Spats Doublio

20 days or so ago, Zhan Qixong, was living in blissful obscurity. Not any more, though, for he is the Chinese fishing trawler captain who was detained by Japanese authorities for 17 days after his vessel bumped into the Japanese Coast Guard in disputed waters. He arrived home by charter flight on Saturday. But Zhan has also vowed to return to the Diaoyu Islands (aka Senkaku, if you are Japanese).

In what is beginning to resemble a soap opera, China has demanded an apology and compensation, while Japan claims that neither is required and wants the repairs to its Coast Guard ships paid for by the Chinese; although Japan has conceded that the collision was not intentional. In what looks like tit-for-tat, too, China has detained four Japanese citizens working for the contractor Fujita in Hebei; they were allegedly videotaping military targets. Chinese customs is also reported, by the Ashai newspaper, to be tightening inspections of shipments to and from Japan.

For the record, Japan is China’s second largest trading partner (after the US) and China is Japan’s largest. Unsurprisingly, there is a theory that Japan backed down from the dispute and released Zhan because it has more to lose economically i.e. there is a wider market for China’s exports than there is for Japan’s. So China won, but it has upset a lot of its neighbours in the process.

There maybe no fishing boats involved in China’s other current diplomatic spat - with the US over the value of the Yuan – but it is similar. For example, economic symbiosis is at its heart: the US is China’s largest trading partner; with China being the US’s number two (after Canada). China is also the largest holder of US Treasuries at some $850 billion (Japan is narrowly number two).

On Wednesday, the US House of Representatives will vote on whether to allow companies to petition for higher duties on imports from China to compensate for the effect of a weak currency. In my view, this would be the US shooting itself in its metaphorical foot - twice; and the Retail Industry Leaders Association of America and Canada’s Trade Minister, Peter Van Loan, pretty much agree with me.

And as if that wasn’t enough of a push/pull here, China has just commenced levying duties of as much as 105% on US chicken imports while, at the same time, the Ford Motor Company invests $500 million in a Chongqing joint venture.

The good news, though, is that due to a convoluted US legal structure any law proposed by the House of Representatives has to go to the Senate; and this is unlikely to happen before Mid-term (but non-Presidential) elections in November. To be fair, too, the whole issue of the Yuan is more political (domestically) than real in the US. Indeed, I don’t think anyone believes that the Yuan will appreciate substantially (despite its strongest level today since 1993) and the Non-deliverable Yuan Forwards market tells you that. Similarly, no one - but no one - wants a trade war.

I realise that there is some repetition in today’s longer-than-normal missive. In my defence, I point to music where repetition is important if not vital. In fact, Richard Middleton once said that “while repetition is a feature of all music, of any sort, a high level of repetition may be a specific mark of ‘the popular’ and that this allows an enabling of an inclusive rather than exclusive audience”.

Shanghai Composite:
Today: +1.41% at 2,627.97 at close
Last week: -0.3%
YTD: -19.8%

Hang Seng:
Today: +1.00% at 22,340.84 at close
Last week: +0.7%
YTD: +2.1%

Oil futures: $76.84
Gold futures: $1299.20
(new ‘immediate delivery’ high of $1,300.07 on Friday)
Euro/$ spot: 1.3457

Headlines

• Stocks rise most in two weeks on US cpaital goods orders (up 4.1% in August)
• Domestic industrial revenue in China rises 33% in first eight months, while profits leaps 55%
• Weather eye on inflation, with one forecast as high as 5% for October (from China Macroeconomics Society)
• Yuan climbs to (another) strongest level since 1993 before US vote i.e. it touched 6.950 to the US dollar today
• Five year interest rate swaps decline six basis points (to 2.95%) as Yuan gains, which eases risk of interest rate rise
• China may reduce annual economic growth target from 7.5 to 7.0% in next plan, says Citigroup
• China allows banks to sell loans on interbank market; and 21 lenders sign up
• AgriBank applies for lower reserve ratios in rural areas, says Economic Observer
• Revamp of policies to promote private investment in local industry has been proposed
• Obama tells ASEAN that the US has an “enormous stake” in Asia and would like to make more ot it
• Asia Cement CEO sees additional Yuan 20 to 30 per ton on cement this year
• China wants to see a legally binding climate agreement by 2011, says Economic Times
• China starts building $1.99 billion extension to Tibet Railway