Can't be a little bit.....

The law of inflation is that whatever goes up will go up some more - and that is the concern in China right now, at both the macro and the micro level. It is also why, the equity market’s super gain in October (+12%) is a little less super than July 2009’s 15.6%. Indeed, some CPI estimates for October range as high as 4.0%, after 3.6% in September. This is also underlined by the widening premium investors demand to hold 10 year bonds. The difference between yields on benchmark debt due in 2012 and that maturing in 2020 rose seven basis points in October to 129 after reaching a five month high of 131 this week. Interest rates swaps also firmed (at the one year level by 17 basis points to 2.36% this month).

The Yuan may yet help out with inflation and, after a mixed week, Forwards rose and point to a 3.6% appreciation over 12 months from the spot rate of 6.6782. Meantime, Westpac says this is too low and plumps for a 5% rise by the end of this year, while Citigroup believes the Yuan will reach 6.0 to the US dollar by the end of 2012. As far as the PBOC is concerned, advisor Li Daokui says China can accommodate a 3 to 5% gain in the value of the Yuan in nominal terms; he also references historic experiences by way of support.

Nor were developers in favour as October equity trading drew to a close and their sub-index within the Shanghai Composite fell 2.2% this morning. China’s banking regulator asked lenders to guard against risks from property loans and the China Securities Journal reported banks had cut discounts on mortgage rates.

As regular readers will know, I am never knowingly pessimistic. I am, thus, grateful to Hartford Financial (with $352 billion under management) which said today that US investors should invest overseas as a hedge against higher taxes after November’s congressional elections and increase their allocations in Chinese and Singaporean stocks. “China is attractive because of strong local consumer demand. In addition business investment also remains strong. Good consumption along with good business investment will bode well for the economy and the market”.

“Production is the only answer to inflation” - Chester Bowles

Shanghai Composite:
Today: -0.46% to 2,978.84 at close
(best since 16 April)
This week: +0.1%
October: +12.2%
Since 5 July: +26.0%
YTD: -9.1%

Hang Seng:
Today: -0.49 to 23,096.32 at close
This week: -1.8%
October: +3.3%
YTD: +5.6%

Oil futures: $81.39
Gold futures: $1338.70
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3842

HEADLINES

MONEY

• Stocks fall on inflation concern, thereby reducing best monthly gain in more than a year
• Yuan Forwards rise by the most in a week
• Yuan may reach 6.0 against the US dollar by the end of 2012, says Citigroup
• Bonds suggest PBOC’s inflation fight is intensifying, says China Credit
• ChiNext’s first anniversary is not an auspicious one with just a 7% gain in value plus and concern is rising over risk of mass selling when ‘lock-ups’ end

DOMESTIC

• Wen hoped for a good meeting with Japan’s PM Kan

HONG KONG

• HKMA activates swap agreement with China after this year’s quota for Yuan-conversion for trade settlement is exhausted in October

Correction not a ceiling

When the Yuan appreciates it seems that share prices in China rise - and vice versa. Today, for example, is the fifth out of the last six when the Shanghai Composite has fallen - having briefly visited the sunny uplit lands of 3,000 last Thursday and Friday. And, is it a coincidence that the Yuan is at its weakest level today since 30 September? Perhaps my eschewing of a career as an equity trader was a smart move after all. In any event China’s toymakers will be pleased and at a trade fair in Guangzhou this week, currency was the number one issue; and as one manufacturer said: “if the Yuan rises to six to the dollar we’re doomed”.

Okay, some of this weakness in the Yuan is driven by a stronger dollar; and there seem to be more and more of them according to Commerce Minister Chen Deming who said that the US Fed’s “uncontrolled” issuance of dollars is adding to inflation risks in China. Similarly, commodity prices are also priced in dollars which provides further exacerbation. But despite what Chen said were “difficulties” for Chinese firms he believes the Nation will see stable growth in exports and a “relatively big jump” in imports next year, 2011.

The State Council or ‘Cabinet’ is also in robust mood following its Q4 economic meeting. It said that while it is not all plane sailing, the economy is “moving in the expected direction”, growth is steady and relatively fast and momentum “further cemented”. However, it remains hawkish on food costs and property prices. Today it was also reported, in the Securities Times, that China may levy a 0.6% property tax on the value of all new homes other than first ones and work on trails may commence before year end.

Premier Wen is also in the spotlight and was seemingly attacked in an editorial in the People’s Daily. It disputed criticism that political reform is lagging behind economic growth, in what analysts said may be an attack on his calls for greater openness. Similarly, Professor Huang Jing (of the National University of Singapore) said that this was an “anti-reform statement”.

As I mentioned, trading day-to-day is not my forte but, as October wends its way to a close, the very positive big picture remains. And, I was particularly heartened by both HSBC, which sees a further 15% rise in equities (even with another 50 basis points on interest rates this year) and CICC, which said the recent decline in China’s stocks is “a correction rather than a ceiling”.

Shanghai Composite:
Today: -0.15% to 2,992.58 at close
(best since 16 April)
This week: +0.6%
October: +12.7%
Since 5 July: +26.6%
YTD: -8.7%

Hang Seng:
Today: +0.20 to 23,210.96 at close
This week: -1.3%
YTD: +6.1%

Oil futures: $82.04
Gold futures: $1325.00
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3809

HEADLINES

MONEY

• Yuan falls to weakest level in October
• “Uncontrolled” printing of US dollars by the Fed poses threat of higher inflation in China
• Loans may exceed the Government’s target this year, says State Researcher
• PBOC sells three month bills at 1.77% yield
• Three year bills at 2.85% - the first rise in a year

ECONOMY

• Cabinet focuses on and food and property economic momentum is maintained
• Yuan appreciation is tough on toy makers

REAL ESTATE

• Property tax may be struck at 0.6% of value (for all but first homes), says Securities Times

DOMESTIC

• Wen may be the focus People's Daily leading article

HONG KONG

• Rally of China share in Hong Kong is intact, says CICC

Arms and legs

Paul the Octopus, who predicted, correctly, every result for the German soccer team at this year’s World Cup - and the winner of the final - has died in Oberhausen. The two and a half year old cephalopod became an international media sensation during the tournament in South Africa as he picked the winners by choosing between two mussel-filled containers sporting the flags of each team. Maybe, it is something about having eight arms that makes predicting the future easier. In any event, asking a devilfish (as they are also known) for help underlines our desperation to know what is going to happen.

