Mexican Stand-off

A Mexican Stand-off or MS is a stalemate/impasse i.e. a confrontation in which neither side is sure of winning and which is, thus, exceptionally dangerous for all parties involved. In the movies, an MS is usually portrayed as two opponents with guns drawn and ready but neither is willing to shoot for fear of being shot in return; yet neither one is prepared to relinquish his weapon for fear that his opponent will shoot him.

On the Korean Peninsula we have a KS or Korean Stand-off. On 23 November, North Korea attacked the island fishing community and military outpost of Yeonpyeong. This was the first shelling of South Korean soil since the 1950-53 war and it left four dead. Today, South Korea proceeded with a live firing drill – the threat of which has prompted North Korean to threaten retaliation; the latter said this “would make it impossible to prevent the situation on the Korean Peninsula from exploding”. Nor could an emergency session of the UN Security Council ease tensions i.e. it ended last night without agreement as China blocked moves to condemn the North and Russia urged the drills be scrapped.

Amid such waves of bellicosity, I admire the buoyancy of RBC Investment Asia, which said: “there’s also a slight concern on escalating tensions in the Korean Peninsula, though it’s unlikely to develop into a major skirmish”. The Shanghai Composite, however, was off 1.4% today (albeit above its worst).

In other news, you will be comforted to know that the Governor of the PBOC, Zhou Xiaochuan, keeps a weather eye on the stock market when determing economic policy..... The Nation will also have to learn to live with higher inflation (4 to 5% next year) if the State Council is taken at its word. Domestically, too, China has decided to reduce 658 drug prices by an average of 40%, it is reported. Elsewhere, Komatsu is selling many more excavators than expected in China with now a 25% forecast increase in Q4 sales versus an estimate of 15% in October. “Komatsu is less vulnerable to a shift to tightening policies as its operations are related to the area that needs spending” said Retela Crea Securities. “There’s no change in the trend that the Country will invest in construction projects and resources”. Similarly, Taiwan’s AU Optronics is to build a $3 billion LCD plant in China. Finally, I am also, palpably, encouraged by Shanghai Jin Jiang and its plans to build the World’s tallest hotel in Shanghai at 632 metres – and the World’s number two tower. There is life after war.

Internationally, China continues to throw money around like a man with no hands,as Premier Wen returns from Pakistan boasting his agreement to $25 billion of Chinese investment there. Similarly, Citic intends to build 10,000 housing units in Venezuela which will be funded by using some of the $20 billion loan which China made to the South American nation earlier; President Hugo Chavez also says that this loan is “renewable”. Meantime, in Greece, China Development Bank is opening a branch in the port of Piraeus, near Athens. The move is partly the result of a decision by the Chinese government to set up a $5 billion fund to facilitate purchases of Chinese-built ships by Greek owners.

“Creating an undesired stalemate is the height of stupidity” - Anon

Shanghai Composite:
Today: -1.41% to 2,852.92 at close
Last week: +1.9%
December: +1.2%
Since 5 July: +20.7%
YTD: -12.9%

Hang Seng:
Today: -0.33% to 22,639.08 at close
Last week: -1.9%
December: -1.6%
Since 25 May: +19.2%
YTD: +3.5%

Oil futures: $88.00
Gold futures: $1385.80
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3160

KOREA
• Stocks drop on tension in Korean Peninsula – shadowed by interest rate Concerns
• China says it is “deeply” worried about Korea

ECONOMY
• PBOC Governor says China is trying to consider economic policy impact on stock market
• 2011 inflation to be 4 to 5% (with peaks of 6%) says State Council
• US Ambassador Huntsman says it is in China’s interests to allow Yuan to appreciate

MONEY
• Derivatives rules increase risks in new market for swaps
• South Korea imposes levy on FX borrowings

REAL ESTATE
• Shanghai's Jin Jiang to build World's tallest hotel – and World’s number two tower

DOMESTIC/INTERNATIONAL
• Taiwan's AU Optronics to build $3 billion LCD plant in China
• Komatsu's quarterly sales of excavators in China surpass estimates
• Wen commits to $25 billion of investment in Pakistan
• Chinese fisherman dies with one missing after clash with South Korea patrol boat
• Russia pipeline to supply 15 million tons of oil per year to China
• China may reduce drug prices by an average of 40%

HONG KONG/TAIWAN
• Hong Kong stocks fall to two month low, with developers weak
• Mixed views on weekend existing home sales in Hong Kong, as prices weaken
• Taiwan may raise Chinese tourist daily limit to 4,000

IRON & STEEL
• ArcelorMittal raises bid for Baffinland by 14% to $485 million; and reduces acceptance level
• Nunavut says lower acceptance conditions in Baffinland bid battle are unfair

Poor's & Standard

The renowned credit rating agency could be mistaken for a description of social strata, with the “Standard” being the middle class and the “Poor’s” being, well, the poor; with the sole omission, in this mythical society, being an upper class. More accurately, too, in China, it might be better to call in “Poor’s & Standard” - such is the weighting to the former.

Nonetheless, in its day job, Standard & Poor’s likes China and it has raised the Nation’s credit rating to the fourth highest level. This comes on the back of record foreign currency holdings ($2.65 billion or around 3% of GDP) and the long term rating has risen from A+ to AA-; with A-1+ short term. Similarly, the outlook is stable. Ironically, the higher ratings may attract even more hot money which would make it harder for the Government to control inflation.

S&P also said that economic growth may average about 8% over the next five years and that China’s rating may be raised again if structural reforms lead to sustained economic growth and a hike in average income levels. Conversely, it could go the other way if growth/reform eases and/or the banks wobble.

We have also learned this week the ‘real’ reason why China has not yet raised interest rates (in the fight against inflation) i.e. PBOC Governor Zhou Xiaochuan said that it was due to the turbulence in the global economy. Now, why didn’t I think of that? Zhou also pledged more policy measures to control liquidity and inflation; and, perhaps most interesting of all, added that increased bank reserve requirements do not rule out interest rate rises.

Elsewhere China’s money market rates look like recording their biggest weekly gain since October 2007. The seven day repurchase rate, which measures lending costs between banks, rose 123 basis points 3.72% this week. Similarly, China’s banks are paying broadly twice the interest rate for Government funds now that they were in December last year 2010 - after increases in reserve requirements have led to a shortage of cash in the financial system and faster inflation damped deposit growth. For example, the PBOC charged a rate of 5.4% for Yuan 30 billion ($4.5 billion) of six month money this week, which compares with 2.35% in December 2009.

Meantime, share prices of real estate companies have moved the other way, and are now down 26% since 1 January, which is pretty much twice the fall in the Shanghai Composite. This means that despite robust trading, the bears - like James Chanos - are winning. He says, for example, that property in China is “a treadmill to hell” or "Dubai times 1,000”. However, Cushman & Wakefield say Chanos’s view is “a little extreme” and “the economy is growing, and has been growing, and the real estate market is increasing in value. The Government knows this and they are getting ahead of it”. Similarly, Citigroup adds that the Country’s plan to boost social welfare housing should be positive for real estate as the Government will want a “stable” property market. Tha Bank has also maintained its “bullish view”.

More broadly, Nomura says “for China, we are bullish, we are expecting 9.8% growth next year. Even though China is now the World’s second biggest economy, it’s still a low income economy with GDP per capita of about $4,500, which is similar to Japan in the mid-1970s. China is still very much in the sweet spot of economic development, still a lot of room to build out the central-west of China with investments. But we are particularly bullish on consumption”.

“One benefit of being poor is that it doesn't take much to improve the situation” - Anon

Shanghai Composite:
Today: -0.15% to 2,893.74 at close
This week: +1.9%
December: +2.6%
Since 5 July: +22.4%
YTD: -11.7%

Hang Seng:
Today: +0.20% to 22,714.85 at close
This week: -1.9%
December: -1.3%
YTD: +3.9%

Oil futures: $88.16
Gold futures: $1376.30
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3320

ECONOMY
• China's credit rating raised from A+ to AA- by Standard & Poor's with outlook stable; meantime, Hong Kong goes from AA+ to AAA

YUAN
• Yuan Forwards rated Asia's best 2011 bet by two leading banks - both Goldman Sachs and Nomura

RATES
• PBOC Governor Zhou indicates global turbulence as reason for delaying any move on interest rates
• Money market rates gains most since 2007
• Banks doubles Government rates
• Interest rates to rise six times in 2011, says Mizuho Research
• Halt to lending to companies buying fixed assets before 31/12

REAL ESTATE
• Chanos remains bearish on Chinese real estate, while others - including Cushman & Wakefield plus Citigroup - are positive
• Real Estate Sector’s share prices are off 26% this year to date
• Property tightening will remain in place, says China Vanke
• China may seek to prevent local governments from forcing people out of their homes to make way for new development
• China Tong Jian to build luxury hotel in Mozambique
• Shui on Land has sold Yuan 3 billion of three year notes at 6.875%

INTERNATIONAL
• Wen’s charm offensive in India and Pakistan continues
• China and India to account for half of World growth, says Nomura
• Cameroon gets $736 million Chinese loan for water supply

DOMESTIC
• China to cut 2011 energy consumption per unit of GDP by 3.5%
• McDonald's to open some 200 restaurants in China in 2011

HONG KONG
• Datang Renewable Power declines on Hong Kong debut as Huaneng Renewables cancels IPO
• Hong Kong to launch mortgage income pilot scheme for the elderly

IRON & STEEL
• China imports 26% more iron ore in November; prices to rise 7% in Q1 2011
• ArcelorMittal sees its bid for Baffinland superior to Nunavut’s increased offer
• Baffinland former CEO says Chinese bidder is interested

50,000 bicycles and one rabbit

50,000 public bicycles may be offered at 1,000 stations in Beijing as a means of easing the World’s worst traffic jams i.e. a global poll of more than 8,000 motorists conducted by IBM ranked the City as having the most “onerous” commute. Other ideas include building tunnels and zonal-congestion-charging in addition to journey-rationing based on licence plates. But, there is little respite on the horizon as, in the first week of December, Beijing saw more than 20,000 vehicles sold, which is double the number sold in the same week a year ago.

