Positive Lightning

The irrational fear of lightning (and thunder) is astraphobia and someone who studies lightning is referred to as a fulminologist. I had a bit of both yesterday as ‘a father and mother’ of a storm descended on rural Sweden. Such freak weather is a typical by-product of a hot summer and, although only 100 or so people are killed worldwide every year by lightning, literally millions of computers, telephones and TVs are fried annually. So unusually, Building Value (“we never sleep”) was off the grid on Thursday save for the Blackberry which is not an ideal medium for lengthy communication.

This has meant a delayed celebration of the best month for a year on the Shanghai stock market; and at the time of writing July was showing a 10% gain. The prospect of looser economic policies, no rate rises and additional spending on tourism helped, as did rampant income growth. Net profits of Chinese industrial companies in 24 regions jumped 72% to $237.5 billion in the first half of 2010 from a year earlier. Similarly, new bank lending in July may have cleared Yuan 500 billion, with some Yuan 3 trillion expected for the whole of H2.

What could spoil the party, though (and cause Sunday lunch indigestion), is China’s Purchasing Managers’ Index for July which is invited on 1 August. It could slip below 50 for the first time since February 2009. Elsewhere, the Oriental Morning Post says that Shanghai will announce tightening measures for the real estate market in the second half of the year; and it quoted Zhou Bo, head of Shanghai’s National Development and Reform Commission.

Still, the likes of UBS (“fears of a so-called hard landing are overblown”), Macquarie (“a lot of value”), Nomura (“half way to a bull market”) and JPM (+21%) are all positive; albeit HSBC is less so.

“Bring in the bottled lightning, a clean tumbler and a corkscrew” (as Charles Dickens once said).

Shanghai Composite:
Today: -0.40% at 2,637.50 at close
This week: +2.6%
In July: +10.0
YTD: -19.5%

Hang Seng:
Today: -0.30% at 21,029.81 at close
This week: +1.0%
In July: +4.5
YTD: -3.9%

Oil: $78.12
Gold: $1171.20
Euro/$: 1.3076

Headlines:

• PBOC sees less need to lift interest rates, says IMF; but it can’t agree on the Yuan (which is undervalued by anything from 5 to 27%)
• Money market rate declines to a 13 week low of 1.68%
• PBOC sells three month (1.5704%) and three year bills (2.65%) at unchanged yields
• Demand for 30 year debt up as cash shortage eases (yield down from 4.03 to 3.96%)
• Sovereign wealth fund or CICC is planning bond sale
• Environment accidents in China double as growth takes its toll
• Nation needs $118 billion to build high speed rail lines

"Neither a borrower nor a lender be"

Posted on Monday, 26 July 2010 [GMT +1]

Polonius - famous for the above aphorism - was clearly not Chinese. New property development loans in China rose 26% in the first half together with fresh personal consumer lending up by 72%. Nor was the father of Hamlet’s girlfriend stupid: “for loan oft loses both itself and friend”; viz the fact that some 23% of all loans to local government financing vehicles are unlikely to be recouped. Okay, the Nation’s top five banks are raising $53.5 billion in new capital, the CBRC has said that all non-performing project loans must be written off by the end of this year and stress tests are also being carried out on China’s property trusts. Nonetheless, it remains a concern.

In Act 4, the stock market caught its breath today after its 6% leap last week and bandwagon jumpers Goldmans, CICC and Citic are now all positive. Spending on flooding is also set to accelerate as in the south of the Country alone this year it has already caused $21 billion of damage. The latter galvanised the belief that the Government will introduce further stimuli and bond yields rose from, in some cases, record lows.

Finally, tucked away in a dusty corner of the stage, was ‘China, the new importer of corn’. Yes, the quantities are relatively small right now, given the Nation is also the World’s number two consumer. But is this the beginning of a “new era” of domestic buying from outside China? “That is the question”.