For my part, I find Merrill Lynch an altogether more palatable alternative and they have raised their Q4 GDP estimate for China from 9.0 to 9.3% (and for the full year from 10.1 to 10.3%). This also comes on the same day that the 1,181 public companies reported a 48% rise in net income for the first nine months of 2010 (albeit cash went the other way). Similarly, the Shanghai Composite leads 89 other benchmark indices for October (+13%) and YCMNet says the rally still “has legs”. Meantime, the Government, with one eye on the inflation rate, has, this week, also raised gasoline and diesel prices by 3%.

In real estate, too, there was good news as those clever people at Citigroup said the measures to control property speculation will have only a temporary effect on demand “given excessive liquidity in the Country, the Government’s dependence on real estate for revenues and the lack of investment alternatives. In our view, policy should not be paid too much attention”. In addition, new loans to the real estate sector rose 32.9% in the first nine months from a year ago to Yuan 1.72 trillion, according to the PBOC.

Finally, the Yuan weakened by the most in 22 months (-0.25% to 6.6795) following Vice Commerce Minister, Zhong Shan’s comments that this year’s trade surplus will be “definitely” smaller than in 2009. Comments from Professor Wang Yong, a PBOC researcher, also had an impact when he said that China should resist pressure from the US and Europe to let the currency appreciate. That said, Yuan Forwards are still looking to 2.6% appreciation (although this is down 100 basis point from last week). In addition, China’s largest shipbuilder listed in Singapore, Yangzijiang, is currency hedging the Yuan at 3% appreciation per year in expectation that it will rise, but that the Government will prevent gains above that pace. An ASEAN meeting takes place in Hanoi tomorrow and Friday and the Yuan is expected to be front and centre in discussions.

“Talent without discipline is like an octopus on roller skates. There’s plenty of movement, but you never know if it’s going to be forward, backwards, or sideways” - H. Jackson Brown Jr

Shanghai Composite:
Today: -1.46% at 2,997.45 at close
(best since 16 April)
This week: +0.7%
October: +12.9%
Since 5 July: +26.8%
YTD: -8.6%

Hang Seng:
Today: -1.85 at 23,164.58 at close
This week: -1.5%
YTD: +5.9%

Oil futures: $81.79
Gold futures: $1333.30
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3819

HEADLINES

YUAN & MARKETS

• Yuan falls most in almost two years
• Yangzijiang Shipbuilding Holdings hedges for 3% annual appreciation of the Yuan
• PBOC Professor defends Yuan
• Shanghai Composite is best global index in the month of October with 13% gain

ECONOMY

• Merrill Lynch raises Q4 GDP forecast form 9.0 to 9.3%
• Nine month profit of listed Chinese companies rises 48% to Yuan 198 billion, but net cash flow falls
• China hikes fuel prices to help cool the economy
• China ranks itself as the World's 17th most competitive economy, which is a gain of 56 places since 1990

REAL ESTATE

• Developers share prices surge on Citigroup comments that property controls will have only a temporary effect
• Nine month new loans to the real estate sector advance 33% to Yuan 1.72 trillion
• Chongqing may introduce a property tax on both second and large first homes
• Singapore and China top league table of house price rise, says Knight Frank

INTERNATIONAL

• ASEAN meeting in Hanoi likely to focus on Yuan
• Rice price is likely to extend rally as flooding and storms damage Asian harvest

BONDS

• Finance Ministry sells 10 year bonds at 3.67% yield
• One year bills at 2.2913% yield and first rise since 8 June
• Bank bonds lead declines after surprise interest rate rise

DOMESTIC

• Transport gridlock drives price of coal to a four month high
• Thousands of students are reported to have marched on Japanese consulate in Chongqing

HONG KONG

• Hong Kong luxury home prices exceed 1997’s peak

IRON & STEEL

• ArcelorMittal shares fall on demand outlook and selling prices
• EU imposes 22.3% five year tariff on Chinese car wheels

31

“31” means working very hard i.e. 24+7 = 31. Such wisdom comes from Jake Harper who is the “half” in the sharp US sitcom “Two-and-a-half-men”. Tim Geithner is a fan too, he tells me, but his abbreviation for hard work is “G20” and, specifically, the finance ministers' unit which concluded its travails on Saturday in South Korea (ahead of the Grand Prix).

Here, they all agreed (save for Japan) to avoid competitive devaluations as a means of boosting exports (okay, it is not a sharp toothed initiative but will, nonetheless, ease indigestion). The IMF was also there and - “in its biggest reform ever” - agreed to increase the role of emerging markets through the fact that Europe has surrendered two seats on the executive board and 6% of the vote moving their way. However, the G20 did not adopt Geithner’s plan to set numerical targets (of circa 4%) for current account surpluses or deficits but did say it would work to reduce excessive imbalances; and it has also initiated the development of a “financial safety net” to stop nascent financial crises.

Still hawkish, but polite, on the Yuan, Geithner made an unscheduled visit to Qingdao yesterday to speak with Vice Premier Wang; which is unambiguously a good thing. This morning, too, Yuan Forwards have regained their poise and are pointing to a further 3.4% appreciation. Don’t expect a surge but such movement dramatically reduces tension and, hopefully, eases domestic inflation (hot money flows aside). It is also a building block in domestic demand creation. The latter is a major objective of the Country’s new five year plan (on which the ink is drying) and the Shanghai Composite reflected investor anticipation of it today, especially in consumer and technology companies, as it waltzed through 3,000 once more to a new six month high.

Credit Suisse (which is looking for 3,600 in Shanghai) and CICC are bullish too, albeit developers remain under the cosh of, perhaps, an even earlier trial of a property tax (and despite eastern China’s CJ Land looking set to raise $618 million in a Hong Kong IPO).

Finally, and also on a positive note, yields on China’s corporate bonds are falling at a record pace relative to Government debt as regulators allow insurance companies to boost their holdings of the securities. The premium investors demand to hold 10 year notes issued by companies rated AAA, instead of sovereign debt, has reduced by 49 basis points this year to 89 basis points, as of last week – which is the biggest annual drop in Chinabond data going back to 2006.

