Plus and minus

Posted on Wednesday, 1 September 2010 [GMT +1]

Pragmatists will tell you that the sky is rarely blue; while scientists would add that for every push there is a pull. Today, we had a push from two PMI Indices which showed, pretty conclusively that the slow down in the Chinese economy will be just that: a slow down and not a collapse (albeit with a weather eye on input cost). Apparently at Anhui Conch, China’s largest cement company, they went home early by way of celebration. But at China Vanke, its largest developer, it was the opposite as the Nation’s bank regulator (the CBRC) said that it will “strictly implement” Government policies aimed at both controlling house prices and restraining “speculative” investment in real estate. Caxin also predicts cash flow problems for developers if sales are not good in September and October; 40% of their loans will mature by the end of this year.

Similarly, the Yuan remains weak against the dollar and the latest twist is that the PBOC will focus not just on the US currency but rather a currency basket.

On a more positive note, Citigroup is to triple its Chinese workforce to 12,000 over the next three years and, according to Sandford C Bernstein, “China is one of the most attractive and profitable countries in the World to operate a bank”. As they say in Scotland: “it is a thin wind that dries nobody’s washing”.

Shanghai Composite:
Today: -0.57% at 2,622.88 at close
This week: +0.8%
YTD: -19.9%

Hang Seng:
Today: +0.43% at 20,623.66 at close
This week: +0.1%
YTD: -5.7%

Oil futures: $72.39
Gold futures: $1249.70
Euro/$ spot: 1.2703

Headlines

• China manufacturing quickens
• Property shares fall
• Chinese developers my face severe cash flow problems by year end, says Caixin
• Yuan drops for a third day on signs China seeks stability versus a currency basket
• More investors
• China's small-cap stocks poised for a “correction”, says Citic
• Citigroup to triple its China workforce to 12,000 in three years
• China currency peg will not spur higher US import duties

Age & Experience

The PRC is 61 years old in October and I turned 57 on Sunday. As a Nation, China is youthful whereas I am, technically, ‘middle-aged’; although I abhor the term. But then China is also probably old beyond its years – and myself? I would like to think that experience has been a sound teacher, which allows a calmer, more rational view of both life’s ups and downs – and the ups and downs of the economy (and their regularity).

In reality, this means that China will still grow at 8% in the final quarter of the year (according to a State economist). Nor does the Government intend to reactionarily change policy (says a PBOC advisor) or push the value of the Yuan much. In fact, the Yuan looks set, in August, for its largest monthly drop since 1994.

Elsewhere, at least three major stockbrokers (including Citigroup) are positive and Japan’s largest developer (Mitusi Fudosan) is planning to build a number of shopping malls in China – where it sees that “the long term potential…outweighs the short term volatility in pricing”. Shanghai Elegant Investment, however, says avoid developers: “you have to invest in sectors that the Government is advocating”

It is also hoped the spike in money market rates (to 2.25% and the highest in seven weeks) is just that - caused by the impending ICBC sale. The same goes for the net outflow of funds from Chinese mutual funds (some $65 billion in the first half); although Citic said that such movements empirically lead to stock market under-performance.

Yesterday (which was public holiday in the UK), China’s stocks rose the most in two weeks (1.6%), led by commodity and consumer companies, as Federal Reserve Chairman Bernanke’s vowed to safeguard the US recovery. But today, shares fell for the first time in four days, as smaller-than-estimated growth in personal incomes in the US heightened concern that the economic recovery may falter. Citic again: “a potential economic relapse and a Fed almost out of bullets are important headwinds in the coming months for Chinese markets”. In the short term, those clever people at Nordea Bank agree – as fears of a new US recession intensify. Nonetheless, they also say that oil prices will exceed $100 per barrel by 2012 as global growth rebounds next year.

As Confucius said: “by three methods we may learn wisdom: first, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest”.

