Diamonds are forever

Posted on Thursday, 16 September 2010 [GMT +1]

The Tower of London, aka Her Majesty’s Royal Palace and Fortress, is an historic castle on the north bank of the River Thames in central London. It was commissioned by William the Conqueror in 1066 (albeit he was dead by the time it was finished) and has played a prominent role in England’s history, most notably as a prison. I had breakfast there yesterday, as part of a corporate event (and happily walked out a freeman afterwards). My group was also treated to a private viewing of the Crown Jewels of the United Kingdom which are fantastically ornate and contain the most famous diamond in the World in the Koh-i-noor. But, as our guide said, the jewels are both priceless and worthless all at the same time; because where could you sell them?

China has never had any difficulty selling anything – and so successful has it been that the US has taken the hump and wants to legally stop, or at least reduce, it. To this end, two more WTO complaints have been lodged and US Congress is considering proposed legislation as a means of forcing up the value of the Yuan (so China is not unfairly competitive in export markets). But there is disagreement in the American ranks about what to actually do. In particular, those companies with operations in China (represented by the US-China Business Council) say that legislation is not the way forward and “Congress should not obsess over the value of the Yuan”. Similarly, Morgan Stanley’s Stephen Roach says that China is “doing its fair share of righting global trade and investment flows”; and “as much as Washington politicians would want China to help the US devalue its way back into economic prosperity, that approach is bound to fail in an era of huge budget deficits”.

More serious, to my mind, are the proposed new capital rules for China’s banks (and the main reason for share price falls today). Indeed, it is reported that the CBRC wants to add a capital adequacy ratio of as much as 4% to shield against economic swings. Inevitably, this would significantly slow the pace of loan growth, as underlined by Goldman Sachs; and means that the banks would have to raise even more fresh capital. China’s proposed new rules would also be stricter than Basel’s.

On a more positive note, FDI climbed for the 13th consecutive in August – and in the first eight months of 2010 it is 18% head at $66 billion. Nor is it likely that interest rates will rise to restrain inflation, which has been pushed up temporarily, it seems, by food (which rose by an annualised 7.5% in August).

“When we long for life without difficulties, remind us that oaks grow strong in contrary winds and diamonds are made under pressure”. (Peter Marshall)

Shanghai Composite:
Today: -1.89% at 2,602.47 at close
This week: -2.3
YTD: -20.6%

Hang Seng:
Today: -0.16 at 21,691.45 at close
This week: +2.0
YTD: -0.8

Oil futures: $75.25
Gold futures: $1274.00 (new high on 14 Sept. of $1274.95 for immediate delivery)
Euro/$ spot: 1.3081

Headlines

• US lodges two WTO complaints against China
• Geithner says US is examining ways to push China on the Yuan
• US lawmakers disagree on Yuan
• China’s stricter capital rules will constrain lending, says Goldman Sachs
• Foreign Direct Investment in China climbs for 13th consecutive month to $7.6 billion in August
• Food is driving inflation – which should mean no immediate rise in interest rates
• Private equity surge
• Wen to meet Obama at UN in New York