As always in China, the numbers defy comprehension. Secondly, the consumer is alive and well; okay - as we found out today - he is also worried about inflation (says a PBOC survey of 20,000). But the monetary authorities are clearly less apprehensive. This means they have not been bundled into an interest rate rise and this is supported by the yield curve where the difference in yields between China’s short and long term bonds has shrunk to the least since 2008. For example, China’s benchmark 10 year bonds currently yield 77 basis points more than two year bonds – and this shows a dip from 123 at the end of November. Meantime, rates on bonds due in 2012 increased 32 basis points this month.

JPMorgan said “the 10 year yield shows the Government is starting to win the inflation battle. Two year notes reflect strongly tighter liquidity in the market after multiple reserve ratio increases”. It also says that inflation will cool to 3.8% by the end of next year and that the gap between two and 10 year yields will narrow to 60 basis points. JPM added, too, that the PBOC will raise lenders’ reserve ratios by 1% by mid-2011 and interest rates by 50 basis points. Major banks currently have to set aside 18.5% of their deposits as reserves and smaller lenders 16%. Meantime, Citigroup said “while rate hikes will come, reserve-ratio hikes will remain the preferred tool to mop up excess liquidity. It is possible the yield curve will steepen a little over the next few months as typically the curve only goes very flat towards the end of a rate hike cycle”.

That said, China’s benchmark money market rate rose to a two year high today. This follows yesterday’s rise by the most since June 2008 due to tighter liquidity. The seven-day repurchase rate, which measures lending costs between banks, was up 29 basis points to 3.58%, following a 72 basis point hike yesterday. At the same time, one year interest rate-swaps based on the repurchase rate saw a three basis point move up to 3.12%. They have also gained 94 basis points since 19 October’s increase in borrowing costs; this is double the 46 basis point advance in 10 year yields.

And so it is a question of “when” not “if” and while the former remains the gift of the PBOC, interest rates, nonetheless, remain the elephant in the room. This is despite near term support from the Yuan where Non-deliverable Forwards saw their biggest fall (-0.13%) in a week today (albeit they continue to point to +2.4% over the next 12 months).

More broadly, too, the economic performance in China remains on steroids with FDI rising by a staggering 38% in November, on a year ago, to $9.7 billion. Similarly, an indicator of China’s economic outlook rose for a sixth month in October, climbing 0.9% to 152.1, according to the New York-based Conference Board.

Equities, however, remain moribund. What we could do with is an unqualified Rabbit out of the conical hat. In Chinese astrology, too, the Rabbit is well known for its ability to attract good fortune and be lucky; and many well known Chinese politicians and diplomats were born in the years of the Rabbit.

Shanghai Composite:
Today: -0.54% to 2,911.41 at close
This week: +2.5%
December: +3.2%
Since 5 July: +23.2%
YTD: -11.2%

Hang Seng:
Today: -1.95% to 22,975.35 at close
This week: -0.8%
December: -0.1%
YTD: +5.0%

Oil futures: $87.56
Gold futures: $1392.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3303

RATES
• Yield curve flattens as central bank exhibits no rush to raise interest rates
• Interest rate pause may reflect policy maker split, says Deutsche Bank's Ma Jun
• China is to extend increase in reserve ratio for some banks
• 2020 Government debt sold at 3.77%

YUAN
• Yuan Forwards drop most (-0.13%) in a week as US economic outlook pushes dollar up
• Forwards now point to 2.4% appreciation over 12 months from 6.6579 per US dollar

ECONOMY
• FDI rise 38% in November to $9.7 billion
• Conference Board sees China’s economic outlook improve further in November, for sixth month in a row
• Chinese consumers show the most concern with inflation since 1999

REAL ESTATE
• Beijing may introduce taxes and credit controls on housing

INTERNATIONAL
• Wen heads for a three day visit to India together with 400 business executives in tow
• US senators seek vote on anti-Yuan measures
• WTO rejects Chinese complaint against US anti-dumping tariffs on imported tyres or tires

DOMESTIC
• China aims to develop $10 billion software firms, says a Shanghai News report
• China’s smart grid spending to reach Yuan 2 trillion

HONG KONG
• Soaring Hong Kong rents prompt financial firms to shift

CLIMATE
• China was “very, very smart” in climate negotiations, says Orbeo

China's Secret

Victoria’s Secret is the World’s most glamorous lingerie shop and we all know how important its products are in terms of allure and foundation. By not raising interest rates last weekend, China’s Government must be confident about both.

On Saturday, November’s CPI number was released and - as widely leaked - it was 5.1%, the fastest in 28 months, and this included food at +11.7%. Similarly producer prices rose by 6.1% last month. On a happier note, industrial output moved up 13.3% and retail sales soared 18.7%; and, finally, urban fixed asset investment was ahead 24.9% in the first 11 months of 2010.

What didn’t happen, though, was the widely expected increase in interest rates. The prime reason for this was so to avoid attracting more hot money, which would simply add to the inflation rate. Perhaps, too, the authorities had one eye on the Yuan (on the one hand, appreciation will help inflation, but on the other it makes exports more expensive). On Friday, though, it did increase bank reserve requirements for the third time in five weeks.

Macquarie Securities said that “the Government knows quantitative measures like the reserve ratio work immediately and, consequently, are controllable and understandable. Raising interest rates creates much more uncertainty”. The reserve movement “clearly shows that the Government is more constrained in raising interest rates. The message seems to be that they don’t want to raise rates. Raising interest rates is difficult while raising the reserve ratio isn’t”.

“The reserve ratio and interest rates are tackling two different problems. If the Government thinks the biggest problem is credit growth it uses the reserve ratio because that will constrain bank lending and they don’t need to raise interest rates to change bank lending. If the biggest problem is asset market prices, then they will use interest rates. The way to affect the flow of deposits in and out of the banks is through interest rates. The stock market is down, the property market is not so hot and the release of bank deposit data from the central bank suggests there was a pickup in deposit growth in November. If we had seen a massive outflow of deposits they would probably have raised rates”.

Perhaps, too, the Government can see inflation abating in 2011. On Friday and over the weekend, the great and good were gathered for the Central Economic Work Conference, presided over by Messers Hu and Wen. No official release has been made but, again, there have been leaks. For example, it is likely that China has set the following targets for 2011: 8% GDP growth; 4% inflation; and 16% money supply expansion for next year. It may also set a target of at least Yuan 7 trillion ($1.1 trillion) for new bank loans for 2011. However, no final number has been set, it is also reported. Analysts’ estimates range from Yuan 6.5 to 7 trillion.

In 2010, the PBOC had a target of Yuan 7.5 trillion of new loans but this was virtually used up by the end of November (bar Yuan 50 billion). However, the total figure could be about Yuan 9 trillion, when off-balance sheet credits and short-term financing bills are converted into loans are included.

Nonetheless credit default swaps are a worry. For example, five year default swap contracts on China’s bonds have risen to 71.5 basis points, from a two year low of 52 basis points on 13 October, according to CMA. Similarly, RBS predicted this month that the swaps may trade as high as 150 basis points next year and recommended investors buy them as a hedge. “China is trying to cool things down and manage a deflation of the bubble. If that fails then that’s how CDSs get driven up, because concern will be that the sovereign balance sheet will have to bear the costs of restructuring banks”. Similarly, Citigroup added that “China’s golden era of low inflationary growth, underpinned by compliant domestic savers and enthusiastic external consumers, could well be at an end”.

Somewhat at odds, it seems, the stock market rose by 1.1% today, which the best one day gain since 25 November. A number of commentators, including CICC, are cautiously positive; and this, despite more sabre-rattling in the northern part of the Korean Peninsula.

“There are three secrets to managing: the first secret is have patience; the second is be patient; and the third most important one is patience” - Chuck Tanner

Shanghai Composite:
Today: +2.88% to 2,922.95 at close
Last week: no change
December: +3.6%
Since 5 July: +23.7%
YTD: -10.8%

Hang Seng:
Today: +0.67% to 23,317.61 at close
Last week: -0.7%
December: +1.4%
YTD: +6.6%

Oil futures: $88.89
Gold futures: $1391.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3245

NEW DATA FOR NOVEMBER
(year on year change unless noted)

- Saturday 11 December
Consumer prices +5.1% (+1.1% on month)
Food prices: +11.7%
Producer prices +6.1 %
Industrial output +13.3%
Urban fixed asset investment +24.9% (first 11 months of 2010)
Retail sales +18.7%

- Friday 10 December (business hours)
Exports +35% to $153.3 billion
Imports +38% to $130.4 billion (a new record)
Trade surplus $22.9 billion

-Friday (after hours)
New bank lending: Yuan 564 billion ($85 billion)*
M2 +19.5%
50 basis point increase in bank reserve requirement ratios to 18.5% (in most case; and effective from 20 December)
*total lending this year is now just Yuan 50 billion short of the Government’s target maximum of Yuan 7.5 trillion

ECONOMY

• Media reports say Government has the set the following targets for 2011:
  - 8% GDP growth;
  - 4% inflation;
  - 16% money supply expansion; and
  - no target set on new bank lending but maybe Yuan 7 trillion
• China pledges to change growth model in 2011
• Inflation tops 5%
• China risks a “rush” to tighten in 2011 after inflation spikes

RATES

• Interest rate speculation splits analysts
• China may delay raising rates, says RBS
• China is constrained in increasing rates, says Macquarie
• Credit default swaps in China climb the most among the BRICs

YUAN

• Yuan weakens as Europe debt crisis lead to US dollar strength
• China is said to be considering Yuan options trading by banks
• Yuan potential appreciation of 10% per annum is “still modest”

EQUITIES

• Stocks advance
• No interest rate rise is “positive” for stocks, says former Golden Bull Prize winner, He Zhen of Shanghai Huli
• Stocks will not see a “major correction” on data, says CICC; albeit an interest rate rise before year-end cannot be ruled out

INTERNATIONAL

• North Korea says the US and its allies are provoking an “all-out war”
• China and US military talks are making progress, says the Pentagon in Washington
• China's Sky-mobi and Bona Film posts record largest first day drop since 2007 in New York IPOs

DOMESTIC

• Power output in China gains at slowest rate in 16 months on restriction to industry

HONG KONG

• Hong Kong residential property prices may be entering a bubble, says JPMorgan; but prime CBD office rents to rise 24% next year

CLIMATE

• UN talks endorse $100 billion climate aid fund and forest protection programme

IRON & STEEL

• Baoshan Steel raises prices for the first time in three months
• Iron ore prices set to rise 7% in Q1 2011, says UOB
• Anglo is awarded permit for Minas Rio iron ore project
• BHP lobbied to block Rio and Chinalco transaction, is reported via WikiLeaks

Jigsaw

Mr Lin of Taipei had a bad day when he accidentally shredded $200,000 worth of Taiwan dollars ($US 6,645), according to Reuters. However, he was also lucky that a local forensic scientist pieced together the remains of 200 bills. “The “jigsaw expert”, Liu Hui-fen, is a 30 year veteran with the Justice Ministry's special investigations unit who also described the task as “difficult” and that it “required patience”.

