- non-financial institutions 7.1 5.1 (2.1)
New deposits (RMB trn) 13.1 12.1 (1.1)
- household 4.3 4.4 0.1
- non-financial institutions 8.1 5.3 (2.8)
- fiscal 0.4 0.3 (0.1)
M1 growth/M2 growth 1.2 1.1 (0.1)
M1/M2 (%) 41.0 39.0 (2.0)
L/D 66.7 66.7 0.0
L/D (%) 73.1 66.0 (7.1)
(In USD)
Outstanding FX lending (% y/y) 56.0 19.5 (36.5)
Outstanding FX deposits (% y/y) 8.4 9.5 1.1
New FX loans (USD bn) 136.2 74.0 (62.2)
New FX deposits (USD bn) 16.2 20.0 3.8
FX loans/FX deposits 8.4 3.7 (4.7)
Foreign reserves (USD bn) 2399.2 2847.3 448.1
Foreign reserves growth (% y/y) 23.3 18.7 (4.6)
RMB/USD (period-end) 6.8282 6.6227 (0.2)
RRR for large banks (%) 15.5 19.0 3.5
Benchmark 1Y deposit rate (%) 2.25 2.75 0.5
Benchmark 1Y lending rate (%) 5.31 5.81 0.5
3M SHIBOR (period-end) 1.83 4.62 2.79
Weighted avg interbank lending rate (%) 1.25 2.92 1.67
Source: BNP Paribas, CEIC
Xingdong Chen 13 January 2011
Market Mover
22
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