Shanghai Composite:
Today: -0.52% at 2,638.80 at close
Last week: -1.2%
This week: +1.1%
In August: +0.1%
YTD: -19.5%

Hang Seng:
Today: -0.97% at 20,536.49 at close
Last week: -1.8%
This week: -0.3%
In August: -2.4%
YTD: -6.1%

Oil futures: $73.96
Gold futures: $1236.40
Euro/$ spot: 1.2659

Headlines

• Yuan is set for biggest monthly drop since 1994 as the domestic economy slows and US dollar gains
• State economist sees China’s Q4 growth at about 8%
• PBOC’s Xia says China will not change economic policy
• Haiton, Societe Generale and Citigroup like China stocks, although UBS, Credit Suisse and others are more cautious
• Money market rate in rises to seven week high ahead of ICBC bond sale from today
• PBOC sells one year bills at unchanged yield of 2.0929%
• China's mutual funds post second largest six month loss (at some $65 billion)
• Japan’s largest developer (Mitusi Fudosan) plans to open more shopping malls in China as consumers spend more
• Soho Chairman sees house prices falling to 2009 levels
• Shanghai Elegant says avoid developers and buy solar stocks
• China Resources Land's H1 net income rises 169% on housing
• Rising wages in China reduce its advantage, says Flextronics
• China may cut taxes for small companies, says China Times
• China defends control of rare earth exports
  

Man and a van

“Economists use decimal places, to show they have a sense of humour”, quipped David Wyss of S&P, while at the same time underlining his 10.3% GDP growth forecast for China this year. He also said that comparisons of H2 2010 with H2 last year are misleading – because the comparative period saw a sharp recovery. He also said that China had pretty much grown at an average 9% per annum for 30 years and saw little reason why this would not continue. Yes, there are domestic risks such as property prices and a parsimonious consumer plus, internationally, he now says there is a 30% chance of a ‘double-dip’ in the US (up from 20% two weeks ago).

Citic Bank was also cautiously positive, particularly on wage growth and ‘the mother-in-law’ impetus to the housing market (they buy jointly with siblings). Similarly, Credit Agricole says that the interest rate swap market is over-estimating the degree of slowdown in China. Of more concern, though is the seven day repurchase rate which has risen a further 36 basis point to 2.2% ahead of the ICBC bond sale from Tuesday. Still a country which has eight days traffic jams, on the Beijing-Tibet Expressway, must be busy (I avoided saying ‘slowing down’).

Finally, I would also like to make a rare Tony-Williams-Award to Mr Zhao of Jining who paid Yuan 100,000 for a new van in notes with a face value of one Yuan or less. This, also, further supports the ‘cash and the Chinese mattress’ theory. Let’s hope more follow suit.

Shanghai Composite:
Today: +0.28% at 2,610.74 at close
This week: -1.2%
YTD: -20.3%

Hang Seng:
Today: -0.07% at 20,597.35 at close
This week: -1.8%
YTD: -5.8%

Oil futures: $73.13
Gold futures: $1236.90
Euro/$ spot: 1.2712

Headlines

• S&P is pragmatic on China; and retains 10.3% GDP forecast for 2010
• Rising wages may prevent property slump, says Citic; although growth and prices will slow
• Interest rate swaps point to an over-estimate of any slowdown in China, says Credit Agricole
• Loan target is intact
• Money market rate gains the most since June ahead of ICBC bond sale
• China to allow companies to keep foreign currency income overseas - in a trial
• Property controls still pending
• China plans reform of production and consumption taxes, says Securities Daily
• Eight day traffic jam
• Man and a van

Pudding and proof

“A whole parade of official sources has issued statements over the past few weeks predicting, with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck, that inflation will come in right at 3% this year”. So says (rather lyrically, I thought) Professor Patrick Chovanec of Tsinghua University as speculation mounts that the official figures are just that: ‘official figures,’ which mask soaring food and accommodation costs. Indeed another professor, Michael Pettis at Peking University says that inflation could well be 6%. Anecdotal evidence is even stronger with, for example, cowpeas having doubled in price in two weeks to 40 cents per pound and a standard foot massage up from around $10 in 2008 to about twice that today.

Proof, of course, can only be verified by retrospective consumption; and inflation remains a source of concern. The same goes for a seven basis point rise in the seven day repurchase rate (which measures funding availability in the money market) to 1.85% as the ICBC warms up for it $3.7 billion convertible note sale. But, this runs counter to action in the PBOC’s bill sale market where yields remain remarkably static across the maturity range.

In other news, a potential property tax has still not gone away and died, as even Warren Buffett shows he is not immune to the rules governing real estate in China. And, finally, the first majority owned Chinese company, Yangzijiang Shipbuilding, is to list in Taiwan in a “milestone” event.

We have a long way to go….