Shanghai Composite:
Today: +0.65% at 2,588.68 at close
Last week: +6.1%
YTD: -21.0%

Hang Seng:
Today: +0.12% at 20,839.91 at close
Last week: +2.8%
YTD: - 4.7%

Oil: $78.50
Gold: $1190.60
Euro/$: 1.2908

Headlines

• Banks will struggle to recoup up to a quarter of their loans to local government financing vehicles
• H1 new property development loans rise 26%; consumer lending up 72%
• China runs stress tests on property trusts
• Goldman Sachs is “constructive” on China's Yuan-denominated shares; CICC and Citic Securities agree
• China to increase spending to protect against flooding
• Yuan Forwards halt their six day loss; while bond prices fall, as does the repo rate
• Shanghai should be pricing centre for Yuan-denominated products, says PBOC
• China and Singapore agree to Yuan 150 billion currency swap
• China and Iran in talks to use Yuan for oil contract settlement
• Property prices may tumble 30% in China as growth slows, says Nikko; while HSBC looks for a fall of 15% in house prices
• China’s fiscal revenue may grow by as much as 17% this year; but no property tax on a family’s first home
• China's CIC may post record year for 2009 as markets and commodities rallied
• China to buy 15 million tons of corn in “new era”
  

"That was the week that was"

Older, Commonwealth readers will remember that the above “TWTWTW” was a famously satirical and ground-breaking BBC TV programme; others, will simply applaud the five day performance of the Shanghai stock market which was up 6.1% in the best week of 2010 (so far). The prime driver is the belief that, as the economy slows, the Chinese Government will not now implement economic and real estate tightening measures (albeit there is no firm evidence this will be so). That said, Citigroup supplied grist to the mill in the form of cutting its China GDP forecast by the most since 2001 (down 1% to 9.5% for 2010). In the ‘more worrying camp’, though, was a slowing rate of auto sales. Why is it a worry? Because domestic consumption is supposed to be the touchstone of more nimble economic growth.

Specifically, on real estate there was also a push:pull of good and not-so-good news. In the former, is the fact that the yield premium (to Government debt) of local currency developers' bonds has narrowed to the lowest ever (95 basis points). That said, offshore dollar bonds have moved the other way and a national property tax now seems inevitable by, say, 2012. But is this really something to be concerned about? I, for one, think the market can take it, especially if it is 0.8% of market value for those with multiple homes (as theorised by ANZ).

Finally, spare a thought for those suffering in the dreadful floods in Southern China at this time.

On Monday, I pinched Harold Wilson’s quip about a week being a long time….but if they are as similarly protracted as this one. Bring it on!

Shanghai Composite:
Today: +0.38% at 2,572.03 at close
This week: +6.1%
YTD: -21.5%

Hang Seng:
Today: +1.10% at 20,815.33 at close
This week: +2.8%
YTD: - 4.8%

Oil:
$78.88
Gold:
$1198.20
Euro/$
1.2931

Headlines

• Best week of 2010 (so far)
• Chinese investors defy warnings as Yuan property bonds rise
• China plans to start implementing property tax trial in 2012
• Shui On Land may sell properties outside of Shanghai
• Citigroup says global outlook is worsening and cuts China target by most since 2001
• Rebound may falter as Government delays easing, says Deutsche Bank
• PBOC may publish a rate with which to manage Yuan versus a basket of currencies
• Yuan demand in Hong Kong may lead to twin rates, says Standard Chartered
• Hong Kong inflation quickens to fastest pace in 19 months on rents and food
• Chinese banks need to raise more capital to meet lending growth, says S&P
• Finance Ministry sells 182 day Bills at a yield of 1.798%
• PBOC sells three month bills at unchanged 1.5704% yield
• Hong Kong property purchasers spend less in China
• China's vehicle prices may fall on increasing inventories
• Tropical storm Chanthu kills two and destroys 3,000 homes in Southern China

"A week...."

