Wednesday, 14 April 2010

Singapore dollar revalued on strong GDP growth, eyes turn to China

The US trade deficit widened in February, and that more often than not signals strong global economic growth.

And growth cannot get much stronger than that reported by Singapore for the first quarter. From Channel NewsAsia today:

Singapore's GDP expanded strongly by 13.1 percent on a year-on-year basis in the first quarter of 2010.

It grew by 32.1 percent on a seasonally-adjusted quarter-on-quarter annualised basis.

In advance estimates released on Wednesday, the Ministry of Trade and Industry (MTI) said it expects the Singapore economy to grow by 7.0 to 9.0 percent in 2010.

The response by policy-makers was predictable. Again from Channel NewsAsia:

The Monetary Authority of Singapore (MAS) will re-centre the exchange rate policy band of the Singapore dollar at the prevailing level and shift the policy band from zero percent appreciation to one of modest and gradual appreciation.

In a news release Wednesday, the MAS which acts as a central bank noted that the Singapore economy has rebounded with expectations to continue on a firm recovery path given the more favourable global economic outlook.

At the same time, inflationary pressures are likely to pick up, driven by rising global commodity prices as well as some domestic cost factors.

"Overall CPI inflation in 2010 is projected to be between 2.5% and 3.5%, slightly higher than the 2-3% forecast earlier" said the MAS.

The move by the MAS caused the Singapore dollar and other Asian currencies to advance today.

However, even as Singapore joins the growing list of smaller economies tightening monetary policy, the exchange rate policy that most people are concerned with is that of China's. From Bloomberg:

China’s economy may have expanded 11.7 percent in the first quarter, the fastest pace in almost three years, making officials more likely to raise interest rates and scrap the yuan’s peg to the dollar.

The median estimate in a Bloomberg News survey of 24 economists compares with a 10.7 percent gain in the previous quarter from a year earlier. The statistics bureau will release the data in Beijing tomorrow.

Apart from strong economic growth, asset prices are also surging in China. Bloomberg reports:

China’s property prices rose at a record pace in March, indicating government efforts to stem gains aren’t working and more drastic measures may be needed amid concern of a bubble in the nation’s housing market.

Residential and commercial real-estate prices in 70 cities climbed 11.7 percent from a year earlier, the National Bureau of Statistics said on its Web site. The data goes back to 2005.

China, though, seems determined to take its time in reviewing its exchange rate policy. From Reuters:

President Barack Obama said on Tuesday that China had yet to set a timetable for reforming the yuan despite "frank" conversations with President Hu Jintao and a Chinese spokesman said Beijing would not bow to foreign pressure on currency reform.

And a hike in interest rates may not come soon. From Bloomberg:

China’s central bank may not need to raise benchmark interest rates until the second half of this year after growth in loans and money supply cooled in March, a government economist said.

“Lower-than-expected loan and money supply growth indicates that monetary authorities’ measures to curb liquidity are effective,” Zhu Baoliang, chief economist at Beijing-based State Information Center, said in a telephone interview today. “The possibility of a near-term rate increase is diminishing.”

Zhu’s comments echo those of two government officials quoted by state media yesterday saying that an imminent rate increase is unlikely. China has kept benchmark rates on hold and asked lenders to set aside more cash as reserves this year as policy makers balance concerns of asset bubbles and overheating with those of a possible “double-dip” global slump.

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