"Yuanderful noises"

Five factories in Guangdong and Zhejiang have manufactured 90% (that’s more than a million) of the Vuvuzela’s being used by spectators at the World Cup. Those of us watching on TV will know only too well what a Vuvuzela is. But for monks and hermits, it is a 65 centimetre long plastic stadium horn which, when blown by its owner, generates 127 decibels. That’s louder than a lawmower, and when blown in unison, they sound like a swarm of angry bees. Whether you love or hate them – they simply can’t be ignored.

China blew the monetary equivalent of a Vuvuzlea on Saturday evening when the PBOC broadcast that it will abandon the Yuan’s peg to the US dollar, allow greater exchange rate flexibility and a managed float against a basket of currencies. There is some debate about the actual wording and any large scale appreciation has been ruled out (Yuan Forwards point to 2.9%). Nonetheless, it is bold and judiciously timed step (ahead of the G20) and one which underlines China’s confidence in its economy, albeit where some fine tuning of inflation may have been needed. And, as a further olive branch to the US, the Nation’s sovereign wealth fund bought more US Treasury notes and bonds. It is not, as Morgan Stanley’s Stephen Roach said, “a pancea for an unbalanced global economy”; but it is a start. Similarly, some domestic exporters are worried (as highlighted particularly in the China Securities Journal) about their future competitiveness. However, there could also be competing benefits from domestic demand.

Vuvuzela – which means “making a noise”.

Shanghai Composite:
Today: +2.43% at 2,574.34 at 13.52
Last week: -2.2%
YTD: -21.4%

Hang Seng:
Today: +2.84% at 20,863.18 at 12.35
This week: +2.1%
YTD: -7.3%

Oil:
$78.76
Gold:
$1261.60 (new records being broken daily)
Euro/$
1.2459

• Stocks/commodities surge as China ends Yuan/USD peg
• China signals an end to the Yuan’s two-year peg to the dollar
• US Senator Schumer calls Yuan statement vague and limited
• Chinese exports to be hurt by big Yuan gains, say newspapers
• Hu buys time at G-20 with Yuan announcement
• China backs US with Treasury holdings rise to $900 billion
• Bank and property stocks raised at Morgan Stanley
• Qatar said to invest $2.8 billion in AgriBank IPO
• China Railway to sell shares up to Yuan 6.24 billion
• Australia and China Sign trade pacts worth $8.8 billion
• China mine blast kills at least 46
• China storms death toll rises to 88; more rain is forecast

The Beautiful Game

The beautiful game came alive in Soweto on Friday as the 19th FIFA World Cup began with 32 countries represented. Notable non-qualifiers this time, however, are Belgium, Columbia, Hungary, Peru, Russia, Sweden, Turkey and, of course, the PRC – despite them beating Myanmar 7-0 in one of the qualifying rounds. It is my sense, though, that it is only a matter of time until China will be vying for the glory that has been Brazil’s five times, Italy’s four and Germany’s three (okay, and England one). By way of a pointer, is the Nation’s success at its home Olympics in 2008 (2nd in the table with 51 Gold Medals) and - less usual - at the Winter version, in Canada, earlier this year (8th with 5 Golds, including the figure skating pairs).

A small glass of Chauvinism-lite aside, too, I reckon China can do most things it sets its mind to; and it is already, for example, the second largest global economy-elect, the fastest growing major, a benevolent neo-colonialist, friend to many of the World’ bad boys and part-time mercantilist.

In a game of two halves, the first six months of 2010 has been a bumpy one with simultaneous fears of overheating/economic slowdown, pre-eminent bubbles (especially in real estate) and a bear stock market. Last week’s economic data, though, provided more comfort blankets for the bulls than the bears. Sure, inflation was at a 19 month high of 3.1% annualised in May - but did anybody look at the month on month movement? It showed a 0.1% fall from April. Similarly, while producer price inflation on an annual basis was +7% in May - and also the largest for 20 months - it moved just 0.6% from April. Elsewhere FDI or Foreign Direct Investment in China rose for a 10th month in May – up 27.5% to $8.13 billion and is maybe set to reach $100 billion this year thereby beating 2008’s record.

Wage levels have also been grabbing headlines and, once again, this has created a push/pull on negative and positive comment. Similarly, while Honda and Hon Hai Foxconn have been the most high profile, “there are strikes every day in China that never get reported”, according to the China Labour Bulletin and reported in The Sunday Times. It is not my intention to debate the moral efficacy of wages here. But, on an economic level, the S.Times says “wages could double and it could be absorbed”. Similarly, Morgan Stanley added that a doubling of China’s manufacturing wages over the next five years will not damp foreign investment because Asian rivals such as India and Indonesia lack comparable infrastructure”.