As they gathered this morning for the so-called Central Economic Work Conference, President Hu, Premier Wen and their cohorts are faced with a “monetary jigsaw” and will need similar degrees of diligence and patience as shown by Liu above. But they have also been counting the pieces ahead of time. For example, tomorrow’s announcement of inflation data for November has been brought forward from next Monday. Furthermore, two newspapers, today, both said that the CPI will be a gut-busting 5.1%. This compares with a consensus forecast of 4.7% and October’s two-year peak of 4.4%. It must have been a leak (albeit a non-Wiki one).

Similarly, after hours today the PBOC released November’s new lending figures which were also ahead (13%) of forecast at Yuan 564 billion ($85 billion). The number also means that this year’s total lending is now just Yuan 50 billion short of the Government’s target maximum of Yuan 7.5 trillion.

Also after hours today, China told its banks that they will need to lodge more money with the PBOC (the third such request in five weeks) – as a means to counter inflation. The increase in the reserve requirement is 0.5% which takes the number to 18.5% for the biggest banks (excluding any additional non-promulgated moves). Market debate ensued, too, about the timing of this move and whether it might be a substitute for an interest rate hike – which most analysts believe will come tomorrow. The Yuan and swap rates agree, whilst equities shrugged it off and rose 1%.

In the broader economy, China reported a larger-than-forecast November trade surplus as exports reached a record. This, too, adds to the case for higher interest rates and an appreciating Yuan as steps to containing inflation. Exports rose 35% to $153.3 billion year-on-year and imports advanced 38% to an unprecedented $130.4 billion, leaving a $22.9 billion excess. The surplus was the fifth this year over $20 billion which have all added flammable cash to the inflation pyre. Nor will the US be best pleased but then as Bloomberg’s William Pesek has said, with holdings of US Treasuries of some $884 billion, isn’t China “America’s Banker”?

Two enlightened US academics (Alberto Alesina and Luigi Zingales) have, this week, also said that China’s surplus is due to its excessive saving, not to its undervalued currency. China saves some 54% of GDP versus an average of 33% among developing countries and 17% among OECD economies. What is more, most of this doesn’t come from household savings, but from the corporate sector, especially State-owned enterprises. Thus, “a redistribution of income would benefit the Chinese people and the world alike”.

More in the here and now, is the real estate market where, although price increases are slowing, volumes remain voluminous. In November, home prices in 70 cities climbed 7.7% from a year earlier (the slowest in 12 months) and increased 0.3% from October. However, sales volumes increased 14.5% from a year earlier (to 10.1 million square metres or 1.09 billion square feet – the most in 11 months); and month-on-month the rise was 9% in November from October. More broadly, too, China’s property investment rose 36.7% to Yuan 462.8 billion ($69 billion) in November from the same month a year earlier and, for the first 11 months of the year, the gain is 36.5% to Yuan 4.27 trillion.

“Beijing will be pleased that house price inflation is continuing to ease” said RBC. “But the pick-up in volumes suggest that conditions are still buoyant in the property sector and that more policy measures are required”. However, CLSA Asia said the month-on-month data “is more relevant and appears quite modest”, while China Real Estate Information added that “the Government is trying to control the home prices, but they certainly don’t want to see the death of developers”.

Elsewhere, China’s top diplomat, Dai Bingguo, met with Kim Jong-il in North Korea and talks were said to have ”reached important consensus”. No such luck in Oslo, where there was an empty chair at today’s Nobel Peace Award to Chinese dissident Liu Xiabo. This does China no favours and indelibly underlines the disparity between economic and social wealth. However, it is also significant that 19 from 64 countries are not attending the ceremony; and the Norwegian Institute of International Affairs said that this reflects China’s growing global influence as its economic power expands. Would you bet against it?

“If you’re good at anticipating the human mind...it leaves nothing to chance” – Jigsaw

Shanghai Composite:
Today: +1.07% to 2,841.04 at close
This week: no change
Since 5 July: +20.2%
YTD: -13.3%

Hang Seng:
Today: -0.04% to 23,162.91 at close
This week: -0.7%
YTD: +5.9%

Oil futures: $88.60
Gold futures: $1386.40
(new ‘immediate delivery’ high of $1431.25 on 6 December)
Euro/$ spot: 1.3239

ECONOMY

• November inflation rate maybe 5.1%, say two newspapers – ahead of tomorrow’s release
• China trade surplus exceeds estimates
• Surplus raises tension with the US

EQUITIES

• Stocks rise as export gain overshadows interest rates

MONEY

• Bank reserve requirement ratio raised for the third time in five weeks
• New lending of Yuan 564 billion in November leaves the total just Yuan 50 million short of the full year target
• Government sells Yuan 10 billion of 273 day bills at 2.8451%
• Yuan has weekly gain on bets interest rates will rise; Forwards point to +2.2% appreciation over 12 months
• China swap rates gain as trade data point to rate increases; but money market rates weaken as PBOC injects funds
• China credit “bubble” set for to burst, says Blackhorse

REAL ESTATE

• China property prices rise at a slower pace
• Homes “over-priced” by 30%

INTERNATIONAL

• North Korea’s Kim Jong Il meets Chinese diplomat and reaches “important consensus”
• China’s economic growth lifts ROW, says IMF
• Sinopec to buy Occidental’s Argentina Unit for $2.45 Billion
• Youku.com leaps 161% in best rise for a US IPO since Baidu some five years ago
• Russia’s VTB is the first company from emerging market, outside Asia, to issue a Yuan bond
• China to lend Sri Lanka $760 million for road development
• Absentees from Nobel Peace Prize ceremony underline China’s growing global influence

DOMESTIC

• China orders a freeze on 2011 thermal coal contract prices
• Crackdown yields 3000 cases of commercial infringement
• Bayer to double sales in China to $6.7 billion by 2015
• Agricultural growth may not be sustainable, says State Council
  

Shoes

“The market is waiting for the next shoe to drop” quipped Shanghai Kingsun IM this week. It may have to wait less time than it thought, though, because the Statistics Bureau has volunteered to work this Saturday and bring forward the promulgation of November’s economic data, including the widely anticipated inflation figure. Here a Bloomberg survey of 29 analysts puts November’s CPI at 4.7%, up from 4.4% in October - which itself was the most in two years. This admittedly sporty number, however, is not the shoe; and the real ‘Jimmy’ is interest rates. China has held off executing a series of interest rate increases, in part because it has sought to shelter exports. However, the China Securities Journal said in a front page article on Tuesday that the period around this weekend may be a “window” for China to raise interest rates (most probably by 0.25% immediately; and then a further 0.75% to end-2011). The one year lending rate is currently 5.56% while the one year deposit rate sits at 2.5%.

Nonetheless, money market rates have moved the other way and, on Tuesday morning, they fell by the most in three years i.e. the seven day repurchase rate, which measures lending costs between banks, fell 1.01% to 2.08% which is the steepest slide since December 2007. At the same time, the PBOC has injected a combined Yuan 166 billion into the financial system over the last three weeks through open-market operations. That said, Societe Generale observed that “from past patterns, the central bank usually adds cash to the market for a bit and then hikes interest rates”. It is also estimated that China’s banks advanced some Yuan 600 billion ($90 billion) of new loans in November and have, thus, already exceeded the Government’s target of Yuan 7.5 trillion for this year - with a month to go - according to the Shanghai Securities News.

Morgan Stanley Asia Chairman Stephen Roach said China’s inflation cycle is at a “critical point,” requiring “disciplined and comprehensive policies”. The Nation needs to convince the market that its shift to a “prudent” monetary policy “has teeth” by adopting tougher anti-inflationary measures.

Unsurprisingly, share prices in both Shanghai and Hong Kong drifted and dropped, respectively, with developers, in particular 'under the pump' as it was reported by (a busy) China Securities Journal that Shanghai will be among the first group of cities to undertake property tax trials sometime between the beginning of next year and the annual National People’s Congress meetings in March. This was also despite news that Shanghai Greenland will build the World’s third tallest building (606 metres) in Wuhan. Greenland is also growing so fast that, with expected revenue of Yuan 120 billion this year, it will begin to rival number one China Vanke.

The Yuan was also lower despite interest rate expectations, although it was given a push by the US dollar. In morning trade, the Yuan was down 0.19% at 6.6575, the lowest for almost two weeks. That said, Non-deliverable Forward contracts are still pointing to 2.4% appreciation over the next 12 months, while other commentators expect more than double that appreciation and underline the currency’s importance as a tool against inflation.

Elsewhere, straws in the wind include the Chinese Academy of Social Sciences (in its blue book) forecasting 10% GDP growth next year. Plus passenger car sales which rose to record in November of 1.28 million i.e. a 27% increase year-on-year (and 10.5% up on October, which was no slouch). With one eye, on the latter, too, the wonderful Jim O’Neill from, Goldman Sachs says that consumer spending in the BRICs (Brazil, Russia, India and China) may climb by more than $500 billion per annum and surpass US purchases in 15 years; and companies which sell to emerging market shoppers are some of the best investments “of our lifetime”.

Finally, Morgan Stanley says that Chinese companies which are dependent on economic growth may outperform the market next year as inflation will be “mild,” valuations are “cheap” and the outlook for earnings is “solid”. Investors should switch to so-called cyclical stocks, such as banks, developers, steelmakers and energy producers. It has a 2011 year-end target for the MSCI China Index at 94.5 (+40%) and that for the Hang Seng China Enterprise Index at 17,682 (+38%). But the last word must go to Shanghai - which has the smartest 15 year olds in the World according to an OECD test of 470,000 students in 65 countries.