“There is no season when such pleasant and sunny spots may be lighted on and produce so pleasant an effect on the feelings, as now in October” - Nathaniel Hawthorne

Shanghai Composite:
Today: +2.57% at 3,051.42 at close
(best since 16 April)
Last week: +0.1%
October: +14.9%
Since 5 July: +29.1%
YTD: -6.9%

Hang Seng:
Today: +0.47 at 23,627.91 at close
Last week: -1.0%
YTD: +8.0%

Oil futures: $82.80
Gold futures: $1345.60
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.4038

HEADLINES

G20, YUAN etc

• Yuan Forwards predict a further 3.4% appreciation
• G20 pledges to avoid devaluations to boost exports
• Geithner expects China to “continue to move” on the Yuan; as he hold unscheduled talks in China with Vice Premier Wang
• G20 split over Geithner's plan to set current account targets
• Geithner says US has special responsibility to support dollar
• IMF Reform in favour of emerging markets

SHARES & BONDS

• China stock index targets are raised by Credit Suisse; including 3,600 on Shanghai Composite
• China's “secular” trend is bullish for consumer shares, according to CICC
• BRIC stocks may double, says SocGen
• Corporate debt yields drop at record rate relative to Government debt

REAL ESTATE

• Developers decline on reports of trial property tax
• China Vanke sees Q3 net income rise 6%
• CJ Land plans $618 million IPO in Hong Kong

DOMESTIC

• China meets target of 70 million visitors to World Expo in Shanghai as nears its conclusion

HONG KONG

• Private home completions hit four yearAir pollution hits “very high” level of 11,100
• Air pollution hits "very high" levels of 109 in CBD

Coffee morning

Did you know that Arabica coffee rose to a 13 year high (of $2.0315 per pound or 454 grams) in New York yesterday? Not many people do. Did you also know that annual coffee consumption per capita in China is 22 grams whereas in Japan it is 3.3 kilos? But, China’s consumption is growing at 20% per annum, reckons Starbucks.

This serves to underline two of the dynamics percolating in China right now: a large number of key commodities, including coffee, are rising in price (which is very important for the inflation rate and profit margins); and the consumer has imbibed his early morning java and is wide-awake.

On the former, one example is Maanshan Steel, the Nation’s number two, which saw its Q3 profits all but disappear, with high iron ore prices working to seriously erode margins. Similarly, producer prices for September, which were out yesterday, showed a 4.3% rise. This was higher than expected and “is a pipeline to the CPI”, says Nomura (which also expects interest rates to rise 1% next year). Countering this, though, is the Chinese consumer and his retail sales, as we know, rose 18.8% in September. Similarly, consumption accounted for more than a third (34.4%) of economic growth in the first nine months of 2010. Goldman’s says “domestic demand is here to stay” and is under-pinned by a strong level of nominal wage growth. “These are even more important than the currency”.

Of the two, above, inflation held sway over the market today as stocks fell for a second day, with a weather eye on interest rates and a Bloomberg survey where the consensus was for an 0.5% rise next year (in two bites). In any event, West China Securities said “the market needs a breather after a big rally starting in the month”.

As the G-20 finance chiefs meeting continues today in South Korea, the Yuan looks like finishing the week lower for the first time since early September (down 0.25% to 6.6580 in morning trade). This suggests China will remain resilient to any dramatic Yuan appreciation pressure, albeit Yuan Forwards reflect bets the currency will strengthen 3.1% in a year’s time to 6.45 (albeit some estimates are as low as 6.20).

Finally on real estate, the IMF is pragmatic saying that while there may be a property bubble in some of the larger cities, “the threat of a housing price bust and consequent financial instability is not immediate”. Similarly, Ping An Insurance, the Nation’s second largest insurer, is diversifying into commercial property (specifically offices, hotels and service apartments), private equity and increasing its holdings in stocks to boost investment performance after its worst year since 2005.

“No one can understand the truth until he drinks of coffee’s frothy goodness” - Sheik Abd-al-Kadir

Shanghai Composite:
Today: -0.29% at 2,975.04 at close
This week: +0.1%
October: +12.0%
Since 5 July: +25.9%
YTD: -9.2%

Hang Seng:
Today: nc at 23,517.54 at close
This week: -1.0%
YTD: +7.5%

Oil futures: $81.03
Gold futures: $1325.30
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3936

Headlines

• Yuan is set for its first weekly drop since the begiining of September: -0.25% to 6.580
• Interest rate increase of 0.5% are likely in 2011, says survey
• China will continue to resist massive Yuan appreciation due to a fear of becoming the Nation becoming ‘another Japan post-the Plaza Accord of 1985’
• IMF (1) sees “property bubble” in major cities, like Shanghai, but not nationwide
• IMF (2) “the threat of a housing price bust and consequent financial instability is not immediate”
• Mizuho Asia says that it is buying China's consumer and health care shares, in particular
• Urban unemployment rate was 4.1% at end-September

Normal resumed

Antonyms of surprise include ‘expected’ and ‘predicted’ with both applicable to today’s GDP and inflation data; unlike Tuesday’s bombshell on interest rates. China’s economy grew 9.6% in Q3, which is the smallest gain in a year (and within 0.1% of the median 9.5% estimate). Meantime, inflation accelerated to 3.6% in September to the fastest pace in 23 months (which was exactly in line with forecasts). Shares fell below 3,000 and off a six month high. Life is normal again.

Worries persist over even higher borrowing costs, but maybe Tuesday was a smart-bombshell and will do the job on its own. Support for this comes from the interest-rate-swap market where the one-year rate (2.36% and up 18bp yesterday) remains below the one year deposit rate of 2.5%. Similarly, Asahi Life says that “China has used various tools and it seems to have worked. Instead of raising rates aggressively, China is likely to see the impact and then adjust all those measures to manage their economy. They only tighten to a point where they can achieve their growth target”. It is also the case that within the overall inflation rate, food is reported to be up 8% and High Frequency Economics said it knows of no interest rate rise which will reduce food prices.

Predictably, too, developers’ share prices have fallen further than the market. However, the Statistics Bureau said that property price increases in China, as seen in the first quarter, have been effectively curbed. Investment demand and speculative investment are also cooling.