Shanghai Composite:
Today: +0.27% at 2,603.48 at close
This week: -1.5%
YTD: -20.6%

Hang Seng:
Today: -0.11% at 20,612.06 at close
This week: -1.8%
YTD: -5.8%

Oil futures: $72.97
Gold futures: $1244.70
Euro/$ spot: 1.2716

Headlines

• Official China data mask surge in housing and food prices
• Money rate rises as ICBC bond sale looks set to drain funds
• Property tax machinations continue
• Luxury homes and apartments are very slow to sell in Beijing’s Chaoyang District
• China may make an example of Buffett-backed BYD for land-use violation
• China shuns US in its foreign investment
• China's Yangzijiang share sale is a “milestone” for Taiwan

‘It’s never a straight line but the direction is definitely up”

So quipped Jim Coulter, co-founder of TPG as he launched their second private equity fund in China in as many days; and $1.5 billion in total. Working in JV with the Chongqing and Shanghai governments, TPG will invest in private companies across a range of sectors. Elsewhere, Huijin, the domestic arm of China’s sovereign wealth fund, raised a similar amount ($5.9 billion) in bonds to invest in the Nation’s banks.

Societe General is also supporting China’s banks, albeit less tangibly, saying the Government would probably tolerate breaching lending limits to sustain growth i.e. there is a 60% likelihood that it will allow “drift upwards” given “the moderation in the growth momentum in recent months”. Citigroup was also in bullish-ish mood saying that low interest rates in the US and a weak dollar are traditionally positive for Chinese equities. It also raised its recommendation on property stocks and raw materials producers to “neutral” from “underweight”.

On both counts property stocks had a good day, aided and abetted by a 72% rise in Shenzhen home sales and positive comments from JLL.

“Except in mathematics, the shortest distance between point A and point B is seldom a straight line”.

Shanghai Composite:
Today: +0.42% at 2,650.31 at close
This week: +0.3%
YTD: -19.1%

Hang Seng:
Today: -1.15% at 20,658.71 at close
This week: -1.5%
YTD: -5.6%

Oil: $72.26
Gold: $1221.00
Euro/$: 1.2618

Headlines

• China will “tolerate” a breach of loan target to sustain growth, says Societe Generale
• Chinese stocks will benefit from extended low global rates, says Citigroup
• PBOC’s Ma pledges moderately loose monetary policy
• TPG to set up Yuan 10 billion worth of funds in JV in both Chongqing and Shanghai
• China property stocks gain most in a week after 72% rise in Shenzhen home sales
• Central Huijin Investment sells $5.9 billion worth of seven year bonds with a 3.16% coupon and 20 year debt at 4.05%
• PBOC sells one year bills at unchanged yield of 2.0929%

'The Shipping News'

Posted on Monday, 23 August 2010 [GMT +1]

The novel of the same name by E Annie Poulx won a Pulitzer Prize. It is the story of Quoyle (no known Christian name), a third rate reporter who is woefully unlucky in love until he finds pain-free revivification on New Foundland. For the record, a ‘quoyle’ is a knotted rope on a ship’s deck which may be walked on.

The Baltic Exchange publishes the shipping news every day and in the last two weeks its Dry Index has sailed to its biggest two week gain (36%) in 14 months as Chinese iron ore buying extended a surge in charter rates. What’s more with eight days of August left, the Baltic Dry Index has risen 40% this month while capesize rates having doubled (to $34,913 per day). This is both good and bad news.

Elsewhere two major property company chairmen have said prices will fall 10 to 15%. But this comes against a slew of first class corporate results including China Construction Bank, Sinopec and Wuhan Steel. And, the stock market nudges forward most days and the Shanghai Composite is now some 12% up from its 5 July low.

Finally spare a compassionate thought for the victims of the wretched flooding in North East China, which has caused death and destruction, and the evacuation of more than a quarter of a million people. But as Quoyle said, as his redemption beckoned: “I believe a broken man can heal”.