Despite a yellow card before half-time, China is becoming more and more sure-footed, particularly with its team’s (economic) management - from which other national competitors could learn. UBS and Deutsche are also new supporters this morning. Time is on China’s side and a hat-trick beckons.

Shanghai Composite:
Friday: +0.29% at 2,569.94
Today: Closed
Last week: +0.6%
YTD: -21.6%

Hang Seng:
Today: +0.88% at 20,047.14 at 12.35
Last week: +0.5%
YTD: -8.3%

Oil:
$74.54
Gold:
$1231.40 (record was $1252.11 on 8 June)
Euro/$
1.2174

HEADLINES

• FDI rise for 10th month in May
• Inflation rises to 19 month high of 3.1%
• CPI may decline in June from previous month, says NDRC
• Economic data challenge Government’s on tentative recovery and Yuan
• WTO rules do not support probes aimed at the Yuan
• Demand falls short for treasury bills
• China investigating leak of data which moved financial markets
• China Vanke says share sale plan will be “relatively difficult”
• China orders local Governments to ensure repayment of debts
• UBS advises investors to return to China stocks on valuations
• Deutsche Bank says emerging market valuations point to returns up to 42%
• China to spend $4.7 billion on post-earthquake reconstruction in Qinghai
• China and Taiwan reach basic agreement on tariff reductions
• Chinese company to build $12.5 million cement plant in Tanzania
• Road accidents killed almost 4,700 people last month

ENDS

DÉJÀ VU

“This is like déjà vu all over again”, is a typical quip from American baseball legend (and famed tautologist), Yogi Berra (as is the one below). He’s not wrong but I prefer the lyrical view that déjà vu is “a checkpoint which marks that we are on the right path” (Sylvia Browne); in other words, if you have seen it before, be pleased. In this sense, the current geo-political and financial landscape is not virgin territory – but rather well trodden; and because it is so, we know, deep down, that it will change and become abundant once more. Good job too, because the recent headlines have all been pretty bleak whether that be US jobs data, tensions in the Koreas, a possible abandonment of the Euro, Hungarian debt or a circumspect G20 meeting of finance ministers and central bankers this weekend, also in Korea (South). The S&P 500 fell 3.4% on Friday (to 1064.88 and a four month low), which is a lot and, this morning, Shanghai joined in; the latter also remains stubbornly less than 80% of its 2010 starting value.

At the G20 meeting, there was more déjà vu, too, when the IMF said the Yuan was “substantially overvalued”. That said, and despite equity market fears of slowing growth in China (and with steel prices down 8.8% in as many weeks), the World Bank said that China’s economy will expand between 9 and 10% in 2010. “Growth in the first quarter (11.9%) was a bit overheated so it would be good that it slows a little”. China’s Finance Minister added that he intends to remain fiscally proactive and cautioned against any rapid and/or clumsy stimulus exits elsewhere in the G20. The PBOC Governor was similarly robust saying that while he was still evaluating events in Europe “China is confident the EU and the European Central Bank will be able to contain the risks of the region’s debt crisis”; and “the impact on Chinese exports shouldn’t be very big”.

“If you don’t know where you are going, you might wind up someplace else”.

Shanghai Composite:
Today: -2.09% at 2,500.31 at 11.30
Last week: +3.9%
YTD: -23.7%

Hang Seng:
Today: -2.36% at 19,313.05 at 12.35
Last week: +0.1%
YTD: -11.7%

Oil:
$70.33
Gold:
$1220.50
Euro/$
€1.193

1. China urges G-20 caution on economic stimulus exit
2. Zhou implies that he will keep a close eye on domestic economy
3. China’s trade unions push for pay rises
4. Wage rises to damp capital spending (Conch falls 2.6%)
5. China will not experience stagflation this Year, says NDRC
6. China house prices to dip 20-30% in “new few quarters”, says Barclays
7. China to apply tighter second mortgage rules to ‘locals’ of less than on year
8. China Vanke’s property sales fell 20% in year to end-May
9. Capitaland to build “affordable” homes in China
10. Sun Hung Kai sells HK$6.5 billion of apartments
11. Official calls China work-safety “grim”
12. China and US bicker over cut in military ties amid Korean tension
13. Expo expands

ENDS