Wen Jiabao has given a state-of-the-nation speech to the annual meeting of the National People’s Congress. In it, he announced that China’s growth target for this year would be 7.5%, a cut from the 8% target of recent years and the lowest since 2004. The target for the budget deficit will be 1.5%, and the target for inflation remains unchanged at 4%. This was all mostly as economists expected. The National Development and Reform Commission has also announced that the target for fixed-asset investment growth will be 16%, lower than economists had forecast.

What does all of this mean? I do not at present have a regular Kremlinologist (Zhongnanologist?) to turn to who would put Chinese policy decisions in their broader context (a gap in my blogroll that I need to fill). Here are some suggestions:

  • The lower growth target is a signal the the government is serious about moving to a more sustainable growth model (how?).
  • The lower growth target is a message to local governments to stop pursuing growth at all costs.
  • The lowering of the growth target and the maintenance of the 4% inflation target are a sign that the government is serious about fighting inflation, even at the cost of growth.
  • It is all just an acknowledgement of the lower growth prospects this year.

I do not know which one of these is right. Perhaps it is a combination of all of them.

Also on the subject of China, the FT reports that the Ministry of Finance is to sell CNY 250bn of debt on behalf of local governments this year, compared to CNY 200bn in both 2010 and 2011. Again, I do not know what this means. Central government is apparently trying to clean up local government, so perhaps the increase is an attempt to make local governments less reliant on other sources of financing (such as dodgy land sales). Local-government financing vehicles have, according to the National Audit Office (last June), accumulated CNY 10.7tr of debt, 70% of which has to be repaid by 2015.

In a HUF

Why? Because I missed the HUF rally this year. Admittedly, I do not watch or trade the currency — I watch the main counters and I try to play the big game. Nonetheless, I need to be alive to opportunities in other markets when they arise. The rally began after Mr. Orban said on 5th Jan that he was prepared to meet the conditions for an IMF bailout (although various, bad, changes to Hungary’s constitution that he has made still stand). Markets respond to the future, not the past. The dreadful Orban’s undemocratic changes and intransigence were in the past; the prospect of a bailout was in the future; thus the HUF rallied.

That’s a bit AUD

To continue the string of awful puns, the odd thing (or, anyway, the unusual thing, if you believe an analyst quoted by Bloomberg) is that Glenn Stevens has, for the first time, suggested that the AUD is stronger than might be warranted by commodity prices. He actually called its recent strength “a bit odd”. I wonder whether this is a signficiant change the might herald a reversal of policy. As recently as November, Stevens was welcoming a strong AUD as a means of controlling inflation.

Shoud I Exit Long Copper?

I am long copper as a catch-up trade. I did not get into equities when they started to rally because my process did not allow it; having changed my process, I went into copper, which is generally correlated with equities but had been a laggard. I have a lower return expectation from catch-up trades and am more inclined than with other trades to take profits early. I am wondering whether I should do so today.

I am inclined to be long risk assets because of the improving US economy (the US remains a crucial driver of the world economy) and because of loosening liquidity conditions. However, in the past week, the economic picture has deteriorated a little and US monetary policy has been tightened a little. The economic deterioration was in the form of the latest ISM PMI, which showed a slower pace of expansion in the US. The tightening was Ben Bernanke’s omission of any reference to QE3 from his latest testimony to Congress — having put a Bernanke put under employment growth (a loosening), Bernanke seemed to indicate by his omission that employment was growing fast enough that the likelihood of QE3 was receding. However, I do not think these points against my argument are decisive. PMI’s in China and Europe improved, if only marginally, and in the US, both my leading index and auto sales (an early indicator of PCE on durable goods, which is a leading indicator of the economy) point to continued expansion. On the monetary side, the ECB has been loosening, the BoJ has started a large round of asset purchases, and the likelihood of QE3 remains higher than it was before Bernanke’s last press conference. Overall, therefore, I think that the US economy continues to grow, the world economy is improving at the margin, and monetary conditions remain relatively loose. Thus risk assets should rise.

Is the successful completion of the second LTRO a tightening (as the end of QE2 was)? I am not sure about this, but I tend to think it was not. The key thing about QE2 was its effect on expectations: it signalled that the Fed was equally committed to fighting inflation and deflation, and was in deflation-fighting mode. When it ended, the market believed that more QE was a political impossibility, even if the Fed had wanted to do it; thus, its end was a monetary tightening. In Europe, Draghi has shown that LTRO’s are politicially possible even in the face on Bundesbank opposition; and since the ECB has not convinced the market that it is as worried about deflation as inflation, the completion of the second LTRO does not signal the end of a deflation-fighting phase. LTRO’s were always more of a one-off event than an extended process like QE; the market sees them more like a put on the state of liquidity in the banking system than an ongoing event. As with US monetary policy, therefore, I think that the loosening implied by a recent shift in regime (indicated by the fact that the LTRO’s happened at all) is the signficant thing.


  • Eurozone final services PMI 48.8 d.e.
  • UK services PMI 53.8 d.e.

This Week

  • Global services PMI’s (Mon).
  • Eurozone retail sales (Mon).
  • RBA meeting (Tue).
  • Australia GDP (Wed).
  • ADP payrolls (Wed).
  • Japan final GDP (Wed).
  • Australia unemployment (Thu).
  • UK MPC meeting (Thu).
  • ECB meeting (Thu).
  • Australia trade balance (Fri).
  • China CPI, investment, IP, retail sales (Fri).
  • Non-farm parolls (Fri).
  • Trade balance (Fri).
  • China trade balance, new loans, M2 (Sat).