Shanghai Composite:
Today: -0.11% at 2,639.37 at close
Last week: +1.4%
YTD: -19.5%

Hang Seng:
Today: -0.39% at 20,899.01 at close
Last week: -0.4%
YTD: -4.4%

Oil: $73.87
Gold: $1229.50
Euro/$: 1.2716

Headlines

• Baltic Dry Index has biggest two week gain in 14 months as China buys iron ore
• Iron ore trade to rise 19% this year; as Rio sets Q3 prices
• JPMorgan trims Chinese economic growth forecasts on “loss of momentum”
• Wen says political changes must be maintained to sustain China's growth
• Three views on real estate prices – all cautious
• Ministry of Finance will deposit Yuan 40 billion with commercial banks for three months
• China Construction Bank reports that its Q2 profit climbed 20% on loan demand
• Sinopec net unexpectedly rises as China's economic growth spurs oil demand
• Wuhan Steel says H1 profit rises 90.4%, as prices rise 15%
  

Elasticity

In economics, elasticity is the ratio of the percentage change in one variable to the percentage change in another. Generally, an “elastic” variable is one which responds “a lot” to small changes in other parameters. Similarly, an “inelastic” variable describes one which does not change much. So I guess we should welcome the recommended application of “elasticity” to the Yuan – which emerged from the PBOC Financial Research Institute (on the back of a 30% surge in Q2’s current account surplus to $70.5 biillion). Or is this another way of saying that the Yuan’s exchange rate will change very frequently but not an awful lot in either direction?

More worrying, though, is the Security Times' estimate that bank write-offs on local government loans could be nudging $90 billion (assuming 20% go sour). Also in bearish mood is Rio Tinto’s CEO who predicts a slowing of China’s GDP growth rate from 10% to 6 or 7% per annum this decade; albeit “this is still robust compared to mature economies and still represents very large absolute levels of growth”.

In more positive news, the State Council has announced some really good incentives for foreign investment in value-added industries in the Mainland. Plus more pension fund cash is to find its way into stocks and bonds. China is also clearly “loving it” at McDonalds which became the first foreigner to issue a Yuan bond (Yuan 200 million at 3%). The US fast food giant also opened its first 1,000 restaurants in China faster than in any other country outside US; and it will have 175 more this year. Perhaps, the Chinese will need more elastic in their trousers?

Shanghai Composite:
Today: -1.70% at 2,642.31 at close
This week: +1.4%
YTD: -19.4%

Hang Seng:
Today: -0.43% at 20,981.82 at close
This week: -0.4
YTD: -4.1%

Oil: $74.52
Gold: $1232.60
Euro/$: 1.2807

Headlines

• Bank provisions on local authority loans could be $88.4 billion
• Yuan set for marginal gain in the week based on probable 30% surge in Q2’s current account surplus to $70.5 billion
• McDonald's sells Yuan bonds in benchmark for China
• Rio Tinto CEO says China’s rate of economic growth may slow to 6 or 7% this decade
• China will encourage overseas investment in value-added industries with range of incentives
• More of pensions to be invested in shares and bonds (especially); but not real estate or private equity
• China has 3,070 reported cases of land misuse since investigation commenced
• Shanghai public housing fund stops third home loans
• China buyers purchased 35% of Hong Kong's new luxury flats, says SCMP

A little bit....

Having a modicum of inflation is like being a little bit pregnant i.e. the situation is a binary: it is something that “is” or “isn’t”. The duration of China’s latest fecundity is the cause of some speculation, although the very clever Jun Ma at Deutsche blames food prices in August and says that the CPI may rise above 4% this month. The externality of this, too, is that we can probably kiss goodbye to monetary easing; plus there are rumours of further bank stress tests. Nor is there any apparent respite for property developers. For example, Shanghai may raise the cost of owning property to reduce speculative demand, according to the local Ministry of Land and Resources and the Oriental Morning Post. This could be achieved by a mix of financial, taxation and land measures. Developers share prices fell again, albeit gold and coal producer rose on speculation resource companies will benefit as inflation quickens. The background noise of Everbright Bank’s very successful IPO on Wednesday also helped. Everbright is China’s 11th largest lender by assets and the last of the Country’s major national banks to be floated.

Elsewhere, Nomura says China’s currency reform places it on the cusp of a ‘Big Bang’ as it allows foreign investors increased access to its domestic market. The term “BB” was coined in London in 1986, when the equity market was deregulated.

Eight months to go.

