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