Posted on Monday, 19 July 2010 [GMT +1]

Harold Wilson, the iconic British Prime Minister from the 1960s and 70s, once said that “a week was a long time in politics”. If he had been a trader of equities in 2010 he might have been tempted to shorten this to “a day”. For example, on Friday, Wall Street fell 2.6% in a single session on fears of weaker US growth. Then, today, surprise, surprise Shanghai shares are 1% to the good – when it was wholly expected that it would be a dark (albeit not black) Monday. While this hardly qualifies as “irrational exurberance” it does, at least, have some foundation (okay, from what we know is a low base).

For a start, global entrepreneurs still have great faith in China, where foreign direct investment rose to the second highest level on record in June: +39.6% to $12.5 billion; and in H1 as a whole, FDI was up 19.6% to $51.4 billion. The Government is also seeking to offset a slowdown in export growth by boosting domestic consumption and is aiming to provide more low income housing (and some local governments intend to allocate 40% of their total land supplies to this type of housing - which will attract developers). The PBOC is also confident of hitting its 3% target for consumer inflation this year. Nor is Wen panicking: the country’s economic performance is “consistent” with the Governments macro-controls; a wobble in the Yuan’s appreciation notwithstanding. Finally, Credit Suisse says that fair value for Chinese shares is 23% higher than they are today.

As Harold Wilson said: “I’m an optimist. But I’m an optimist who takes my raincoat”.

Shanghai Composite:
Today: +0.87% at 2,445.36 at 11.30
Last week: nc
YTD: -25.4%

Hang Seng:
Today: -0.98% at 20,052.41 at 12.35
Last week: -0.6%
YTD: -8.3%

Oil:
$75.76
Gold:
$1193.00
Euro/$
1.2907

• Wen says that “relatively fast” growth is needed
• Yuan drops most in three weeks
• H2 export growth seen 16.3%
• Commitment to reduced export role will be tested
• FDI in China rises to highest level in more than two years
• China and Germany sign 10 deals during Merkel’s visit
• Property tax will not impact prices in China
• China to keep restrictions on property market
• China interest rate swaps decline to one year low
• Investors pay premium for bonds insured against default
• China is the next “fallen-angel”
• Storms kill 13 in Sichuan Province; 300 trapped in Chongqing
• Thirty killed in three mine accidents in China

Goldilocks

Those of us weaned on Western fairy tales or Hollywood cartoons will know all about Goldilocks. She was the one who stumbled upon the breakfast porridge of a family of bears (dad, mum and baby); okay these omnivores were pretty dexterous ones. From the three plates standing on the kitchen table, the first was “too hot”, the second “too cold” and the third “just right”.

Are we seeing the same in China, with the temperature of the economy getting just right? That is, do we have a ‘Goldilocks’ economy in the wake of today’s easing of GDP growth and inflation?

Here, I particularly liked the quip from ANZ “it’s a moderation, stupid”.

Returning to the victuals theme, David Novak the CEO of YUM! Brands (KFC and Taco Bell) also said, this week, that the Company “is going long in China.”. And finally, even the august Anthony Bolton of Fidelity said conditions are in place for the resumption of a bull market in Chinese A shares; although it didn’t feel like it today.

• China GDP growth eases to 10.3% in Q2; making 11.1% for H1
• CPI eases to 2.9% in June from 3.1% in May (producers +6.4%)
• Industrial output in June (+13.7%) is weakest since September
• Urban fixed asset investment +25.5% in H1 (2009 = +33.6%)
• 3-year bill yield declines for first time in six weeks
• 7-day repurchase rate off 77 basis points in July to 1.86%
• Yuan Forwards reflect weaker appreciation bets
• China’s housing is not a bubble, says Marco Polo Pure AM
  
  Shanghai Composite:
  Today: -1.87% at 2,424.30 at close
  This week: -1.9%
  YTD: -26.0%
  
  Hang Seng:
  Today: -1.48% at 20,233.66 at close
  This week: -0.6%
  YTD: -7.4%
  
  Oil:
  $77.19
  Gold:
  $1213.80
  Euro/$
  1.2828
  

"Reign in Spain"

Sub-editors had it easy this morning as they worked on copy about the World Cup Final.....and for, Spain, a country which has had a surfeit of economic precipitation, last night’s win is very welcome indeed. For example, GDP in Spain last year fell 3.6% and will fall again in 2010. The unemployment rate is 20% (and more than double that for 17 to 35 year olds) and the Nation has lost it’s triple-A credit rating. Sovereign debt? Let’s not go there.