“A lie can travel halfway around the world while the truth is still putting on its shoes” - Mark Twain

Shanghai Composite:
Today: -0.95% to 2,848.55 at close
This week: +0.2%
Since 5 July: +20.5%
YTD: -13.1%

Hang Seng:
Today: -1.43% to 23,092.52 at close
This week: -1.0%
YTD: +5.6%

Oil futures: $87.81
Gold futures: $1392.60
(new ‘immediate delivery’ high of $1431.25 on 6 December)
Euro/$ spot: 1.3195

DATA

• China brings forward November data release to Saturday the 11th of December (from 13th)

EQUITIES

• Stocks fall on interest rates and possible property tax
• Morgan Stanley looks for China’s cyclical stocks to drive 40% appreciation in two key indices
• China “see-saw” stocks signal that a false rally will falter, says Chart Partners
• Easier to de-list on ChiNext

ECONOMY

• GDP may grow 10% in 2011, says CASS

MONEY

• Yuan drops (to 6.6575) as US tax cuts bolster dollar and growth prospects; as Non-deliverable Forwards point to +2.4% over next 12 months
• Money market rates reduces by the most in three years on Tuesday as PBOC injects more cash
• Biggest bond slump since 2004 is not over
• One year bills sold at unchanged yield of 2.3437%
• China outstrips Federal Reserve in liquidity stakes and, thus, risking a 2011 inflation spike

REAL ESTATE

• Shanghai Greenland to develop World's third tallest building in the city of Wuhan

INTERNATIONAL

• BRIC consumer spending offers the investment of a lifetime, says O’Neill
• US teens lag as China soars on international test
• China purchases Japanese debt as Yen beats US dollar/Euro
• IPO of China Dangdang makes elegant debut and raises $272 Million in US – more than expected
• Clinton says China has a “special role” with North Korea
• US Senate may pass measure on China's Yuan

DOMESTIC

• Passenger car sales rise to record in November
• Tax to be levied on sulphur dioxide and sewage water
• Citigroup to triple its China outlets to 100 within three years
• Google's revenue in China is increasing on advertising demand

HONG KONG

• Stocks slump by the most this month, especially developers
• Domestic shares to do better than the mainland in H1 2011

IRON & STEEL

• Vale commences tradings its depository receipts in Hong Kong
  

....of timing (and plumbers)

“A wise man makes his own decisions, an ignorant man follows public opinion” is a Chinese proverb and, at this time, the PRC Government is marking its judgment by taking time to decide on what do next with interest rates. There maybe an inevitability ability about it – or there may not.

For example, today China’s benchmark money market rate dropped to a five day low after the PBOC, last week, added cash into the financial system for a third straight week. In total, it has injected a combined Yuan 166 billion ($25 billion) in the last three weeks through open-market operations, after taking out a combined Yuan 153.5 billion in the previous four weeks. Historically, it has also added more funds in December than in other months to complete its budget (Yuan 986.3 billion last year), which will increase finance companies’ cash holdings, according to China Merchants Bank “We’ll see an enormous increase in liquidity this month and the money market rate will decline to below 3%”; albeit a further hike in higher bank reserve requirements may follow.

Meantime, the seven day repurchase rate, which measures lending costs between banks, fell 24 basis points to 3.09% this morning, which took it to the lowest level since 29 November (last week it rose 60 basis points). Meantime, the one year interest-swap rate, the fixed cost needed to receive the floating seven-day repo rate, dropped nine basis points to 3.02%, the lowest level since 24 November. This followed a 27 basis point drop last week (the first decline since October) albeit the prior week’s closing level of 3.38% was the highest since August 2008. Watch this space.

The Yuan has also risen to its highest level in eight weeks (6.6528 in morning trade) on optimism about Europe’s problems and the Head of the PBOC Statistics Department says gradual and small gain will help inflation. Similarly, the NDRC says that December’s inflation will be below 5%; and, to help this along, the local council in Kunming has imposed temporary price ceilings on retailers

Elsewhere, stocks rose as Federal Reserve Chairman Ben Bernanke said he may continue the purchase of Treasury securities beyond the $600 billion announced last month. And Nomura, for one, is looking for China’s stocks to rise more than 20% in 2011 and it is bullish on industries including oil and gas, financial, property and consumer. However, to show that it takes two views to make a market, CICC says that an early interest rate increase would be good for stocks as it reduces the risk of policy over-tightening in the future, while Deutsche Bank sees 75 extra basis points in seven months and Mizuho expects the first one on 10 December.

Finally, tensions continue on the Korean Peninsula, while at the same time China is hoovering up South Korean Government bonds. China is also flexing its muscles in Cancun at the UN climate summit as its more local neighbour, Taiwan, booms.

“One does not allow the plumbers to decide the temperature, depth and timing of a bath” - Jack Gould

Shanghai Composite:
Today: +0.52% to 2,857.18 at close
Last week: -0.8%
Since 5 July: +20.9%
YTD: -12.8%

Hang Seng:
Today: -0.36% to 23,237.69 at close
Last week: +1.9%
YTD: +6.2%

Oil futures: $89.62
Gold futures: $1417.50
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3343

MONEY & RATES

• Money rate drops to five day low as PBOC injects cash
• China may raise interest rates by 75 basis points in seven months, says Deutsche Bank; Mizuho says 10 December
• PBOC advisor points to higher reserve requirements at banks
• Yuan climbs on optimism that Europe’s debt crisis is easing

INFLATION

• NDRC says December’s inflation will be below 5%
• PBOC official says gradual and small Yuan gains can help with controlling inflation
• Retailers face temporary price controls in the south western city of Kunming

INTERNATIONAL

• North Korea says tensions are at an “uncontrollable extreme phase” as South Korea continue with live-round multi-national military exercises
• Chinese “patriotic hackers” hit US government sites and Google, says NYT
• China buys more Korean bonds

HONG KONG & TAIWAN

• Hong Kong’s weekend sales of existing homes rise after sellers move to reduce their prices
• Buy Taiwan options as trade and tourism with China surge, says Morgan Stanley

CLIMATE

• China seeks climate compromise on “disastrous” debate to extend Kyoto

Cream cheese

“There are three rules that I live by: never get less than twelve hours sleep; never play cards with a guy who has the same first name as a city; and never get involved with a woman with a tattoo of a dagger on her body. Now you stick to that, and everything else is cream cheese”. So said the indomitable US basketball coach Bobby Finstock as he eschewed playing fast and loose.

The Chinese monetary authorities sleep well and heed sensible advice; they also know their semantics and what the opposite of “fast and loose” is. It should come as no surprise, then, that Xinhua News reports today that China will shift to a “prudent” monetary policy next year as the PBOC seeks to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles (it had previously described its stance as “moderately loose”). The Government “will (also) adopt proactive fiscal policies and prudent monetary policies” continues Xinhua referencing a meeting of the ruling Communist Party’s Politburo. Nonetheless, the latter is also reported as saying that China has a sound base for stable and fast growth next year even as difficulties and challenges remain. Here, Merrill Lynch has penciled in 9% GDP growth for next year.

The IMF also jumped on the band-wagon saying that China should raise interest rates further and impose a property tax to curb the risk of asset bubbles and a “disorderly fall” in home prices. Existing measures “at best only treat the symptoms of high residential real estate inflation and not the underlying structural causes”. Similarly, RBC says interest rate hikes are imminent, while Mizuho Securities adds that one may come today or next week at the Annual Economic Work Conference.

Elsewhere, Yuan Forwards also look set to have shown their largest weekly (+0.95%) gain in four and are pointing to +2.3% over the next 12 months from a spot of 6.6597 today.

More worrying, though, were two non-manufacturing PMI surveys which showed a nine month low (National Statistics/Federation of Logistics) and a two year low (HSBC) in October; with the former dropping from 60.5 to 53.2

In real estate, there was a push/pull of news flow with SouFun, the Nation’s largest real estate website owner, saying that home prices in 100 cities rose 0.8% in November despite higher interest rates for a full month (plus higher bank reserve requirements). What’s more, China Vanke, the number one developer, also became the first to hit Yuan 100 billion annual sales. This also meant that it had reached its 2014 target, four years early. It has done so too by targeting smaller cities, smaller units and cash buyers (total household deposits in China in September were Yuan 29.9 trillion or $4.5 trillion). Similarly, the IMF added that there is no sign of “a broad based and significant over-valuation” of residential property in China. Nonetheless, a sub-index of developers' share prices are off 27% this year in a stock market down 13%.

Finally, infrastructure spend marches on, as it must, with 25 new nuclear power plants being built (which is 50% of what it being built worldwide) – against 14 now. The Nation also plans to spend Yuan 2 trillion per annum on alternative energy and the like. Plus 16,000 kilometres of high speed passenger rail network races to a 2020 completion. This will give China as much track - even by 2012 - as the entire rest of the World. The very smart Jing Ulrich from JPMorgan adds, too, that this will alter “the landscape of consumer and property markets” in the same way that the bullet trains did in Japan in the 1970s and 1980s.