In the first three quarters of the year, GDP grew at 10.6% and, within that, investment accounted for 58.8%, consumption 34.4% and exports 6.8%. This is the sort of arithmetic I like and it is economically sound. The World Bank has cut its forecast for China from 8.7 to 8.5%, while the State Information Centre says that the Nation is adjusting its economic model with “potential” growth moderating to around 9% (from 11% in the past five and 10% in the past three decades). This is all very okay to be getting on with, especially with one eye on the composition (see above).

Elsewhere, as Yuan Forwards advanced for the first time in three days and point to further appreciation of 3.7%, who has heard the words “currency war” this week?

“What we anticipate seldom occurs, what we least expected generally happens” - Disraeli.

Shanghai Composite:
Today: -0.68% at 2,983.53 at close
This week: +0.4%
October: +12.4%
Since 5 July: +26.2%
YTD: -9.0%

Hang Seng:
Today: +0.37% at 23,644.53 at close
This week: -0.5%
YTD: +8.1%

Oil futures: $83.39
Gold futures: $1343.80
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.4025

Headlines

ECONOMY

• Economic growth cools but inflation doesn’t as GDP rises 9.6% in Q3; and inflation is 3.6% in September (while producer prices are at 4.3%)
• Urban fixed asset investment 24.5 % in the first nine months
• Retail sales rose 18.8% in September
  Investment takes lion’s share of output at 58.8%; consumption is at 34.4%; and exports are 3.7%

YUAN & RATES

• Yuan Forwards advance for first time in three days and point to further currency appreciation of 3.7%
• Interest-rate-swaps point to no further rate rises: one year rate of 2.36% vs deposits at 2.5%
• Rate rise may take “hot air” out of stocks, says Aberdeen Asset Management; and share prices remain attractively valued for the longer term
• China increases three month bill yield for first time since June: +0.2 to 1.7726%
• Finance Ministry to sell Yuan 28 Billion of 10 year bonds at end of October
• Banks pay 30% less on Yuan debt in Hong Kong

TRADE

• Krugman says trade war is looming
• Geithner’s comments may signal peace, says BNY Mellon
• China pledges to maintain rare earth supplies; and may increase exports in 2011

DOMESTIC

• Shanghai may build new vacation resort near the new Disney theme park where work has commenced
• Cold wave of weather moves across China and may harm energy, transport and farming

IRON & STEEL

• Steel output in China drops 5.9%, year-on-year, in September on energy restraints; and is minus 7.2% versus August
• Steel prices have risen 10% since July

Shanghai surprises

While avoiding the literality of the title, if you left work early in Shanghai on Tuesday you would have missed a trick or two. First off, the Shanghai Composite jumped 60-odd points in the last hour of trading to close above 3,000 for the first time in six months. Then, even later, interest rates went up for the first time since December 2007; effective from today.

The latter move was a genuine shocker, especially as PBOC Governor Zhou Xiaochuan had said, as recently as 8 October, that bank reserve requirements and bill sales were sufficient tools to control inflation. Similarly, 13 from 19 economists in a Bloomberg survey last month forecast that lending rates would stay unchanged this year. However, policy makers most probably acted ahead of what are expected to be feisty inflation data tomorrow: the median September CPI estimate is 3.6% but some estimates range as high as 4.0% (August was 3.5%). They authorities must have also anticipated the surge in industrial production of +16.3% in the first nine months of the year (and data were promulgated today); albeit they ignored the probable easing in Q3 GDP growth from double digits to 9.5% (figures are out tomorrow).

The collective noun for surprises could be ‘party’ and it continued today with, first, the Yuan falling by the most in four months (-0.3% as measured by the daily reference rate); and then the stock market did not tank - and sustained the 3,000 level. The logic here is that the first interest rate increase in nearly three years will help tame inflation and prevent asset bubbles. Certainly Goldmans, JPMorgan and UBS (who said the rate hike was a “speed bump”) are all bullish, albeit Deutsche is more circumspect. There is also a risk that hot money may flow into China and stoke inflation. But, as Credit Suisse said capital controls can deal with the former; and capital flows are the “lesser evil” when compared with inflation anyway.

Strangely, the Hang Seng did not join in and shares closed almost 1% down, with property stocks the hardest hit of the Index’s four industry groups.

Finally, I am also indebted to Reuters who pointed out that the increase in one year interest rates of 25 basis points was the first time in modern history that Beijing adjusted deposit and lending levels by a number that was not a multiple of nine. In the past, the PBOC typically raised rates by 27 basis points. “The reason is that on the abacus, adding multiples of nine was much easier than adding multiples of 10. So the modern PBOC inherited that special character from the old days” observed Ken Peng at Citigroup.

There is another big day tomorrow; and remember as both Kung Fu and Oscar Wilde said: “expect the unexpected”

Shanghai Composite:
Today: +0.07% at 3,003.95 at close
(best since 21 April 2010)
This week: +1.1%
October: +13.1%
Since 5 July: +27.1%
YTD: -8.3%

Hang Seng:
Today: -0.87% at 23,556.50 at close
This week: -0.9%
YTD: +7.7%

Oil futures: $80.12
Gold futures: $1340.20
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3795

Headlines

• China raises interest rates as higher inflation anticipated
• Industrial output rises 16.3% in first three-quarters of 2010
• Yuan falls most in four months after surprise interest rate rise (-0.3% at reference rate)
• Rate move may attract capital and fuel inflation
• Five year bond sale yield at 15 basis points higher (to 2.91%) - after interest rate rise
• IMF says China could raise rates further
• Abacus superceded, says Reuters as increases divisible by nine are abandoned
• Buy Chinese shares after interest-rate-induced dip, says Goldmans; most others agree
• Ikea plans to add $300 million to its investment in China
• State-owned companies see their nine month profit rises 46% to Yuan 1.4 trillion ($211 billion), year-on-year
• Lending to small and medium-sized firms is rising sharply; +19% in H1
• The development push is West to benefit from lower wages; and the Yangtze gets even busier

Bountiful 3,000

Ovid said, “take rest; a field that has rested gives a bountiful crop”; and Shanghai is clearly both classically educated and a good listener. That is, after yesterday's pause for breath (closing down 0.5%), today, the stock market surged back through 3,000 for the first time since April – and all in the last hour of trading. At the same time, JPMorgan and Citigroup moving from “neutral” to “underweight”. Similarly, the lyrically named fund manager, Bosera, says every dip is a good opportunity to buy large-cap stocks. This means it should have been buying property developers in morning trade when their sub-Index, within the Shanghai Composite, dipped for the first time (-1%) this month. The reason it fell was a report, from Caixin Online, that property tax trials will begin early next year in Shanghai and Chongqing (but is this really new news?).

