Great minds

Andy Xie and I have something in common, insofar as we both used to work for Morgan Stanley. Since then he has morphed into an iconic commentator on affairs in China…..but I’m better looking. In any event, he says that while China and US will engage in a war of words about the value of the Yuan, ahead of this year’s congressional elections, the US will most likely not take any substantial measures against China on the issue; and I agree. Xie also says that China’s currency is not undervalued given the Nation’s rising inflation rate, which he reckons is actually 6 to 7%; not the official 3.5%.

By way of a token measure perhaps, the Yuan is now at its strongest level since July 2005 (6.7172 per US dollar) and has risen 1.5% since the peg was scrapped on 19 June. Maybe this is enough? My view is that China is not in a hurry to do anything here. The PBOC has also cautioned against volatility in the value of the US dollar, saying that this could threaten the global recovery (which it could). The Central Bank also says that China will maintain “steady and relatively fast” growth in 2010 but a rebound in demand in the domestic economy is not yet on a solid foundation. Inflation expectations are also rising and it has pledged vigilance on this issue. The PBOC will also strictly control credit for industries which have overcapacity.

Turning to share prices, the excellent Jun Ma at Deutsche says that the likelihood of a year end rally has diminished because the Government is unlikely to take steps to boost the economy and accepts slowing growth; say 7% per annum rather than 10%. He also like property developers working in second and third-tier cities, where there will be more direct Government investment (as opposed to first-tier). Elsewhere, the CBRC has said publicly that it has no current plans to implement any new regulations in the real estate sector. This is good news and very significant.

In 1618, Hans Beer-Pot is reckoned to have coined the phrase “great minds think alike (as, it appears, do Morgan Stanley old boys); that new kid at Deutsche Bank isn’t bad either.

Shanghai Composite:
Today: -0.15% at 2,598.69 at close
This week: -2.4%
YTD: -20.7%

Hang Seng:
Today: +1.29% at 21,970.80 at close
This week: +3.4%
YTD: +0.5% (first time positive since 16 April)

Oil futures: $75.10
Gold futures: $1283.60 (new high on 17 Sept. of $1280.80 for immediate delivery)
Euro/$ spot: 1.3136 (note how this has risen too)

Headlines

• CBRC has no new property industry policy
• Policy-driven rally for China stocks is now less likely, says Deutsche's Jun Ma
• Andy Xie says stocks will be volatile but US take no substantial action on Yuan
• Geithner says China needs to allow “significant” Yuan gains
• China says US dollar swings may threaten recovery after US hearings
• Yuan is set for best week in 28 months as Geithner presses China for gains
• China will expand cross border Yuan settlement
• Dell may spend more than $100 billion over a decade in China
• China is set to lose 2% of GDP cleaning up decades of pollution