“Your dresses should be tight enough to show you're a woman and loose enough to show you're a lady” - Edith Head

Shanghai Composite:
Today: -0.04% to 2,842.43 at close
This week: -0.8%
Since 5 July: +20.2%
YTD: -13.3%

Hang Seng:
Today: -0.55% to 23,320.52 at close
This week: +1.9%
YTD: +6.6%

Oil futures: $87.79
Gold futures: $1393.60
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3154

EQUITIES & MONEY

• Stocks decline
• China is changing to a “prudent” monetary policy, says Xinhua
• Yuan Forwards set for largest weekly gain (+0.95%) for a month; and point to further 2.3% gain over 12
• China is “scared” of US monetary policy
• Bill yields too low compared with inflation
• Nation must raise deposit rates to 12 year in order to protect savers, says Andy Xie
• Channel savers cash away from bank deposits into stocks, says PBOC adviser
• China should consider increasing gold reserves to boost trade in the Yuan

ECONOMY

• Non-manufacturing PMI falls to nine month low

REAL ESTATE

• Home prices rise 0.8% in November
• China Vanke is first domestic developer to record Yuan 100 billion of annual sales
• Property stocks have fallen 27% this year
• IMF says China should use property tax and interest rates to avert bubbles
• Rail boom which will do for China what the bullet trains did for Japan; especially real estate
• Shanghai's housing rents and hotel rates fall by up to 50% after Expo

DOMESTIC

• China may ease limits on industrial energy usage
• Country is set for a nuclear boom
• Alternative energy boom

INTERNATIONAL

• China’s refusal to condemn North Korea at UN narrows US and allied options
• India to overtake China as World’s fastest growing major economy by 2015

CLIMATE

• China turns negotiating tables on US in stalled climate talks

30 Seconds to Mars

“TSTM” are well on the way to being ‘the next big thing’ in music and on an artic night in London they played a truly outstanding gig at the O2 Arena – the World’s most successful live venue. The name apparently comes from a Harvard University thesis which examines expediential growth of technology as it relates to humans and predicts that it will, one day, literally take thirty seconds to travel all the way to Mars.

Expediential can be both a compliment and a pejorative. For example: using what you have at hand to gain a result - advantageous; or taking what you can rather than doing what is right – self interest rather than principle.

China’s growth has been a bit of both, depending where you sit, and today’s two sets of PMI data show that it is continuing - as manufacturing hit its highest level for seven or eight months. There was, however, a little sting in the tail insofar as input prices rose to their highest level since June 2008 or 2004 depending on which survey your read (Logistics Federation or HSBC/Markit). Credit Suisse calls this “alarming”.

Others were more sanguine. For example, Nomura said that China is in “a solid growth phase” even as inflation concerns rise, while Citigroup said that while inflation, mainly driven by food and global commodity costs, is “a critical policy worry,” the economy is not overheating as it did in 2007-08. Similarly, the NDRC said yesterday that nationwide price controls are not needed yet.

That said, China’s benchmark money market rate advanced to the highest level in two years with the seven day repurchase rate, which measures lending costs between banks, rising five basis points to 3.355% (this compares with 3.420% on 10 October 2008).

Standard Chartered forecasts one more increase in interest rates this year and three in the first half of 2011; it also predicts that Chinese banks’ reserve requirement ratios will be boosted by 50 basis points as many as five times. Credit Agricole has also doubled its projections for the number of interest rates increases by mid-2011 to four. In fact, inflation may have accelerated to 4.8% in November, says CICC. It may also average 5.5% in 2011, up from an estimated 3.2% this year, adds Standard Chartered.

But Nomura (again) is looking through the inflationary haze – and says that it will begin to clear next year, allowing the Government to unwind measures intended to cool the economy. “CPI is likely to peak out soon, which damps the need for drastic monetary policy action. We expect the room for monetary easing will emerge in the latter half of 2011”. Both Morgan Stanley and RCM Capital Management also like equities, especially emerging ones.

“A visitor from Mars could easily pick out the civilized nations. They have the best implements of war” - Herbert Prochnow

Shanghai Composite:
Today: +0.12% to 2,823.45 at close
This week: -1.5%
In November: -5.3%
Since 5 July: +19.4%
YTD: -13.8%

Hang Seng:
Today: +1.05% to 23,249.80 at close
This week: +1.6%
In November: -0.4%
YTD: +6.3%

Oil futures: $85.31
Gold futures: $1392.80
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3103

ECONOMY & MONEY

• China's manufacturing growth accelerates, according to PMI
• Money market rate rises to two year high
• Yuan little changed on overheating concerns and Europe’s debt crisis; Forwards point to +1.9%
• Five year bonds sold at 3.64%

EQUITIES

• Stocks rise on economy's resilience
• Nomura says China may ease policy as inflation cools
• Morgan Stanley targets a 19% rise in emerging market shares next year; but is worried about inflation
• Global stocks to rise 15% next year, says RCM Asset Management; likes China in 2011

KOREA

• China blocks UN security council action against North Korea
• Chinese State Councillor to visit North Korea today

DOMESTIC

• Acer says China will be the World's largest computer market within three years

HONG KONG

• China to increase the number of companies involved in cross border Yuan trade settlement, says HKMA
• China’s Yuan bond sale in Hong Kong is 10 times over-subscribed
• Sandy Hendry Shui On Land aims to sell PRC homes in Hong Kong buyers
• Hong Kong retail sales rise 21.6%

The 11th month

“No shade, no shine, no butterflies, no bees, no fruits, no flowers, no leaves, no birds. November” – Thomas Wood

With apologies to Southern Hemisphere readers, those of us in the North know that November (even with one day to go) can be a miserable month; and in Shanghai share prices showed the first month on month fall (-5.3%) since June. Further monetary tightening is imminent and, in many ways, it would be better if the Government simply got on with it, rather than sitting on its hands. In fact money market rates (after a pause for breath yesterday) are already there as the seven day repurchase rate rose 63 basis points today to 3.31%. Similarly, the Chinese Academy of Social Sciences says benchmark interest rates could rise 200 basis points (albeit with no timetable).

Nor does the background noise from Europe help; and let’s not forget that this is China’s single biggest (albeit multi-national) market taking around one fifth of exports. Tensions on the Korean Peninsula continue, too, albeit WikiLeaks points to evidence that China may be beginning to distance itself from, North Korea and in one exchange between China and the US - apparently - China’s Vice Foreign Minister said the Government in Pyongyang was acting “like a spoiled child”.

In real estate, Moody’s gives with one hand and takes away with the other i.e. the property market was given a stable outlook but with a moderate downward correction. “The improved liquidity positions of developers, resulting from robust sales over the last year, and the low debt leverage of buyers together reduce the risk of any panic sales”; and this will help “avoid any drastic correction”. However, the latest set of regulatory measures will be “progressively enforced”.

Moody’s also says that contracted sales values, or a combination of sales volumes and prices, for the 23 Chinese developers tracked by the credit rating company will drop 15 to 20% in 2011. But this is “manageable” for most of the real estate companies. Similarly, home sales volumes in 17 of 35 major cities increased last week from the previous week, according to SouFun, which operates China’s biggest real estate website. That said, the dollar bonds of China real estate companies had their first loss (-0.35%) of this half year after the PBOC imposed restrictions intended to limit developers’ access to bank loans and slow mortgage growth.

Back in the stock market, only Citigroup remains positive. “The liquidity driven rally will likely carry on in the next six months. We remain bullish on China in coming months”. Given the inflationary environment and prospects for further Yuan appreciation, Citigroup recommends an “overweight” allocation for cement companies, automakers, heath care companies as well as technology stocks.

“Happiness is an attitude. We either make ourselves miserable, or happy and strong. The amount of work is the same” - Francesca Reigler

Shanghai Composite:
Today: -1.61% to 2,820.18 at close
This week: -1.8%
In November: -5.3%
Since 5 July: +19.5%
YTD: -13.9%

Hang Seng:
Today: -0.68% to 23,007.99 at close
This week: +0.6%
In November: -0.4%
YTD: +5.2%

Oil futures: $85.64
Gold futures: $1369.80
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3103

EQUITIES & MONEY

• Stocks set to show first month’s fall since June; Citigroup remains positive
• Seven day repurchase rate rise 63 basis points to 3.31%
• “Prudent” monetary policy advocated by former banker
• Yuan trades near three week low
• Emerging markets attract new record level of funds at $84 billion; as China has best week since September

KOREA

• China is beginning to distance itself from North Korea, according to WikiLeaks

REAL ESTATE

• Moody’s sees stable outlook property but also a 15 to 20% drop in contracted sales values in 2011
• Real estate US dollar bonds show first loss

DOMESTIC

• China will cut prices of 17 medications
• Rolls-Royce pushes $990,000 cars among China’s new rich
• China approves 5.6 gigawatts of hydropower projects in Sichuan Province

HONG KONG

• China’s Yuan 3 billion debt sale in Hong Kong to individuals may offer 2% yield
• PBOC is unlikely to expand Yuan quota for Hong Kong

IRON & STEEL

• Baltic Index drops for three days running as capesize vessel supply increases
• Seaborne iron ore volumes set for 6% rise in 2010
• Chinese steel prices rise 7.2% in November; as production rises
• Vale may invest $158 million in Malaysia next year, says Business Times

Über alles?

In the first seven months of this year, China’s two way trade with its three largest trading partners - the US, Japan and South Korea - was $484.7 billion. During the same period, trade between China and North Korea amounted to $1.65 billion (okay, this makes the PRC the North’s largest trading partner and supplier of much of its foreign currency, fuel and food). From a pure economic point of view, then, there would appear be a huge, relative economic benefit to China in keeping sweet with the ‘Big 3’ rather than the ‘little Northern 1’.

People a lot smarter than me (some say it is not difficult) at the Brookings Institution and Center for Strategic and International Studies (CSIS), both in Washington DC, say the following. The Chinese Government’s principal goal is to preserve regional stability by preventing the collapse of Kim Jong-il and his regime, which might lead to a flood of refugees into north east China along a 1,415 kilometre (880 mile) border. Additionally, it might also create a unified and democratic Korea allied with the US i.e. “the Chinese worry about refugees and chaos from a North Korean collapse in the short term and, in the long term, of the magnetic effect of having a strong modernised Korea of 75 million people on their border” concludes CSIS. However, Professor Zhu Feng at Peking University adds that the recent attack by North Korea on the South has “injected growing anxiety about the stability of North Korean behaviour among Chinese diplomats and officials”. This will most likely put more pressure on the five day visit to China - which begins tomorrow - of Choe Tae Bok, Chairman of North Korea’s Supreme People’s Assembly.

In the short term, too, China’s call to resume six party talks (the two Koreas, the US, Japan, Russia and itself) has fallen on deaf ears. But there are two views on this. Brookings says China wants to look like it is taking “some initiatives on this important matter”; and North Korea also would like to resume the talks, so this is “the best possible action for China, from China’s perspective”. However, CSIS believes the initiative is “totally useless. People have been calling for getting back to talks for the past three years. It’s typical no risk, no cost, no commitment China”.