Up to 750 million people may have watched the World Cup Final last night, many of them in China despite the absence of it’s national team. That said, I am certain China will be in Brazil in 2014. It certainly ships enough product there (so why not its football team?). In June, exports from China to Brazil surged 125% and, this, after more than doubling in April and May.

In total, Chinese global exports surged 44% last month to a new high of $137.4 billion. Imports moderated (if +34% can be defined as such), which meant the trade surplus rocketed by 140%. These data were all released on Saturday and look pretty good, as does a moderating money supply (weakest since December 2008) and bank lending, which eased for the third month. In turn, this is further good news for inflation. Finally, the Yuan is nudging up (+0.8% since 19 June) although this is probably not enough for the Americans.

But best of all, though, is a stock market which had its best week (+3.7%) of 2010. Has China recovered from being two or three goals down in the first half?

Shanghai Composite:
Today: +0.86% at 2,492.12 at 13.00
Last week: +3.7%
YTD: -24.0%

Hang Seng:
Today: +0.67% at 20,516.07 at 12.35
Last week: +2.4%
YTD: -6.2%

Oil:
$75.93
Gold:
$1200.00
Euro/$
1.2604

Headlines

• China's trade surplus widens in Hune, adding pressure to Yuan
• China FX reserves increase at slowest pace in 11 years
• Money supply and lending slow in June
• Inflation pressures may ease
• Developers rise on loan speculation
• Yuan Forwards strengthen and point to 1.8% appreciation
• US says China should let “undervalued” Yuan rise as promised
• Gradual Yuan appreciation is good for China, says ex-advisor
• China stocks find “bottom” and may rebound
• Torrential rain and floods kill at least 27

Biggs and me

Posted on Tuesday, 6 July 2010 [GMT +1]

In another life I worked for Morgan Stanley. So did Barton Biggs and both of us are now founders of our own businesses (mine is the specialist advisory boutique 'Building Value'; his is the hedge fund, 'Traxis Partners'). Okay, he is truly famous and richer, but he is also old at, 77, for this or any other industry. That said, he is also lucid, energetic and listened to avidly by investors. So when he says that he intends to sell about half of his stock investments – you take notice. This follows a 5% fall in the S&P 500 to 1,022.58 last week (and its lowest since 4 September) and a 4.5% slide in the Dow to 9,686 (the Index last fell for seven days in the month following the collapse of Lehman Brothers).

Headlines are one thing but the small print another and, here, Mr Biggs said that stocks may still rise. He also compared the current market to the end of the 1982 recession when the S&P 500 declined 13%. “This is what always happens at this stage of the cycle and we are at exactly the same stage in the cycle as we were in 1982, using the exact kind of words: ‘the US economy is collapsing, the World is collapsing and it is the worst time since the Great Depression’. Blah blah blah”.

I particularly like the “blah, blah, blah’ and would apply this to what people are saying about China. Here the stock market is off more than 28% this year so far and looks set to close, today, at a 16 month low. Worries persist about an economic slow down and company fund raising (including the $20 billion sought by Agribank). Goldman Sachs, amongst others, has also cut its GDP forecasts (11.4 to 10.1% this year) and there is yet another bearish survey, this time on services. “Blah, Blah, Blah”. At least Morgan Stanley plus Templeton and JPMorgan are looking through the rhetoric.

