PBOC Tightening - Fundamentally Positive

Stocks hit a Chinese wall Last evening, the People’s Bank of China (PBOC) announced it will raise the reserve ratio requirement (RRR) by 50 bps to 16% from 15.5% for big banks and to 14% from 13.5% for smaller institutions from Jan 18 with rural credit cooperatives excluded. That took the wind out of the sails of Asian markets. This is the first time since Dec 08 (after the Lehman collapse) that the PBOC is raising the ratio. Analysts and economists were expecting the RRR to be raised sometime in February. According to Bloomberg News, a median of 11 forecasts were expecting the move to be made only in April. As a result, the Hang Seng Index lost 578 points or 2.6% to close at 21,748 on Wednesday while the Shanghai Composite Index dived 3.1% or 101 points to close at 3,172. In a research note, DBS Research says that the China’s decision to hike its RRR “sends the clearest signal yet that it is beginning to tighten monetary policy”. That in turn could dampen sentiment for stocks with pure exposure to Chinese properties, it adds. Chinese property companies listed on the Singapore Exchange include Chongqing-based Ying Li International Real Estate, Yanlord Land Group, Centraland, Pan Hong Property Group, Guangdong-based China Yuanbang Property Holdingsand Sunshine Holdings. Analysts also predicted that any tightening of monetary policy by PBOC will affect commodities. Already, copper and oil eased on Wednesday, while the Baltic Dry Index ended at 3,160, down roughly a third from its Nov 09 high of 4,661. STX Pan Ocean lost 56 cents to $15.50 on Wednesday. Other SGX bulk carrier operators include Mercator Lines and Courage Marine. DBS Research believes there could be “a knee-jerk reaction from commodity plays such as CPO (crude palm oil) and coal”. Wilmar Internationalhas been very much a China play and its stratospheric ascent came to an abrupt halt on Wednesday when prices fell 13 cents to $7.04. “We note that CPO stocks Indofood-Agri Resources (target price: $2.30) and First Resources (target price: $1.16) have both exceed our fundamental target prices,” DBS says. On the other hand, Citigroup Research reckons any tightening by PBOC would have a positive impact on Chinese banks. “We see the sector range-bound in the near term due to capital raising uncertainties, but view monetary tightening as fundamentally positive leading to higher net interest margins (NIM),” Citigroup says in a report released on Wednesday. “We would much prefer slower loan growth and higher NIMs than the opposite combination.” Its top picks are China Construction Bank, China Merchants Bankand China Citic Bank. While the 0.5 percentage point increase in bank reserve requirement only drains about RMB200-300 billion ($40.7–$61.1 billion) from the market, it could be the start of further tightening which could drain another RMB500 billion from the market, China watchers estimate. Moreover, this first step comes in the wake of the Chinese government’s concerns over inflation. Bank lending is estimated to have risen to RMB600 billion in the first week of January versus RMB295 billion in Nov ’09. Asian markets could be vulnerable should PBOC tighten further, analysts warn. Chart Watch: Short-term decline The STI’s decline was more measured than its North Asian peers with the index falling 27.7 points to 2,888. Support for the decline is at 2,800, and the still rising 50-day moving average is at 2,795. Last Friday, short-term indicators had turned down. Monday’s move to a new high of 2,933 created a minor negative divergence. This is not a major divergence, and a failure swing hasn’t materialised. Against this background, the down move should be temporary as the main uptrend remains intact. — Goola Warden, The Edge
	Disclaimer: The Edge Publishing Pte Ltd does not accept any liability whatsoever for any direct, indirect or consequential losses or damages that may arise from the use of information or opinions in this newsletter. The information and opinions are not to be considered as an offer to buy or sell any of the companies discussed. If you do not wish to receive any further emails, please clickhere.For other inquiries, please contact The Edge Publishing Pte Ltd, 150 Cecil Street # 13-00, Singapore 069543. Phone: (65) 6232 8622 Fax : (65) 6232 8630. * terms and conditions apply Email: edge-sgonline@bizedge.com

My Take:

Fundamentally, PBOC tighthening is an important move to restraint the run away loan growth as well as asset price. This is in fact an important step by the chinese government to rein in, or to at least signal to the market that they are not keen to see unfettered growth in asset price and hot money flow.

While this may be negative for Property and Chinese bank stocks in the near term, in the long run, this move should be viewed as healthy.

As for commodity, it is time for some healthy revaluing anyway. Physically, I do not think demand for commodity will come down. I will let the hype die down a tad, and look for good re-entry opportunity. Wilmar, Noble, Olam - blue chip commodity play in SGX. Can also look at H-share for more upside.
This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework as usual.