Shanghai Composite:
Today: +0.81% at 2,687.98 at close
This week: +3.1%
YTD: -18.0%

Hang Seng:
Today: +0.24% at 21,072.46 at close
This week: nc
YTD: -3.7%

Oil: $75.88
Gold: $1232.20
Euro/$: 1.2812

Headlines

• China inflation reduces prospect of monetary easing, says Deutsche Bank
• China says Q3 industrial material prices will be generally stable
• Finance Ministry makes statement that the risks from local government loans are controllable
• Bad bank loans may double on local government finance, says 21st Century
• PBOC sells three month bills at unchanged 1.5704% yield
• Finance Ministry sells seven year Government Bonds at a yield of 2.81%
• China currency reforms may mark the beginning of a ‘Big Bang' says Nomura
• China may introduce import stimulus in September
• Li Ka-Shing makes $979 million bet on Hong Kong housing market, picking uo two sites at auction
• Taiwan stocks are poised for a “golden decade” due to economic agreement with China, says CLSA

"Yeah, right"

The Yuan rose for the first time in six days (+0.2% to 6.7948) as the PBOC said it favours two-way fluctuations to deter speculative flows of capital…....Yeah right. Elsewhere, FDI rose for the 12 consecutive month in July (+29%) and is now up 21% in the year to date at $58.4 billion. Meantime, the Conference Board says the economy continues to expand moderately and domestic markets offer the most dynamic business opportunities (remember CB data can be prone to revisions). The Government is also selling down its stocks of US Treasuries as yields hit all-time lows but has done very nicely along the way thank you. And finally, the best (potential) news of the day is the probable merger of A and B Shares in Shanghai.

Shanghai Composite:
Today: +0.38% at 2,671.89 at close
This week: +2.5%
YTD: -18.5%

Hang Seng:
Today: +0.31% at 21,137.43 at close
This week: +0.1%
YTD: -3.4%

Oil: $75.88
Gold: $1228.90
Euro/$: 1.2888

Headlines

• FDI into China increases in July for 12th consecutive month
• China leading economic index rises for second month says Conference Board
• China cuts long term US Treasuries by most ever as yields drop
• Yuan ends five day drop as China favours two-way moves to ease speculation
• China B-Shares to advance on possible A-Share merger, according to CICC
• PBOC sells one year bills at unchanged yield of 2.0929%
• Home sales rise 26% in Shanghai

Donor fatigue

DF is a phenomenon in which people no longer give to charities. There are a number of causes of it, including overstretched budgets and frustration with badly managed charities; plus simply being over-whelmed by the number and scale of global disasters. I can understand how it happens, but can anyone not be palpably moved by the scenes from both Pakistan and Gansu in China at this time?

The Indus River is the most important river in Pakistan, and, at 3,200 kilometres it is also the longest. It flows the full length of the Nation from Tibet to the Arabian Sea and is a vital life source. Right now this is hard to believe as it breaks its banks and floods at almost every twist and turn. At least 1,600 people are dead and up to 20 million (from a total of 180 million) are displaced. Cholera has broken out.

In Gansu and the town of Zhouqu, in particular, the scenes defy belief. The centre is simply filled with glutinous mud and debris up to the third storey; and lower rise buildings have simply been swept away. It is impossible to imagine, the terror in the darkness when this tsunami of water, mud, rocks and trees swept through Main Street with no warning. Members of single families survived sleeping upstairs whilst their relatives downstairs disappeared, some never to be found. The latest count is 1,200 dead with more than 500 missing.

Such events put investor fatigue and whether the Karachi 100 or the Shanghai Composite goes up or down into perspective. But we go on; we go on because we must.

Turning to today’s headlines, China now looks like a shoe-in to be the World’s number two economy this year after Japan’s GDP rose marginally (by an annualised 0.4%) in the three months ended 30 June. Nonetheless, Japan is still favoured by China’s sovereign wealth fund along with Europe – and at the expense of the US. The Nation has been buying “quite a lot” of European bonds, according to Yu Yongding, a former adviser to the PBOC. Similarly, China bought $20.1 billion more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years. China’s $2.45 trillion of foreign exchange reserves are the World’s largest.

However, “stocks won’t have a big jump simply because China will surpass Japan in terms of the GDP” said China Construction Bank. “What we are looking at is the quality of the GDP such as per capita disposable income and energy consumption per unit of GDP. Stocks will react positively only when China has successfully transformed the structure of its economy”. Other commentators focus on rising inflation and, thus, favour gold stocks; or as Nomura says higher food inflation make equities a “more appealing asset class” relative to fixed income. “The recent rise in inflation supports the case for local equities to experience fund flows from deposits”. Morgan Stanley also likes property shares (down by an average 12% this year) in China and expects a rebound in prices, despite Chongqing’s probable introduction of a property tax.