In other news, the Yuan recorded its biggest weekly loss (-0.42%), last week, since December 2008 as investors eschewed Asian currencies and plumped for the US dollar as South Korea, in particular, resisted calls for six party talks (as above). The currency was also off today to 6.6745 and Yuan Forwards are forecasting just 1.5% appreciation over the next 12 months. That said, analysts estimates range to 6%+ over the same period. Capital adequacy at China’s banks has also been increased by the regulator to 8% plus two lots of 2.5% - one as a “surplus” and one as a “counter-cyclical buffer”. The Government will also meet, it is reported, on 11 and 12 December to discuss monetary and fiscal policy and may introduce a new inflation rate of 4.0% (the old one was 3.0%). However Dazhong Insurance lamented that the past weekend was almost a vacuum for news on Government policies – and this added to uncertainties regarding the future control measures in the market. “Investors remain cautious on speculation of tighter policies including interest rate hikes. The fluctuations will continue with downward pressure”.

“We must always seek to ally ourselves with that part of the enemy that knows what is right” - Mahatma Gandhi

Shanghai Composite:
Today: -0.19% to 2,866.36 at close
Last week: -0.6%
In November: -3.8%
Since 5 July: +21.3%
YTD: -12.5%

Hang Seng:
Today: +1.26% to 23,166.20 at close
Last week: -3.1%
In November: +0.3%
YTD: +5.9%

Oil futures: $84.78
Gold futures: $1367.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3285

KOREA

• China calls for six party talks as US and South Korean naval exercises begin

MONEY

• Yuan sees biggest weekly loss (-0.42%) since December 2008
• Yuan declines to three week low today; with Yuan Forwards now at +1.5%
• Capital adequacy raised to 8% plus 2.5% (surplus) plus 2.5% (‘counter-cyclical buffer)
• Yuan positions at China’s banks rise most in 30 months
• Futures traders will need to hold more cash

ECONOMY

• China’s Government is to meet on 11-12 December to discuss monetary and fiscal policy, it is reported; this may include a new inflation target of 4.0%
• China to increase supplies of sugar, cooking oil and cement (mixing not advisable)
• China’s coal prices rise to two year high
• Gas prices increases halted in some provinces

INTERNATIONAL

• Black Friday sales in the US rise 0.3% as shoppers wait for retailers to cut prices
• Chinese firm wins contract for $46 million Ethiopian highway

REAL ESTATE

• Wharf Holdings buys residential land in Wuhan for a total of Yuan 1.02 billion
• Hubei to invest in $27 billion in port expansion

DOMESTIC

• Cnooc JV to buy Pan American Energy stake for $7.1 billion from BP
• China Huaneng to acquire 50% stake in InterGen in a deal worth $1.23 billion

HONG KONG & TAIWAN

• Huge demand for Yuan debt in Hong Kong
• Taiwan’s relations with China may improve after ruling KMT party’s election win
• Hong Kong home sales look like slowing further

IRON & STEEL

• Rio and BHP may increase iron ore quarterly contracts by 7%, says MB…..….while the Steel Index says +7.7%
• Sweden to invest $2.9 billion iron pellet production to meet demand from China

"Black Friday"

The day after Thanksgiving in the US (which is always a Friday), is known as ‘Black Friday’ – because it is the biggest shopping day of the year ($18 billion last year) and the day on which the majority of US retailers move (from the red) into the black profit-wise. It is also a lead indicator for the entire Christmas season. This year, too, there appears to be an unprecedented level of price discounting in order to attract buyers. Subsequently, the US Retail Federation predicts a gain of 2.3% for the entire holiday season (to $447 billion) which is also consistent with an incipient recovery in consumer spending: +2.8% in Q3; the best since Q4 2006. For the record, too, consumer spending accounts for more than two-thirds of US GDP.

To my knowledge, China does not celebrate Thanksgiving - and while it is good news for China’s exporters that US consumer spending is on the up - today is not ‘Black Friday’ either. In fact, it is more like ‘Moribund Friday’ as China’s Finance Ministry failed to draw enough demand at a bill sale for the first time since June i.e. it placed 58% of the Yuan 20 billion on offer. In turn, this reflects a cash shortage at the banks after the PBOC increased their reserve requirements twice this month. Similarly, the money markets continue to point the way to higher interest rates; and the seven day repurchase rate, which measures lending costs between banks, rose 25 basis points to 2.73%, the highest level since 30 September. In addition, Guotai Junan Securities, China’s largest stockbroker by revenue, is forecasting a hat trick of increases in benchmark rates by end-June next year.

Unsurprisingly, the Shanghai Composite drifted as investors adopt a ‘wait and see’ stance although consumer staples and cement stocks were in demand. Indeed, it is reported that cement prices in eastern China have risen 40% since August – and Anhui Conch had its best day (on Thursday) since the end of August. Elsewhere, the Asian Games in Guangzhou close tomorrow and the event has had a very significant economic benefit on the City with its budget of $18.3 billion. Did you know, too, that Guangzhou has a GDP greater than many small countries, including Vietnam and Morocco?

“Only Robinson Crusoe had everything done by Friday” - Anon

Shanghai Composite:
Today: -0.92% to 2,871.70 at close
This week: -0.6%
In November: -3.6%
Since 5 July: +21.5%
YTD: -12.4%

Hang Seng:
Today: -0.77% to 22,877.25 at close
This week: -3.1%
In November: -1.0%
YTD: +4.6%

Oil futures: $85.58
Gold futures: $1367.60
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3237

EQUITIES & TRADING

• Stocks drop on tightening concerns
• Cement stocks advance on demand and prices (+40% in eastern China since August)
• Shanghai Futures trading is being tightening up
• Dalian Exchange to lift margins and daily trading limits to stabilise prices
• China’s credit-default swaps trading begins as the regulator seeks to implement tighter controls

MONEY

• Money markets continue to point way to higher interest rates
• PBOC fails to complete bill sale for first time since June

REAL ESTATE

• Guangzhou is to close Asian Games tomorrow as the City booms with $18.3 billion of spending

HONG KONG

• Hong Kong’s debt rating is raised by Fitch on economic growth and fiscal strength

IRON & STEEL

• Vale seeking depositary receipt listing in Hong Kong
• Brazilian steelmakers under pressure
• South African Government seeks agreement on iron ore prices with ArcelorMittal and Kumba
  

Children

My son turned 23 yesterday which stimulates a panoply of emotions, atop of which is the shiver of ancientness and the realisation that you are, at the very least, MA (i.e. middle-aged). I am sure too that, psychosomatically, my perambulation over the last 24 hours has been a little slower and a little stiffer. Second, is that feeling of responsibility and the very clear memory of the very first moment you have a child; this is the day that you stop being one yourself and become an adult for the very first time.

North Korea (NK) is a child and a naughty one at that; and although not a direct descendant of China, it is - at the very least - a step child. ‘Father’ Wen Jiabao (who is on a visit to Russia) also finally said something about NK’s recent bellicose behaviour towards its southern relative (and the death of four people). He called for stability on the Korean Peninsular but, at the same time (through filial loyalty, perhaps) did not find fault with NK. Coincidentally or not, China’s foreign minister (aka NK’s Godfather) cancelled a visit today to South Korea due to scheduling issues (yeah, right).

As for the rest of the family, the Yuan rose for the first time in four days to 6.6502, albeit that it’s recent weakness (-0.31%) has had more to do with dollar strength on the back of Korean hostilities. Yuan Forwards are pointing to +2.2% over 12 months, albeit Standard Chartered says it is more likely to be +7.0% annualised in H1 next year; at the same time 2011 inflation is forecast to rise to 5.5% against 3.2% in the current 12 months. Similarly, money markets are presaging higher interest rates as the PBOC pledged to strengthen liquidity and “normalise” monetary conditions. The seven day repurchase rate, which measures lending costs between banks, jumped 15 basis points to 2.48% which is the highest level since 8 October. And as DBS Bank said “enough has been done on the supply side, but work needs to be done on the demand side”. In the same vein, new loan targets for next year may be as low as Yuan 6.0 to 6.5 trillion (down from Yuan 7.5 trillion+ in 2010).

Meantime, our cousins in real estate took a bit of a battering as the State Council said that it needed to introduce “harsher” measures to restrain speculation. It also pushed for an increase in the supply of affordable housing for low and middle income families. At the same time, the Government also plans to carry out a nationwide property inspection with a focus on local government land supply, affordable housing targets, idle land and misuse. Juxtaposing this, though, are number one developer China Vanke and its doubling of sales in October plus the property sector sub-Index rising 2.4% in early trading in Shanghai.

The bonds playground - Government and corporate - remains busy and Caterpillar has sold Yuan 1 billion of debt in Hong Kong. It is the second US corporate to do so after McDonalds. Chinese IPOs, however, have lost their shine both in Hong Kong and New York with two delayed (Bluestar Adisseo and China Datang) and one falling 15% on debut (Syswin, which provides services to property developers in 17 Chinese cities) respectively.

On a brighter note, Credit Suisse says China’s stocks may climb about 20% in 12 months as “abundant” liquidity and profit growth overshadows the risk inflation. Similarly, while a little more cautious in the short term, JPMorgan has maintained its medium term “positive stance”. It also says that the risk of inflation running out of control has been “exaggerated” while China still has a “solid” economic and corporate growth outlook”.

