德银-中国-宏观经济-利率上涨的背后是什么-20171128-21页_2mb

Summary of "What's behind the rising interest rate?"

Core Content

The document analyzes the recent rise in interest rates in China, particularly the 10-year CGB and 10-year policy bank bond yields, which increased by 40bps and 70bps over the past two months, respectively. Despite a slowdown in economic growth and inflation remaining below 2%, the rate increase has surprised the market. The report explores the underlying factors driving this trend, including financial sector deleveraging and inflation expectations.

Main Views and Key Information

1. Financial Sector Deleveraging

• Credit-M2 Gap: The gap between broad credit and M2 growth has narrowed significantly, indicating ongoing deleveraging in the financial sector.
• Leading Indicator: An inverted credit-M2 gap is identified as a good leading indicator for bond yields, with a lag of about 3 months.
• Role of Small Banks and Asset Management Funds: These institutions were major buyers of government and policy bank bonds between 2014 and 2017, contributing to 82% of incremental holdings.
• Impact of Deleveraging: As small banks and asset management funds became less expansionary in late 2016 and early 2017, bond prices fell and yields rose. New regulations on asset management products may have further reduced bond purchases, contributing to the rise in yields.

2. Inflation Expectations

• Nonfood CPI Inflation: Nonfood CPI inflation has been rising steadily, which could influence interest rates.
• Headline CPI Inflation: The low headline CPI inflation is mainly due to subdued food prices, especially pork.
• Stabilization of Food Prices: Recent stabilization of food prices may signal the potential for higher CPI inflation.
• Forecast: The baseline forecast suggests CPI inflation could reach 3% in early 2018, but may decline in the rest of the year. If inflation remains elevated in Q2, it could raise concerns among investors and policy makers.

3. Other Macro Economic Publications in November

• China Fiscal Series I: Revisiting the LGFV debt issue (6 Nov)
• A Big Step to Open Up China's Financial Sector (10 Nov)
• Property Sales Growth Turned Negative in October (14 Nov)
• Risks to Watch in the Next Six Months (15 Nov, 20 Nov, 23 Nov)

4. China Macro in Charts (CMiC)

CMiC is a comprehensive chart pack that covers four main themes:

1. Economic activities and price development
2. Monetary and capital market development
3. Trade, capital flows, and RMB exchange rate
4. Fiscal development

It provides insights into key macroeconomic developments and updates on in-depth research from previous publications.

5. Key Macroeconomic Indicators

• Real GDP Growth: Expected to decline from 6.9% in 2017 to 6.3% in 2018.
• Fixed Asset Investment (FAI) Growth: Projected to decrease from 9.2% in 2017 to 8.2% in 2018.
• Industrial Production Growth: Expected to fall from 6.8% in 2017 to 5.6% in 2018.
• Retail Sales Growth: Projected to increase from 10.0% in 2017 to 10.8% in 2018.
• CPI Inflation: Expected to rise to 2.7% in 2018, with a potential peak of 3% in early 2018.
• PPI Inflation: Projected to increase from 6.2% in 2017 to 2.0% in 2018.
• M2 Growth: Expected to decrease from 9.2% in 2017 to 9.3% in 2018.
• Credit Growth: Projected to decline from 11.1% in 2017 to 10.2% in 2018.
• FX Reserves: Expected to decrease slightly from 3.11 trillion USD in 2017 to 3.03 trillion USD in 2018.
• USDCNY: Expected to rise to 7.10 by the end of 2018.

Conclusion

The rise in interest rates is primarily attributed to financial sector deleveraging and rising inflation expectations. The reduction in bond purchases by small banks and asset management funds, driven by regulatory changes and the narrowing of the credit-M2 gap, has pushed bond yields higher. Additionally, the gradual stabilization of food prices and the potential for higher CPI inflation in early 2018 may have also contributed to the rate increase. The report provides a detailed overview of various macroeconomic indicators and forecasts, emphasizing the importance of monitoring these trends for investors and policymakers.