Shanghai Composite:
Today: -1.49% at 2,347.46 at 13.07
Last week: -6.7%
YTD: -28.4%

Hang Seng:
Today: -0.23% at 19,859.94 at 12.35
Last week: -3.8%
YTD: -9.2%

Oil:
$72.51
Gold:
$1213.70
Euro/$
1.2543

• HSBC Services Index slides to 15 month low
• China growth forecast cut by Goldman Sachs; and others
• China academic sees Q2 growth at 10.6%
• China raises growth rate for LAST YEAR from 8.7 to 9.1%
• Additional stimulus may prove to be rash, says Legislator
• Money rate drops as Wen targets “relatively fast” growth
• PBOC signals that any big moves in the Yuan are unwelcome
• Property prices face correction, says Minister
• China’s real estate market is a long term play, says Woori
• China’s population to hit 1.39 billion by 2015, says Xinhua
• Stocks look oversold says Morgan Stanley
• Emerging markets are still in “bull phase”, says Mobius
• Emerging markets: “extraordinary” opportunity, says JPM
• Bank of China to raise $8.9bn as ICBC looks for $3.2bn
• China must address wage gaps to sustain growth: China Daily
• GM’s H1 sales in China surge past the US
• Car sales growth rate slowed in June.

"No irony in China"

Written on 28 June; posted on Monday, 5 July 2010 [GMT +1]

I was in Dublin last week for the 69th Conference of Euroconstruct, an august body which forecasts the outlook for Europe’s construction industry, overall, and the individual futures of 19 countries, including Ireland. Fortunately, I was also asked to present a paper: “Pitfalls, Recovery and Opportunities”.

If you have had the pleasure of visiting Ireland, you will have shared its great beauty, wonderfully warm hospitality and a remarkable, omnipresent serenity. You may have also heard the aphorism: “the luck of the Irish”, which is actually ironic. Indeed, when they arrived en masse as immigrants to America (following crop failures and a famine for its staple food, the potato, in the mid-1800’s), the Irish were not popular and the locals did not believe they were capable of success. Hence the dictum.

Over the next three years, the Irish construction industry will not be lucky either. For example, this year, the industry will fall 28% in real terms (and this after 2009’s minus 35%). These are incredible declines as the 'Celtic Tiger' moves into reverse, aided and abetted by Europe’s debt crisis. Similarly, even by 2012, the industry will still only be only operating 40% of its 2007 peak.

There are no such constraints in China where construction and the economy continue to grow at a rate in high single digits and will do so for the foreseeable future. The Nation also seems to have had a good G-20 Summit, despite some currency sabre-rattling by Obama. Closer to home, AgriBank looks set to raise as much as $20 billion in its IPO and Shenyin & Wanguo Securities says the stock market could rise 17% in the second half of this year. Similarly, industrial profits rose 82% in the first five months of 2010 and Deloitte says China will remain one of the most competitive nations over the next five years. In my view, there is not an ounce of irony in talking about “the luck of the Chinese”.

Shanghai Composite:
Today: -0.61% at 2,537.23 at 11.30
Last week: +1.6%
YTD: -22.6%

Hang Seng:
Today: +0.32% at 20,757.81 at 12.06
Last week: +2.0%
YTD: -5.1%

Oil:
$78.78
Gold:
$1256.60
Euro/$
1.2378

• Yuan Forwards extend gains as US sees further appreciation
• Hu says G-20 must co-ordinate to consolidate recovery
• Yuan reform and European debt crisis to impact exports
• China to create more channels for Yuan use
• China shows “bad faith” in Yuan move
• China stocks to rise 17% in H2, says Shenyin & Wanguo
• AgriBank IPO at up to Yuan 2.68 i.e. $20 billion
• China H2 fiscal revenue growth at least 10%
• Less need to raise interest rates need to rise, says Li
• Chinese banks see their capital adequacy ratio rise to 11%
• China banks asset deterioration is a near certainty, says Fitch
• China should build up its corporate bond market
• China considers allowing foreign firms to issue Yuan stocks
• 331 companies have applied for listing on Chinext
• Wen urges harmonious employment relations
• Chinese industrial profits jump 82% from year earlier
• China, India, Korea to stay most competitive, says Deloitte
• China says cuts to export rebates is not a policy change
• China may limit processing for export business
• Steel prices in China fall 6%
• Death toll in the south China floods rises to 381