It increasingly looks like China Inc. has put monetary tightening on hold, in response to both global economic uncertainty due to European travails and signs of a marked slow-down in the Chinese economy as well.
One clear example supporting this notion is that the Chinese central bank (PBoC) has begun re-injecting liquidity into the financial system via open market operations, as shown below by Morgan Stanley.
Interestingly, we have observed that the PBoC’s open market operations turned to net injection of liquidity last week. This, in our opinion, might reflect that the regulators are pausing monetary tightening, given what’s going on outside China.
As shown below, sales volumes in China’s top cities have clearly come down in response to tightening measures aimed at the property market so far. Auto and appliance sales growth has also fallen markedly from a high base. (not shown)
As a result Morgan Stanley believes it makes sense for Chinese regulators to halt further monetary tightening. In response, they’ve recently removed a previous ‘underweight’ call on Chinese banks, highlighting relatively attractive price to book valuations for the space.
(Via Morgan Stanley, China Portfolio Strategy, 17 May 2010)