“Children are like wet cement. Whatever falls on them makes an impression” - Dr Haim Ginott

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: +0.13% to 23,054.68 at close
This week: -2.3%
In November: -0.2%
YTD: +5.4%

Oil futures: $83.65
Gold futures: $1372.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3312

KOREA & EQUITIES

• Wen calls for stability on Korean Peninsula
• Stocks may gain 20% in 2011 on liquidity and profit growth, says Credit Suisse

MONEY

• PBOC says it will strengthen liquidity management and normalise monetary conditions
• Money market rate climbs to highest level in a month
• Yuan rises for first time in four days; with Yuan Forwards pointing to +2.2%
• Yuan appreciation to quicken with inflation, says Standard Chartered in HK
• Commodity exchanges in China increase fees to combat threat of speculation
• Shanghai Futures Exchange to suspend preferential trading fees by charging both sides of transactions

BONDS

• PBOC sells three month bills at static yield of 1.8131%; and same for three year offer at 3.0%
• Seven year bonds sold at 3.83%
• Caterpillar raises $150 million in Hong Kong sale of Yuan bonds
• Chinese State-owned companies look set to double US dollar bond sales

REAL ESTATE

• China needs “harsher”property restraints and increased supply of lower cost housing, says Cabinet official
• Cheng says China may curb developers further
• Ministries to carry out property inspections
• Shimao Property and China Vanke (especially) see very good sales advances in October
• Developers shares rise 2.4% in largest gain since 13 October (but still 5% down in November to date)

INTERNATIONAL

• Syswin shares retreat as Chinese IPOs lose momentum on the New York Stock Exchange
• Tokyo follows Hong Kong with shorter stock market lunch break - back to one hour

DOMESTIC

• China builds French-designed nuclear reactor for 40% less
• China may face power supply issues this winter
• Citigroup may double number of staff in China to 10,000 over three years
• China to encourage foreign investment in “high level” manufacturing
• Machinery industry to grow at 15 to 20%, with focus on items for use in construction

HONG KONG

• Bluestar and Datang delay $2.6 billion Hong Kong IPOs on worries about volatility

IRON & STEEL

• Iron ore investment opportunities abound on London’s AIM
• Steel and cement output to rise as power limits ease, says CICC; selling prices to fall
• Hunan Valin sells $189 million stake in Fortescue Metals

"Lunch is for wimps"

"LIFW" was the disdaining description of business mores from Gordon Gekko in Wall Street 1. And, in Hong Kong, they are clearly listening as the traditional two hour lunch break will be cut by 30 minutes next March and then by a further 30 minutes in March 2012 to a single hour. Was this the reason that Hong Kong fell 2.7% today to its lowest level since 7 October? I don’t think so. The market fell because of worries over the border in China and a domestic property sector being hammered by Government constraints. By way of a kindred spirit, the Shanghai Composite joined in with a near 2% drop to its lowest since 11 October as it - amazingly – settled at 2828.28…..Lucky for some?

Investors are worried that the Chinese Government will ratchet up its fight against inflation. This was evidenced by a People’s Daily editorial on its front page saying that the Nation should designate more goods as important commodities and intervene in prices where necessary. Citigroup also talked about the ‘supper cycle’ (as opposed to the ‘super cycle’). By this it meant that “when iron ore prices double, it hardly touches rural Chinese workers. But when food prices rise by 10-15% every year, it does”. Similarly, Standard Chartered is forecasting a consumer price index peak of 6.3% in June.

Already, too, the money markets are anticipating a further interest rate rise as the seven day repurchase rate, which measures lending costs between banks, advanced to 2.22% as at 10.23 hours in Shanghai, which is the highest since 8 October. That said, China International Fund Management believes that China’s economy may bottom out in the second quarter next year; and that “the market will seek support at a lower level in the short term as we are in the midst of very severe tightening”. Similarly Tesco remains positive on the PRC as it plans to quadruple sales by 2015 to £4 billion; and Rolls-Royce has just sold $1.8 billion of jet engines to Air China. Plus a 1,920 kilometre high speed rail link between Yunnan and Yangon, the capital of Myanmar, is due to commence construction work in two months.

It is also reported, but not confirmed, that - with 38 days to go in 2010 - China’s banks have already lend their PBOC limit of Yuan 7.5 trillion; which is good and bad.

Finally, as South Korea scrambles fighter jets due to the fact that its northern neighbour lobbed artillery shells into its backyard this morning (actually one of its back-islands called Yeonpyeong), it maybe time to don your tin hat, actual and figurative.

“The most valuable commodity I know of is information” - GG

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: -2.67% to 22,896.14 at close
This week: -3.1%
In November: -0.9%
YTD: +4.7%

Oil futures: $81.07
Gold futures: $1363.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3558


EQUITIES, BONDS, YUAN & BANKS

• Stocks fall to a six week low on tightening
• One year bill year sold at same yield of 2.3437%; but less of them are offered
• Yuan Forwards now at +2.6% as US dollar strengthens
• Yuan/Ruble trades begin
• China's bank “has reached” its limit of Yuan 7.5 trillion this year with a month-and-a-bit to go
• PBOC adviser Li says China can consider selling US Treasuries, as price rises

DOMESTIC

• China will meet 2010 energy reduction goal, says NRDC
• Rolls-Royce wins $1.8 billion engine contract for Air China
• Tesco plans to for a four-fold rise in sales from double the number of stores by 2015
• China to start work on Myanmar high speed rail project
• China’s rare earth exports fell by 77% in October

HONG KONG

• Hong Kong stocks decline for a third day
• Centaline halts expansion as is predicts Hong Kong home sales may halve from peak
• Hong Kong brokers see their lunch cut by 30 minutes (to 90) and an extension of trading hours from 7 March; a further 30 minutes will be cut in 2012

29 and 29

29 miners remain trapped in a coal mine in New Zealand while 29 were rescued in Sichuan in south west China. At the same time, national financial efficacies are equally divergent. For example, Standard & Poor’s has lowered its credit rating outlook for New Zealand (incidentally, also the Nation of my birth) to negative; albeit that it remains at AA+, the second highest grade and the same as Hong Kong. At the core of this view is the danger of a “prolonged” struggle to recover from the global recession due to diminished demand for its goods and services in the US, UK and Japan; and a widening current account deficit which leaves the country increasingly dependent on foreign capital.

Earlier in November, Moody’s raised China’s debt rating to its fourth highest Aa3 (from A1) with a positive outlook. China, of course, also has a massive current account surplus (at the end of last year it was just shy of $300 billion) plus foreign currency reserves of $2.45 trillion. But it also has inflation (with some 2011 estimates now north of 6%). In turn, this led, after hours on Friday, to the PBOC raising the reserve ratio for banks for the fifth time this year by 50 basis points (to 18.0% for the larger banks); which removes as much as $53 billion of cash from circulation.

Typically, the PBOC did not do what the market expected i.e. raise interest rates. Nonetheless, the smart money says this is a matter of time; and by the ‘smart money’, I mean HSBC, BNP Paribas, Citigroup, Credit Suisse, UBS and ANZ who all say that the central bank will raise rates before the end of the year by at least 0.25% (the benchmark one-year lending rate is currently 5.56%). ANZ, too, expects another 150 basis points on the reserve ratio.

More smart money at RBC added that, prior to Friday, people had thought we were nearer the end of the China tightening cycle. But the tightening is being extended further than the market expected. But this means that “China is now giving a very clear indication that they’re very intent on conquering inflation”. And, “there will be a very attractive opportunity to buy Chinese stocks as we get towards the end of the China tightening cycle, particularly those sensitive to interest rates. It’s probably early now, but we’re brewing towards quite an attractive opportunity”.

Elsewhere, the Yuan is firm and Non-deliverable Forwards are pointing to +2.9% over 12 months from the spot rate of 6.6378. However, consensus forecasts point to +6.1% to 6.26 by year-end (note, too, that the currency briefly touched a 17 year high on 11 November of 6.6173). Similarly, one year Yuan interest rate swaps climbed to the highest level since October 2008 in Hong Kong on Friday. As we mentioned on Friday, too, an appreciating Yuan is likely to be an important weapon in fighting inflation (and Li Daokui from the PBOC agrees).

The State Council has highlighted the “importance and urgency” of tackling inflation; and at the same time the PBOC Governor Zhou Xiaochuan said China is under “pressure” from capital inflows and that the central bank will “strengthen liquidity management” (which it is doing). By way of background noise, too, there are also signs that the Chinese economy is maintaining momentum and both the World Bank and the OECD are forecasting 10% growth this year; and the latter is on the same number in 2011 and 2012. Similarly, the newly IPO-ed General Motors Company of Detroit expects sales in China to rise 15% next year.

And, finally, UBS says Shanghai and Beijing’s luxury home prices may increase 15% each year to overtake Hong Kong (where new controls have been introduced) in the next five to 10 years. China’s tightening measures will not stop prices from rising and may only “delay” the gains, it said. Similarly, “monetary policies may also be eased over time to avoid a rise in unemployment. It doesn’t matter what the Government is doing, whether we have 100 new measures or 10,000 new measures. In the long term, all these are noises and will disappear, and only one variable matters - and that's money supply”.

“When you say one thing, the clever person understands three” – Chinese proverb

Shanghai Composite:
Today: -0.15% to 2,884.37 at close
Last week: -3.2%
In November: -3.2%
Since 5 July: +22.0%
YTD: -12.0%

Hang Seng:
Today: -0.35% to 23,524.02 at close
Last week: -2.6%
In November: +1.9%
YTD: +7.6%

Oil futures: $82.42
Gold futures: $1361.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3737

RESERVES ETC

• China to raise bank reserve ratio by 50 basis points from Monday 29 November 2010
• Inflation fighting by China and higher reserve ratios may harm equities and bonds
• UBS says liquidity is the issue; interest rates rise to follow
• Obama repeats call for surplus nations to allow currency gains
• Credit-default swaps for Chinese companies build in greater risk than their for their US counterparts

YUAN & BONDS

• Yuan Forwards point to +2.9% over 12 months; albeit consensus forecasts point to +6.1% by year-end
• Yuan appreciation can reduce inflation, says PBOC Advisor
• Merrill Lynch starts Yuan services as hedge fund demand grows
• China to sell $1.2 billion of Yuan bonds in Hong Kong

REAL ESTATE

• Shanghai and Beijing's luxury house prices to over-take Hong Kong, says UBS
• CIC holds 7.4% of General Growth Properties

INTERNATIONAL

• Food prices to rise by only 2% after crop costs surge, says US Agriculture Secretary

DOMESTIC

• Japan military deployment near disputed islands may damage further relations with China
• GM expects sales in China to rise 15% next year
• China’s corn stockpiles are “ample”, says State Administration of Grain; same goes for other grains
• All 29 trapped Chinese coal miners are rescued alive

HONG KONG & TAIWAN

• Hong Kong increases tax on property re-sold within two years to cool market
• Weekend home sales collapse
• Developers fall by a further 3.3% - biggest drop since May
• Yuan loses out to Taiwan Dollar as GDP rates converge

IRON & STEEL

• Indian iron ore export ban from Kanataka upheld by court
• Fortescue approves $8.4 billion iron ore expansion
• The ‘Big 3’ to expand capacity by 400 million tons

China buys Ireland

Okay, I made that headline up; but it could. Irish GDP this year is around $227 billion, although its enterprise value is much larger. Officially the budget deficit is 14.3% of GDP, but some estimates put it as high as 24% which would add a further $50 billion or so to the purchase price. But this is small beans when compared with China’s reserves of $2.45 trillion.

