Futures Outlook - An Excerpt from CRB'S Futures Market Service

Chinese Q3 GDP report of +8.9% fuels talk about Chinese interest rate hike

China reported on Thursday that its Q3 GDP grew +8.9% y/y, the fastest pace in a year. China’s GDP hit a cyclical trough of +6.1% in Q1-2009 and then steadily improved to +7.9% in Q2 and +8.9% in Q4. Growth in the first 9 months of 2009 was +7.7%, which means that the economy may well exceed the government’s 2009 growth target of +8%. The Chinese economy is the fastest growing major global economy and is helping to pull the rest of the world out of recession.

The strong Q3 GDP report, however, caused the Chinese government to shift to a slightly more hawkish tone that caused market worries that some stimulus withdrawal and an interest rate hike might not be far behind. China’s State Council said “the policy focus of the next few months is to balance the need to maintain stable and relatively fast growth... and the need to better manage inflationary expectations.” The government is worried that low interest rates and large stimulus programs might be causing a new bubble. The Shanghai Composite stock index this year has so far rallied by 68% and property sales so far this year are up sharply by 73%.

The Chinese central bank during the financial crisis late last year cut its benchmark 1-year rate by a total of 189 bp from 7.20% in September 2008 to 5.31% by December 2008. The 1-year rate has been at 5.31% all this year, matching the record low seen during 2002-04. The Australian central bank recently became the first major country to raise its interest rates and the Chinese central bank may be next. An interest rate hike may have a temporary negative influence on the Chinese stock market, but a rate hike could also  be taken as a positive sign that normality is returning and that the Chinese government has the will to prevent an artificial boom from eventually turning into a bust.

Meanwhile, the recovery in the Chinese economy ahead of other major economies is likely to put upward pressure on the yuan. The Chinese government has kept the yuan virtually unchanged since last June. However, the yuan is likely to resume the upward climb seen from mid- 2005 to mid-2008 as the Chinese economy recovers further, particularly if the dollar continues to experience long-term weakness.

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