Elsewhere, power consumption grew 14% in July which sharpens focus on the Nation’s forthcoming $736 billion of alternative energy investment. And, finally, the Yuan continues its longest losing streak for a year and AgriBank becomes officially the World’s largest IPO at $22.1 billion.

“There are two big forces at work, external and internal. We have very little control over external forces such as tornadoes, earthquakes, floods, disasters, illness and pain. What really matters is the internal force. How do I respond to those disasters? Over that I have complete control”. Leo F. Buscaglia

Shanghai Composite:
Today: +2.11% at 2,661.71 at close
Last week: -1.9%
YTD: -18.8%

Hang Seng:
Today: +0.19% at 21112.12 at close
Last week: -2.8%
YTD: -3.5%

Oil:
$75.28
Gold:
$1220.20
Euro/$:
1.2805

Headlines

• Morgan Stanley favours property shares in China and now expects a rebound
• Chongqing to introduce property tax on a trial basis
• China may make list of developers hoarding homes
• Urbanisation is expected to lead to the demolition of half the old houses in China
• Economic planner sees new factors pushing up prices in China in third quarter
• Power consumption rises 14% in July as targets for reductions loom large
• China may introduce alternative energy plan next month
• Yuan has longest losing streak in a year on slowing growth
• Finance Ministry sells $4.1 billion of 30 year China bonds at a yield of 3.96%
• China should raise deposit rates, says PBOC Adviser
• ICBC Credit Suisse seeks to raise $2.1 billion for largest China bond fund
• Agricultural Bank of China sets IPO record as size raised to $22.1 billion
• West China Cement raises $179 million in Hong Kong
• China mourns mudslide deaths

Friday the 13th

Movie buffs all over the World will be familiar with the eponymous American horror franchise which now consists of twelve slasher films (and I can’t wait for the 13th 13th). As you know, the majority of the characters in these films are not what you would call fortunate and in Western superstition today is also deemed to be an unlucky day. In the Gregorian calendar, Friday the 13th occurs at least once, but at most three times a year and if any month begins on a Sunday, its 13th day will be a Friday.

Today was neither lucky nor unlucky in Shanghai (the Composite rose by around 1%) and closed the week (-1.9%) in marginally negative territory (but this was not bad considering Wall Street fell 2.5% in a single day on Wednesday). For me those wise folk at West China Securities summed it up: “the economy is really cooling but expectations are growing that there will be counter-measures from the Government to stem the drop in growth. It’s a game between investors and the Government. The market will be range-bound until there’s a clear sign which side will gain the upper hand”. For its part, too, the China Real Estate Association has called for Central Government restraint, while Credit Suisse raised its forecast for export growth this year (24.6%) but almost halved it to 9% for 2011. In other news, the Yuan saw its biggest weekly drop (-0.3%) for 21 months when I (and Tim Geithner) thought it should be going the other way.

On a brighter note, consumer confidence ticked up in Q2 and Blackstone’s fabulously named Byron Wien (who I used to work with at Morgan Stanley) still loves China – calling it the engine of global growth. Meantime, real estate companies maybe able to tap the bond market for funding. Similarly, Credit Suisse (again) says that the Chinese populace hide $1.4 trillion of income annually, which is one explanation for the surge of spending on luxury goods.

And finally, spare a thought for Hong Kong’s unlucky stockbrokers who face the prospect of having their lunch break cut from two to one hour and are complaining bitterly about it. Perhaps they need a reality check with Jason at Camp Crystal Lake?

Shanghai Composite:
Today: +1.21% at 2,606.70 at close
This week: -1.9%
YTD: -20.5%

Hang Seng:
Today: -0.16% at 21,071.57 at close
This week: -2.8%
YTD: -3.7%

Oil:
$76.31
Gold:
$1219.10
Euro/$:
1.2858

Headlines

• Yuan sees largest weekly drop since December 2008
• China Q2 consumer confidence index rises, says Nielsen
• China is the top global growth engine, says Blackstone's Wien
• Credit Suisse raises China export growth forecast for 2010; but cuts 2011
• Real estate industry ask Government for restraint
• Shanghai mortgages collapse more than 90% in July
• China bank clampdown may trigger a “flood” of bond sales by property firms
• China's rich have $1.4 trillion in hidden income
• China to spend $220 billion in Guangxi on infrastructure
• China imported more than 55% of oil needs in H1; which puts July’s 15% dip in perspective
• Hong Kong brokers balk at prospect of losing their long lunch
• Torrential rain hampers relief work in mudslides

"Last night in Soho...."