Elsewhere, the Communist Party concluded its annual knees-up and anointed Hu’s successor in making Xi Jinping head of the army. It has also put the finishing touches to spending plans for the next five years and said that China will boost domestic demand to continue China’s economic growth, look to domestic welfare and “actively participate” in global economic governance. And, as Societe Generale points out, consumption as a percentage of the economy is less than 40% compared with some 70% percent in the US. That said, Deutsche’s Ma Jun is worried about the impact on profit growth. There is also scepticism about proposed energy reduction targets of 17.3% (as a unit of GDP) from 2011 through 15.

The weight of capital flows from developed to emerging markets remains an issue, too, and Tim Geithner has been on his ‘bash-China-soapbox’ again, saying that the Yuan is creating “a playing field that’s unbalanced”.

Finally, there was a tragic update this morning from Henan where all 37 coal miners have now perished.

Shanghai Composite:
Today: +1.58% at 3,001.85 at close
(best since 21 April 2010)
This week: +1.0%
October: +13.0%
Since 5 July: +27.0%
YTD: -8.4%

Hang Seng:
Today: +1.25% at 23,763.73 at close
This week: 0.0%
YTD: +8.5%

Oil futures: $82.79
Gold futures: $1369.70
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3920

Headlines

• China’s “laggard” stocks are upgraded from "neutral" to "underweight" by both JPMorgan and Citigroup
• Property tax trials to begin next year in Shanghai and Chongqing, says Caixin Online
• PBOC speaks of “vicious cycle” of capital flows from the developed to emerging markets
• Geithner says nations cannot devalue their way to prosperity; and openly criticises China
• China feels strain in rush to save energy, says FT
• Xi is duly awarded the top job in the military; and becomes Hu’s anointed successor
• Party says it will boost domestic demand to continue China's economic growth, look to domestic welfare and “actively participate” in global economic governance
• Deutsche Bank is worried about impact of new five year plan on corporate profit growth
• Environmental tax may be included in the new plan
• China says it has no plans to cut rare earth export quotas in 2011; after a 40% reduction this year
• All 37 miners are dead in Henan coal mine explosion

Mining and timing

More than one billion TV viewers, it is estimated, watched the dramatic and heart-warming rescue of 33 miners in Chile after 69 days under ground. In China, on Saturday, 26 coal miners were killed in a gas explosion in Henan province; and 11 remain trapped as rescuers battle inflammable gases to reach them. The juxtaposition is too painful to bear. Unsurprisingly, too, Chile’s avuncular President, Sebastian Pinera, has offered help and assistance. Nor am I saying that Chile has a perfect safety record, it does not; albeit China does have the worst (seven deaths per day in 2009 versus 18 per annum in the US). It is simply the tragic coincidence and divergence of the two events which is so striking.

China is different, we all know that: bad and good; and its scale and speed of development are compounding factors. Mine safety is clearly in the bad camp, whereas a Yuan 1.04 trillion ($156 billion) increase in household deposits in September is, unqualifiedly, in the good. It is also the biggest rise in seven months and takes the total to Yuan 29.9 trillion. In turn, this gives cause to believing that the current share price rally and bull market (+25% since 5 July) will continue. What is more the Shanghai Composite edged above 3,000 this morning, albeit dipping lower on the day.

Developers remain popular, too, especially their US dollar bonds which are outperforming the debt issues of more general companies. S&P also says that China’s property companies can withstand price declines of as much as 10% in major cities over the next 12 months because they have “adequate liquidity and have already locked in the majority of their revenue for 2010”. And this, despite Guangzhou being the ninth city to limit new home purchase to one per household; you also have to be over 18 and have lived in the City for a year or more.

The other big news is the fact that the US Treasury Department has said it will delay a report on international currencies - which was due out on Saturday - and expected to label China as a currency manipulator. At the same time, the Treasury referred to progress in the acceleration of the Yuan’s rise. The report will be delayed until after meetings of the Group of 20 nations on 11 through 12 November (although no date has been given). The Yuan has risen by some 2.8% since 19 June and Yuan Forwards are pointing to a further 3.9% over the next 12 months. On Friday we quoted the prescient Gene Ma from International Strategy & Investment Group who said that the US had three choices: “yes” China is a currency manipulator; “no” it isn’t; or “delay” publication of the report. He plumped for “delay” saying that if it was “yes”, there was risk of a political firestorm. Three points and a captain’s badge are on their way to Gene.

“Timing, degree and conviction are the three wise men in this life” - R. I. Fitzhenry

Shanghai Composite:
Today: +0.18% at 2,976.44 at close
(best since 23 April 2010)
Last week: +8.5%
Since 5 July: +25.0%
YTD: -9.8%

Hang Seng:
Today: -1.21% at 23,469.38 at close
Last week: +3.6%
YTD: +7.3%

Oil futures: $80.61
Gold futures: $1360.90
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3977

Headlines

EQUITIES

• Shares are on a roll - as household deposits in September rise by Yuan 1 trillion

YUAN & ECONOMY

• US delays currency report with reference to Chinese progress on the Yuan
• Yuan Forwards rise and point to 3.9% currency rise over 12 months, as PBOC signals its policy of gradual appreciation
• September inflation may be about 3.5%, says Shanghai Securities News/NDRC
• China says US trade complaint on clean energy policy is “irresponsible”; plus 100% duties are to be added to Chinese steel pipe imports
• China says its medium and heavy rare earth reserves may last only 15-20 years
• China increase study on carbon market with PBOC funding
  

REAL ESTATE

• Chinese developer bonds continue their rally, as home prices continue to rise
• Guangzhou joins eight Chinese cities limiting the number of new home that can be purchased per household etc
• Disney to begin building in Shanghai

DOMESTIC

• China may appoint Xi to military post and lay ground for him to become the Nation’s leader
• China sets about testing political and social reform in City of Shenzhen, says WSJ
• China wants to maintain ties after thousands of Japanese and Chinese protest
• Environment-risk-insurance pilot plan commences in eight Cities, says CIRC
• Rescuers battle gases to reach 11 miners trapped for three days in China
• City sues Zijin Mining over dam break
• China increase study on carbon market with PBOC funding