Capacity is one thing, inclination another and right now the Chinese Government’s proclivity is domestic (aside from taking a near 1% stake in GM in its IPO). Inflation is rampant, especially in food and not only are interest rates almost certain set to rise, but also price controls and the mobilisation of food reserves are imminent.

The latter measures are, of course, artificial and may only have a short shelf-life. More fundamental is the issue of liquidity both imported and domestic. This has led a number of commentators to recommend treating the ‘illness’ not the ‘symptoms’. For example, Sandford Bernstein expects new bank loans to fall 12% next year to Yuan 6.6 billion (and other estimates are lower). Similarly, Standard Chartered sees three interest rate rises next year (in addition to the probable one of 0.25 to 5.56% before end-December). What’s wrong, too, with letting the Yuan appreciate further, which is a pretty painless way to reduce inflation?

Understandably, the Shanghai Composite is not a happy camper and, even after today’s respite, it has fallen almost 9% since its November high on the 8th (when it was also back to April’s level). And while I might sit on my hands for a day or two, I would not panic.

The OECD says China will grow by “about 10%” in 2011 and 2012. It also says that China’s current account surplus will stabilise at about 5.5% of output, and that the Government should allow the Yuan to strengthen further. “The stability of the domestic economy would be enhanced if the exchange rate policy were more oriented to allowing an appreciation against a basket of currencies. In addition, Government spending should continue to be reoriented to social objectives”. Note, too, the OECD has just reduced it global economic outlook bringing down its GDP forecast from 4.5 to 4.2% and is talking about a “soft spot” as stimulus spending fades – before investment spurs revival in 2012.

“Ireland is where strange tales begin and happy endings are possible” - Charles Haughey

Shanghai Composite:
Today: +0.81% to 2,888.57 at close
This week: -3.2%
In November: -3.0%
Since 5 July: +22.2%
YTD: -11.9%

Hang Seng:
Today: -0.13% to 23,605.71 at close
This week: -2.6%
In November: +2.2%
YTD: +7.9%

Oil futures: $85.42
Gold futures: $1359.50
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3684

HEADLINES

EQUITIES

• Buy A-shares and ‘short’ H-shares as prices drop, says Credit Suisse; while JF is more positive

YUAN & RATES

• Money market rates point the way to higher rates
• Interest rate rise around the corner because price controls may be “insufficient”
• Yuan fails “freely usable” test for SDR basket, says IMF
• Bank lending target may be reduced 12% to Yuan trillion, says Sanford Bernstein
• China to raise rates twice more and Yuan to rise, says Aviva

ECONOMY

• OECD says China will grow by “about 10%” in 2011 and 2012

INTERNATIONAL

• OECD cuts Global growth outlook for next year to 4.2% and predicts “softspot”
• GM sells $500 million (0.97%) stake to Chinese partner SAIC as part of IPO
• World food import costs are $1 trillion+ this year says UN
• Nobel Committee may not present its Peace Prize to Liu (as it must be made to him of family member)

DOMESTIC

• China pledges adequate grain supplies
• China to give local governments more power on taxes
• Tibet lures hoteliers as China's big cities are over-supplied
• Chinese man uses SUV to knocks down 11 officials who were demolishing his house

HONG KONG & TAIWAN

• Hong Kong is said to be planning new property curbs
• IMF says Hong Kong economy risks boom and bust
• Yuan's Hong Kong premium shrinks from 2.6 to 0.6%
• Taiwan's GDP grows 9.8% in Q3 which underlines Asia’s recovery and capital flows

IRON & STEEL

• Baosteel and Taiwan’s China Steel in iron ore move
• Wuhan and Angang reduce steel prices for December, according to Mysteel
• Rio Tinto’s CEO says Governments face “populist pressures” on foreign bids; but adds that China’s economic strategy is “sensible”
• Baosteel expects quarterly iron ore pricing to stay
  

Quod ali cibus est aliis fuat acre venenum

This Latin aphorism was coined in the First Century BC by Lucretius and was first translated into English in 1604 by the Jacobean playwright Thomas Middleton: “what is food for one man may be bitter poison to others”.

And so it is with China - and while Japan (or even the UK) would give its right arm to have some inflation, China is just the opposite. Inflation in the PRC hit a two year high in October (4.4%) and UBS, for one, thinks that it could top 5.0% in November. And, food (not poison) is the issue (it accounted for three-quarters of October’s gain). For example, corn and rice have hit new record prices this week and not only are vegetables 18% up year-on-year, they also jumped 62.4% in the first 10 days of November, says the Financial News. Even McDonalds has raised prices across its product range by Yuan 0.5 to 1.0 per item.

Little wonder, too, that Premier Wen is drafting measures to counter excessive price gains. In typically Chinese fashion, too, it is seeking to punish speculators and hoarders. Similarly, the Dailan Commodity Exchange has become the third in China to announce measures to restrain speculation.

On the other hand, commodities have tanked in price on the prospect of higher interest rates and lower economic growth (and the CRB Index in New York has just completed its biggest five session slide in 15 months). Investment legend - and head of Fidelity’s China Fund - Anthony Bolton says that last month’s interest rate rise may be the first of several. He also highlights the international flow of hot money (which is yet another irksome problem for the Chinese monetary authorities). “I have never before witnessed the current situation whereby money created in one country is leaking at a rapid pace into assets in another part of the World. This is a phenomenon that I think is only in its early stages and could be the big investment story of the next year or so”. However, he remains positive on China, saying that economic growth may slow to 7 to 8% although that will still look pretty interesting in an economic environment where much of the World is growing at about 2%.

Similarly positive was the Conference Board’s leading indicator index which rose by 0.6% to 150.8 in September for a fifth consecutive month. This suggests that the economy will expand steadily through early 2011. Similarly, FDI rose 7.9% in October (the third month of acceleration) to $7.7 billion; and for the first 10 months of the year it is ahead 15.7% at $82 billion. In addition, Adidas has just announced plans to open 500 new stores in China next year (worth $1.4 billion) to take it tally to 6,100.

Okay, consumer confidence has unsurprisingly taken a battering and the latest Neilson/Statistics Bureau index shows the first drop in six quarters (from 109 to 104 in Q3) on expectations that the price of goods and services will keep rising. Only first-tier cities such as Beijing and Shanghai were spared. In the same vein, the Shanghai Composite is now off almost 5% this week; and it’s only Wednesday. Plus, stock index volatility is at a six month high and Nomura has turned bearish. That said, investors last week opened 565,972 accounts to trade equities, the most in 15 months.

On brighter note, too, Citigroup says that further Government restraints on real estate are unlikely as its focus shifts to inflation i.e. it does not want Yuan 1 trillion of liquidity flowing out of property and into other areas. Thus, Citigroup reiterates it overweight stance on property stocks saying that current share prices have factored in much of the bad news. The Government’s draft plan on the real estate market, 2011-15, will also be completed at the end of this month. Similarly, the Chairman of CCCB says that his bank is unlikely to have stopped loans to property developers (as was reported in the media). Finally, 13 million low income apartments are planned to be built over the next two years and Governments (central and local) will use at least 10% of the net proceeds from land sales to develop low cost housing.

“The food here is terrible and the portions are too small” - W. Allen

Shanghai Composite:
Today: -1.92% to 2,838.86 at close
This week: -4.9%
In November: -4.7%
Since 5 July: +20.1%
YTD: -13.4%

Hang Seng:
Today: -2.02% to 23,214.46 at close
This week: -4.2%
In November: +0.5%
YTD: +6.1%

Oil futures: $81.66
Gold futures: $1335.00
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3483

HEADLINES

EQUITIES

• Nomura turns “bearish” on Chinese shares as policy tightens
• China stock index volatility is at a six month high – which means investors should refrain from buying, says CICC
• Stocks decline as inflation measures may reduce earnings
• Investors open more account in any week for 15 months

MONEY & BONDS

• Money market climbs to a three week high on rate risk
• China may raise interest rates several more times, says Fidelity's Bolton
• Yuan “okay” (for now) says Geithner and Germany’s CFO
• UBS forecasts Yuan 7 billion as the new bank lending target for 2011 (after Yuan 7 billion in this year); Credit Suisse says Yuan 5 billion
• Finance Ministry sells 50 year bonds at 4.4% yield (up from 4.03% in May)
• PBOC’s Yuan 10 billion worth of one year bills sold at unchanged at yield of 2.3437%

ECONOMY

• UBS sees 5% inflation in November
• Consumer confidence has first drop in six quarters on prices
• China's leading economic index rises for fifth month as growth stabilizes
• Faster gains in FDI as economy rebounds
• China may introduce measures to curb food and cotton price, says China Securities Journal
• PBOC should increase rates twice, says researcher
• Zhou targets liquidity as price controls are discussed
• Commodities fall by largest five session slide since July 2009
• Agricultural commodities decline in China as Wen says he will cool inflation
• McDonald's raises prices in restaurants in China

REAL ESTATE

• 13 million low income apartments in two year
• Draft property plan to be finished this month
• Construction Bank Chairman says halting loans to developers is unlikely
• Policies cannot contain the rise in residential prices
• Property policy risks to stabilise, says Citigroup

INTERNATIONAL

• Pacific Basin Shipping will expand its fleet by 10 dry bulk vessels worth $284.4 million
• Shipping costs fall
  

DOMESTIC

• China may introduce measures to curb food and cotton price, says China Securities Journal
• Adidas plans 500 net store openings in China next year
• Gap and JCPenny see dramatic rise in cotton prices
• 2011 natural gas supply may not meet demand
• China orders stricter fire controls after Shanghai blaze kills 53

HONG KONG

• IPOs are Beijing's next export for Hong Kong Exchange
• Yuan-denominated debt - or “dim sum” bonds - rise in popularity on competitiveness in HK