Most famously, it is the heart of London’s red light and theatre district. In Manhattan, it is a bijoux area “South of Houston” Street, while in Hong Kong it is an entertainment zone located in Mid-levels and bordering Sheung Wan within Central (i.e. “South of Hollywood” Road). It is also a hotel in Budapest, an observatory (Solar & Heliospheric) and a song (prefixed by “Last night in….”) by DDDBM&T.

But in China it is “Small Office, Small House” and the acronym for developer Soho China, which is the market leader in Beijing’s CBD with a stock market value of $3.7 billion. It’s CEO is Zhang Xin (her husband, Pan, is Chairman) and she rose from penniless sweat shop worker to become, at 45, one of the World’s richest ladies worth some $2.2 billion. On Thursday, I noted her reported comments dismissing the bears of China’s property boom. She hopes to prove sceptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai. “I don’t see any bubbles” said Zhang. “The next few months will be a fantastic time to buy”.

And, in June, she paid Yuan 2.25 billion ($332 million) for a 22,500 square metre plot of vacant land on the Bund, which is Shanghai’s stately colonial-era waterfront strip, with echoes of 19th Century in Europe. Two weeks later in Beijing, she launched marketing of an innovative 485,000 square metre commercial, retail and entertainment complex which is shaped like interlinked cocoons. It will be designed by Pritzker Prize-winning architect Zaha Hadid.

Zhang says success in real estate has come down to guessing what the Government will do next. In June, she gave her prediction: “everyone was so pessimistic, and I was saying that in the next six months or a year, prices will go up again. My guess is that it is austerity now, but at some point it will become stimulus again”.

Stephen Roach, Asia Chairman of Morgan Stanley, agrees with Zhang. China’s property bubble is confined to luxury properties, he says. The lending curbs are successfully deflating high end speculators in the top 10 cities, which collectively account for just 6% of the total market. “It’s a micro bubble, not a macro bubble”.

As DDDBMT sang “you came into my life like rain upon a barren desert”.

Shanghai Composite:
Today: +0.53% at 2,672.53 at close
Last week: +0.8%
YTD: -18.5%

Hang Seng:
Today: +0.57% at 21,801.59 at close
Last week: +3.1%
YTD: -0.3%

Oil:
$81.27
Gold:
$1210.70
Euro/$:
1.3295

Headlines

• The so-called ‘gauge of investor fear’ falls to lowest level since 2006
• Industrial production and trade data this week expected to confirm slow down
• 2087 companies have been ordered to shut outdated plants – which may inhibit economic growth
• “No hard landing” says Nobel Prize-winning economist Joseph Stiglitz in TV interview
• State researcher sees economy growing at 10 to 11%
• More economic stimulus would cause bubbles, says People's Daily newspaper
• Yuan Forwards rise most in two weeks on US recovery doubts
• China plans $738 billion of new energy investment
• Average house prices declines in Hainan Province
• Gemdale’s property sales drop 42% for first seven months
• Finance Ministry sells three-year local govt. debt at 2.37%
• HSBC to sell its first Yuan certificates of deposit in HK
• Wheat prices fall
• Landslides kill 127 in Northwest

TTD;TTW

A topsy turvy* day in a topsy turvy* week…..which looks set to close narrowly ahead of were it started on Monday. Within that, too, a sub-index of property stocks, which forms part of the Shanghai Composite, is headed for its worst week (-4.2%) in three months after the banking regulator reiterated higher down payment and mortgage rates for purchases of third homes (last month, real estate shares bounced 18% from their 2010 low on 1 July).

For its part, the China Banking Regulatory Commission said banks can decide on their own whether to stop mortgage loans to buyers of third homes, based on risk conditions. Similarly, down payment ratios and mortgage rates for such homes should be increased to “a large extent”, it said.

“The Government is in a dilemma as it does not have much maneuvering room to manage the economy given an accelerating inflation outlook” said Dazhong Insurance. “There isn’t a big possibility that there will be dramatic loosening of current policies”. BNP Paribas agrees saying that “China is unlikely to relax existing real estate industry policies anytime soon and the strict implementation of these measures may damp a recent recovery in sales, disappointing investors. We expect the sector will be under downward pressure in the short term”.