HONG KONG & TAIWAN

• Hong Kong sees surge in existing home sales, despite Government controls
• “Farewell to the long lunch” is most likely for Hong Kong traders
• 43 firms with mainland China operations prepare to sell shares in Taiwan

IRON & STEEL

• BHP and Rio drop iron ore JV due to regulatory rejection
  

Mark Twain says

Mark Twain said “October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February”. Under pressure, though, he did make an exception for Shanghai; and in October 2010 it is nearly 12% to the good (so far). More significantly the market is now more than 25% up on 5 July and within sniffing distance of 3,000. There are three reasons for this: growth, growth and growth; and I could add “relative” to each of those, with a fair dollop of “liquidity”. On the latter point, too, Foreign Direct Investment or FDI rose 6.1% in September and 16.6% in the first nine months of the year to reach $74.3 billion.

“Buy land, they’re not making it any more” was another of Twain’s quips and latest data from China’s real estate market bears this out. Property prices rose 0.5% in September (the first increase since May), albeit on an annualised basis the gain was 9.1% down from August’s 9.3% and April’s record 12.8%. Meantime, transactions soared 52% in September, although year-on-year the rise was 16.6% and, in the first nine months of 2010, the increase was 8.2%. There is plenty here for hawk and dove alike. In the former camp, are those commentators who say the Government will clamp down further and harder on the property sector; while the latter are more pragmatic, saying there are already signs of cooling and that further fiscal restraint will be at the margin. I think the second view is more tenable.

Meantime, the Yuan remains in the spotlight, especially as China’s trade surplus with the US reached a new record of $28 billion in August. The currency added 0.1% to 6.6472 as of 10.14 hours, contributing to a 0.4% advance for the week; and at one point touched 6.6463, the strongest level since 1993. The US Treasury Report, which is expected to label China as a currency manipulator, is due out tomorrow. On this, too, I like the opinion of Gene Ma from International Strategy & Investment Group. He says the US has three choices: “yes” China is a currency manipulator; “no” it isn’t; or “delay” publication. He plumps for “delay”, saying that if it is “yes”, the risk is a political firestorm.

“The reports of my death are greatly exaggerated” - MT

Shanghai Composite:
Today: +2.03% at 2,971.06 at close
(best since 29 April 2010)
This week: +8.5%
Since 5 July: +25.7%
YTD: -9.3%

Hang Seng:
Today: -0.45% at 23,744.92 at close
This week: +3.5%
YTD: +8.6%

Oil futures: $82.95
Gold futures: $1379.00
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.4140

HEADLINES

• September property prices rise 0.5% in month and 9.1% year-on year
• FDI rose 6.1% in September; and 16.6% in first nine months to reach $74.3 billion
• China's trade surplus ($28 billion) with US reaches record for first time in two years
• Conference Board leading index shows preliminary advance in August by 0.7% to 149.9
• Europe must secure resources to counter Chinese competition, says Merkel
• China says, Japan is in no position to criticise Yuan policy as trade surplus with China continues for an eighth year
• Agile Property sees contracted sales rise 59% to Yuan 20.2 billion
• Gemdale wins Shanghai residential building site with Yuan 2.29 billion offer
• Dalian Port seeks Yuan 37 billion in Shanghai IPO
• Record loans in Hong Kong driven by cost, availability and mainland companies

- Iron & Steel

• Rio and BHP have not decided what to do yet after Germany said it would object to their iron ore JV

No rest on the seventh day

Will Shanghai opt for a divine break and rest on the seventh day, having been hard at rebuilding value (okay, not the Universe) for six? More than three wise men say “no it won't and the resurrection will be sustained” and they include brothers RBS, CICC and Cabot. One or two doubting Thomases remain, including Chart Partners Group who have a technical issue at 3,000 in Shanghai (we are currently a touch under 2,880). But, overall faith prevails in this near 22% beautification since 5 July.

In secular news, the Communist Party, and its 204 man Central Committee, begins its three day Annual Assembly tomorrow and top of the list will be replacements for Wen and Hu from late 2012 and a new five year economic plan. The official growth target is not expected to be above 8% per annum; but in reality actual growth is expected to be 8.7% says the National Development and Reform Commission. By way of background noise, too, 23 retired Party officials have pushed for freedom of speech by way of a letter on the Internet ahead of tomorrow’s Assembly.

Money supply also appears plentiful, if not profligate, and Chinese banks extended a more-than-estimated Yuan 595.5 billion ($89 billion) in new local currency loans last month. Similarly, the broadest measure of money supply, M2 rose 19% in September from a year earlier. Bonds, both Government and corporate (Yuan 312 billion has been issued year-to-date), remain popular which also means yields remain tight.

Elsewhere, the Yuan is clearly out of rehab and continues to break daily records (versus 1993 and/or 2005). Last seen, too, Yuan Forwards were at 6.4362 implying a further 3.4% of appreciation over the next year. Whether this is enough to appease the Americans is another issue, however. In this context, though, it is also interesting to note a report from my cousin, Mark Williams, a senior China economist at Capital Economics. He says that profit margins for export orientated companies in China did not fall when the Yuan loosened its peg to the dollar from 2005 to 2008; and the Yuan increased in value against the US dollar by nearly 20% during that period. That said, Zhang Monan, a researcher with the State Information Center said reducing holdings of US Treasuries is China’s most-effective tool for dealing with the Americans.

