Shares under pressure from rates worries

PUBLISHED : Saturday, 17 November, 2007, 12:00am
UPDATED : Saturday, 17 November, 2007, 12:00am

Central bank tightening looms on soaring mainland urban fixed asset investment

A shares and H shares both slumped yesterday as worries over another interest-rate increase intensified after the latest official data showed that the country recorded its fastest growth in urban fixed asset investment from January to October.

Anticipating higher borrowing costs, both mainland stock exchanges declined yesterday. The Shanghai Composite Index dropped 48.993 points or 0.91 per cent to close at 5,316.274 and the Shenzhen Composite Index lost 13.621 points or 1.05 per cent to close at 1,287.973. Shares on both exchanges finished the week flat.

The possible rate rise also cast a shadow over H shares or mainland companies listed in Hong Kong. The Hang Seng Chinese Enterprises Index tumbled 4.28 per cent or 747.73 points to 16,737.73, ending the week down 5.46 per cent.

'Beijing will be launching a series of macro-control measures to cool the overheated economy, including a possible new round of interest-rate increases,' said Patrick Yiu Ho-yin, an associate director of CASH Asset Management. Any increase would be the sixth in the key interest rate this year.

Besides the five rate increases, the People's Bank of China has ordered banks nine times to set aside more of their deposits in reserve. However, the world's fastest growing major economy has continued to boom, expanding by 11.5 per cent in the third quarter, projecting the fifth consecutive year of double-digit growth.

The mainland's urban fixed asset investment in the first 10 months expanded at the fastest pace in more than a year, an official report showed yesterday, capping a week of strong data that has cemented expectations of an immediate interest-rate rise.

Capital investment in factories, roads and infrastructure in urban areas surged 26.9 per cent in the January-October period to 8.9 trillion yuan, the National Bureau of Statistics said. This was the fastest pace since September last year and 0.5 percentage point higher than the 26.4 per cent advance in the first nine months.

Qu Hongbin, HSBC's chief mainland economist, said the10-month data implied a single-month growth rate of 29 per cent year on year in October, against September's 24.9 per cent. The bureau does not issue monthly data, only cumulative figures.

Yesterday's data capped a busy week of statistics for last month that showed a rebound in the consumer price index to an almost 11-year high of 6.5 per cent, surging retail spending, a record-high trade surplus and slowing industrial output growth.

Mr Qu said even more worrisome was the fact that the amount invested in new projects continued to accelerate to 26.5 per cent year on year in January-October from 24.2 per cent in the first nine months and 6.4 per cent in the first half.

'This higher investment figure, plus a rebound in headline CPI and accelerating credit growth, should give the PBOC more than enough reasons for taking immediate tightening actions,' Mr Qu said.

He expected at least another 27-basis-point rise in both deposit and lending rates as early as next week, two rounds of reserve ratio increases of 50 basis points each and tougher curbs on bank lending for the rest of the year.

However, Mr Qu said all these measures probably would not pace economic growth that significantly.

Liang Hong, the chief Asia economist with Goldman Sachs, said the strong fixed asset investment growth might reflect last year's low base.

'However, coupled with the 11-year record-high inflation rate and the acceleration in bank lending growth, we see policy tightening risks continuing to rise,' Ms Liang said in a research note.

She noted that fixed asset investment expansion last month was driven by stronger investment growth in both ferrous and non-ferrous metal smelting industries and the non-metal mineral product industry.

The statistics bureau also announced that property investment jumped 31.4 per cent to 1.92 trillion yuan in the latest period.

Spending in the non-metals minerals industry grew 53.5 per cent to 215 billion yuan while coal exploration investment rose 24.2 per cent to 125.8 billion yuan, non-ferrous metals surged 33.4 per cent to 98.3 billion yuan and electric power rose 9.4 per cent to 601.7 billion yuan.

Turning up the heat

Capital investment in factories, roads and infrastructure so far this year rose: 26.9%