However, BNP analysts also say that China’s developers may report a 38% gain in H1 profit. Similarly, China is unlikely to issue new tightening measures for the property market, according to Zhu Zhongyi, Vice Chairman of the China Real Estate Association. In the same vein, JPM’s Jing Ulrich does not believe the hype about a 60% fall in house prices; although in July they were off 1.32%.

Best of all, though, was the confidence of Hong Kong’s richest man: 82-year old Li Ka-shing (worth $21 billion) who is regarded as a “Superman” due to his investing skills. He was speaking at announcements by his companies Hutchison Whampoa and developer Cheung Kong (which owns 49.9% of the former) and was in robust mood, as was his son, Victor, who is Vice Chairman of Cheung Kong. At the meeting, Li (Senior) said he was optimistic about the World economy and China’s growth; and was also “full confidence” in China’s banks. “Don’t worry” he said and reminded his audience that the largest shareholder in these banks was the PRC Government. His son also said that the property market in China did not feel like a bubble and by far the majority of its buyers were “users” not “speculators”.

Finally, China’s stock-index futures rose, signalling the benchmark indices may pare a weekly loss, on the prospect that corporate earnings will withstand a slowdown in the economy. For example, H1 corporate earnings have beaten market estimates and that has led to good expectations about profits in Q3.
*turned or positioned upside down

Shanghai Composite:
Today: 1.23% at 2,653.10 at 14.02
This week: +0.6%
YTD: -19.0%

Hang Seng:
Today: +0.56% at 21,671.55 at 12.35
This week: +3.1%
YTD: -0.9%

Oil:
$82.23
Gold:
$1199.66
Euro/$
1.3190

Headlines

• China car sales to rise 10% in 2010
• House prices dip 1.32% in July
• JPM’s Ulrich says house price drop of 60% “very unlikely”
• PBOC predicts inflation risks as economy is stabilising
• China may commence environment tax trial in four provinces
• China car sales to rise 10% in 2010

Over 10 and over 50

We are half-way to a ‘nouveau’ bull market in China on the back of July’s 10% gain (and a further 1% or so today); and at least one PMI survey - the more important one from FLP and the Government - defied the Jeremiahs by being on the right side of 50 i.e. 51.2. Any digit above 50 means expansion not contraction, albeit growth was the slowest for 17 months and the HSBC/Markit version was at 49.4. Similarly, I was encouraged by the fact that the FLP employment sub-index rose in July. What’s more listed companies in China posted a 50% gain in net income in the first half of 2010 (based on the 264 companies which had released earnings results as of end July).

The bulls (including the youngsters) continue to edge out the bears, with even Vale snorting. Meantime, Elliott Wave International forecasts a set of eponymous surges in the stock market following a so-called correction - which has lasted almost a year. Indeed, the market has reached a consensus view that the Government will ease current measures to rein in growth as data show the economy is already slowing down.

Even real estate shares have joined in and this sub-sector has gained 16% in Shanghai since 1 July, which is the most among the five industry groups. Morgan Stanley, in particular, is very confident here. That said, there are doubting Thomases including the learned US National Bureau of Economic Research which says house prices could fall 40%; but don’t let that spoil the party.

Finally, and by way of further girding the loins, I refer you to a new book about China, “The Party”, written by Michael Sheridan who was the bureau chief for the Financial Times in China. It makes startling reading about the Nation’s hierarchy and its focus on success: “sheng zhe wei wang bai zhe wei kou”. Roughly translated, this means “the winner is king and the loser is a mere outlaw”.

Shanghai Composite:
Today: +1.33% at 2,672.52 at close
Last week: +2.6%
In July: +10.0
YTD: -18.5%

Hang Seng:
Today: +1.82% at 21,412.79 at close
Last week: +1.0%
In July: +4.5
YTD: -2.1

Oil:
$79.60
Gold:
$1183.60
Euro/$
1.3064

Headlines

• Chinese manufacturing grows at slowest pace in 17 months say FLP and Government.....
• ......but HSBC/Markit’s survey says it was ‘below 50’
• Buy property ‘call spreads’ on Government policy relaxation, says Morgan Stanley
• Housing faces “meaningful correction” within two years, says economists from the NBER
• China will not relax property measures, says Securities Journal
• China stocks to outperform World markets, say Nomura
• Shanghai Composite set for “wave” of gains
• Yuan deposits rise in Hong Kong
• PBOC’s Hu says Yuan’s trading band is appropriate
• China’s TV commercial
• China’s Government news chief ‘missing’ in Britain