“So may all your enemies perish, Oh Lord. But, may they who love you be like the sun when it rises in its strength. Then, the land had peace for forty years” - Judges 5

Shanghai Composite:
Today: +0.64% at 2,879.64 at close
(best since 28 April 2010)
This week: +5.1%
Since 5 July: +21.8%
YTD: -12.1%

Hang Seng:
Today: +1.68% at 23,852.17 at close
(best since 6 June 2008)
This week: +4.0%
YTD: +9.1%

Oil futures: $83.76
Gold futures: $1384.10
(new ‘immediate delivery’ high of $1377.15 on 14 October)
Euro/$ spot: 1.4077

HEADLINES

SHARES

• Stocks rise for a sixth day
• Global liquidity wave to boost Chinese and Asian shares, says RBS; CICC and Cabot agree

DOMESTIC

• China five year growth target will be less than 8% pa; but, in reality, more (as in the past)
• Vice President Xi urges closer economic ties with the US, says Xinhua News Agency
• Buffett-backed BYD factories confiscated
• Chinese elders call for greater press freedom ahead of 15/10 (see below)
• Communist Party annual three day assembly begins tomorrow (15 October)

YUAN, BONDS & MONEY

• Yuan rises to another record as further authorised appreciation beckons
  Yuan bond sales hit record, especially in railways
• Government bonds also popular: (i) three month bills offered at yield of 1.5704%; (ii) three year at 2.65%; and (iii) seven year at 3.1%
• Loans rise more than expected in September; with M2 - the broadest definition of money supply - up 19%
• US bill seeking to punish China on Yuan could become law, says Senator Max Baucus

REAL ESTATE

• Shanghai property share sub-Index rises most since May on the economy, and valuations on Wednesday
• Fund manager, Angelo Gordon, raises $625 million for Asia property fund focused on China
• Tianjin plans $200 million luxury yacht harbour

IRON & STEEL

• Rio Tinto maintains its 2010 iron ore forecast at 234 million tons on back of record Q3 and renewed demand from ChinaIron ore prices up 7% this month to $150.80
• Petropavlovsk's IRC wins orders for all shares in Hong Kong IPO
• India’s JSW Steel may spin off its international coal and iron ore units

Not Wednesday's child

Jean de LaFontaine said “from a distance it is something; and nearby it is nothing”, which was true about China yesterday. It was reported (but remains unconfirmed officially) that the Government raised the reserve requirements for its six largest bank lenders by 0.5% to 17.5% as a means of slowing lending growth. In the US and Europe, the bears danced while, at home, the Shanghai Composite entered a new bull market by closing 20.2% up on its 5 July low. The market is up a further 0.3% today and developers were also ahead 3.3% in early trade.

Goldman Sachs said that if the reserve percentage has been moved, this simply shows that the PBOC is willing to take action to control lending - if necessary. It may also reflect future economic uncertainties (which is fair enough) and, perhaps, divergent views on policy within the central bank (which is understandable). Meantime, HSBC’s headline was “No Policy U-turn”. Similarly, the money market rate and five year swaps both fell today. Bond yields are also stable-to-easing. Nor do any commentators expect benchmark interest rates to rise before next year. As the State Information Center said, China will become “extremely cautious” in raising rates in order to prevent hot money inflows and to control the pace of Yuan appreciation.

On the latter, even Tim Geithner is giving credit (with one hand) to China, saying that Yuan appreciation has been at a “pretty significant rate”. He also added a note of rare pragmatism: “China takes a long view of these things”. Meantime, Yuan Forwards are at a two year high and point to 3.3% of further appreciation against the US dollar over the next 12 months.

Another more urbane American, Templeton’s Mark Mobius, believes that the current rally in share prices is going to continue as investors will increase purchases in the market, which has lagged behind gains in Asia. He is also supported by technical factors, including the Shanghai Composite rising above its 200-day moving average.

Today’s September export data (+25%) also suggests that China’s economy will grow steadily through external demand, as does the best quarterly trade surplus ($66 billion) since 2008. Imports, however, rose 24% - and while this underlines the strength of internal demand, it also meant that for the month of September on its own, the trade surplus ($16.9 billion) was the lowest for five. Finally, the IMF last week reiterated its forecast that China’s GDP will climb 10.5% this year.

Wednesday’s child is clearly not full or woe.

Shanghai Composite:
Today: +0.70% at 2,861.36 at 13.30
(best since 30 April 2010)
This week: +4.0%
Since 5 July: +20.5%
YTD: -13.1%

Hang Seng:
Today: +1.45% at 23,457.69 at close
(best since 6 June 2008)
This week: +2.2%
YTD: +7.3%

Oil futures: $82.66
Gold futures: $1359.00
(new 'immediate delivery' high of $1364.77 on 7 October)
Euro/$ spot: 1.3987

Headlines

• China sees $16.9 billion trade surplus after exports rise 25% in September; but it is lowest in five months
• Yuan Forwards at two year high and point to +3.3% of further appreciation over next 12 months
• Yuan premium hits record high in Hong Kong
• China’s money market rate falls on view that banks have ample cash
• Geithner criticises and praises China: it puts pressure on other emerging market nations; but Yuan has appreciated at a “pretty significant rate”; and “gradual process” of appreciation will continue
• Mobius is positive; and technical analysts agree
• Developers rise 3.3% in early trade
• China will be “extremely cautious” on interest rate rise, says State Researcher
• Finance Ministry sold seven year Government bonds at 3.1% yield; as credit default swaps fall 26% in past month
• New one year bills yield is unchanged at 2.0929% in auction
• China Academy recommends raising inflation rate target from 3 of 4% per annum
• New stock accounts more than double to 236,276 in week ending 30 September
• September’s passenger car sales rise 19% as incentives attract buyers

War

“War: what is it good for? Absolutely nothing” or so mused the soul singer Edwin Star (1942-2003); and who would disagree? However, in the (literally) thousands of column inches which have been written in and around the IMF and World Bank annual meetings in Washington, the ‘w’ word has been used again and again in relation first to ‘currency’ and then to ‘trade’. We have economic precedents, too, including the Smoot–Hawley Tariff Act in the US, which was signed into law on 17 June 1930. It raised penal tariffs on over 20,000 imported goods and the retaliatory tariffs which followed from US trading partners reduced American exports and imports by more than half. People a lot cleverer than me also say that this made the Great Depression even worse than it would otherwise have been.

More contemporarily, a majority of nations is seeking economic growth through higher exports with the-means-to-an-end being a weaker currency; and there has been proactive State intervention in the foreign exchange markets by the likes of Japan, Brazil, Switzerland and South Korea. But, it is axiomatic that not everyone can have a weaker currency and when that doesn’t work trade barriers follow like “and Robin” does “Batman”.

More ‘Mr Freeze’ than ‘The Joker’, China is nonetheless cast as the villain due to its currency which is said to be “significantly” undervalued and pressure continued to build ahead of and during the IMF/World Bank get-togethers. But criticism widened, too, with human rights, climate change and the Nation’s burgeoning superpower status - but not conduct - being highlighted. The first of these moved front and centre with the award of the Nobel Peace Prize to political prisoner Liu Xiaobo; and now the house arrest of his wife, Lui Xia. Then on climate change, China is said - by the US - to have ignored its Copenhagen pledges. Finally, the superpower ‘thing’ is a combination of all of the above.

Premier Wen, who last week completed his European tour in Turkey (with talk of a Silk Road railway), has been a stout defender of China’s policies, particularly on the Yuan. He was also helped out vociferously in Washington at the weekend by PBOC Governor, Zhou Xiachuan, who said China would avoid “shock therapy” on the Yuan. “Nor will calling for China to let the Yuan strengthen solve the US’s unemployment. It is time for people to calm down and think about the fundamental causes of the crisis, not to blame someone else”. He also wants a bigger role for China within the IMF.

I believe that the lessons of empiricism will prevail, hand-in-hand with his mate, common sense; I also believe that China has time (and scale) on it side. And, the equity markets appear to agree with me. New York closed above 11,000 on Friday for the first time since May. Similarly, Hong Kong is at its best level since June 2008 while Shanghai is also the best since May and some 19% to the good since early July.

“War can’t give life, it can only take it away” ES

Shanghai Composite:
Today: +2.49% at 2,806.94 at close
(best since 5 May 2010)
Last week: +3.1%
YTD: -14.4%

Hang Seng:
Today: +1.15% at 23,207.31 at close
(best since 11 June 2008)
Last week: +2.6%
YTD: +6.1%

Oil futures: $83.12
Gold futures: $1352.20
(new immediate delivery ‘high’ of $1364.77 on 7 October)
Euro/$ spot: 1.3970

HEADLINES

YUAN ETC

• Yuan Forwards surge to strongest in two years; and point to a further +3.5%
• China set to see currency reserves reach record $2.5 trillion for the third quarter
• Finance leaders at IMF meeting are divided on currency
• Default swaps show that China’s Government bonds are becoming as safe as US Treasuries: 56 points plays 46
• China to reduce current account surplus through gradual adjustment, say Yi
• Geithner says Yuan “significantly” undervalued at weekend IMF (although not by name)
• Finance chiefs seek to ease “currency war”
• Currency tension can be eased by IMF, says Strauss-Kahn
• China credit rating upgrade could be a “double-edged sword”: cheaper to borrow, but pressure rises to appreciate currency
  

ZHOU

• China will avoid “shock therapy” on currency
• He also says China's current monetary policies are sufficient to control inflation
• Finally, Zhou wants China to have a larger role - and say - at the IMF; and warned of uncertainties in global recovery

INTERNATIONAL

• China and Turkey cement strategic ties; and discuss dramatic plans for a Silk Road railway
• US rejects China demands for it to “stay out” out of the rising number of maritime disputes
• China cancels EU press conference

DOMESTIC

• Jailed Chinese dissident, Liu Xiaobo, awarded Nobel Peace Prize; and later his wife is placed under house arrest
• China’s foreign debt was $513.8 billion as at end of June
• China may increase electricity prices by 6% in six regions
• BMW and Mercedes report surge in demand in China
  

REAL ESTATE

• Shanghai’s Mayor says property prices are “very high”; and further action is proposed

CLIMATE

• China is ignoring promises made over global warming, according to US Special Envoy for Climate Change, Todd Stern

HONG KONG

• Hong Kong IPOs in 2010 will be greater than last year's tally of HK$ 189.3 ($24.4 billion)

IRON & STEEL

• Baoshan Steel says nine month profit advances more than expected on prices
• Petropavlovsk iron ore cuts IPO size by 50% to $240 million
• Mittal calls for China to relax investment rules
• Chinese refractory bricks used in steelmaking may incur renewed EU tariffs

"Money never sleeps"

In London this week, ‘Wall Street 2’, the movie, subtitled ‘money never sleeps’ opened and it is very good. It focuses, this time around, on the machinations of the US and other governments during the global financial crisis. Perhaps, then, I should not have been surprised to bump into Mervyn King, Governor of the Bank of England in the foyer of the cinema. I was with my wife, whereas Mervyn was accompanied by two fresh-faced body guards.

Over a dry sherry during the intermission, I asked him how the job was going. He said “you know, Tony, I am a bit fed up to tell you the truth. As a country we have no money, only debts, nobody wants to hold the British Pound and it will all probably get worse before it gets better. What I wouldn’t give to have Zhou Xiaochuan’s job (Zhou is the PBOC Governor). He’s got currency reserves of $2.45 billion, a fast growing economy and everyone wants to be his friend. Okay, there’s a bit of local difficulty over the value of the Yuan. But I agree with him and Wen. They talk about gradually increasing flexibility and appreciation. They are also at pains to point out that the value of the Yuan is no ‘silver bullet’ to solving the World’s economic issues – either per se or relative. To be fair, too, the Yuan is now at its highest level since 1993”.

“To make my envy even worse, I read in your blog this week that Moody’s is thinking about upgrading China’s debt rating, which is good news for them; and, retail sales over the National holidays leapt 18.7%. Those clever people at Goldman Sachs and JPMorgan also say that the Government will focus on boosting domestic consumption over the next five years, which is further good news. Okay, there is the odd pocket of over zealous house price inflation, but the Government has looked to fine tune this and not kill the market. For example, in Shanghai its latest move to restrict home purchases to one per household and increase land supply looks pretty sensible. In my view, China is strong frugal, well managed and won’t lose money or its advantage”.

“Money’s the bitch that never sleeps and if you don’t keep an eye on her, then you wake up in the morning and she’s gone” - Gordon Gekko

Shanghai Composite:
Thursday: +3.13% at 2,738.72 at close
(best since 6 May 2010)
This week: +3.1%
Last week: +2.5%
YTD: -16.4%

Hang Seng:
Today: +0.26% at 22,944.18 at close
(narrowly best since 24 July 2008)
This week: +2.6%
YTD: +4.9%

Oil futures: $81.68
Gold futures: $1333.70
(new immediate delivery ‘high’ of $1364.77)
Euro/$ spot: 1.3942

Headlines

• Yuan climbs to strongest level since 1993; retail sales surge; and share prices hit five month high
• Wen and Yi say they will do their bit on currency and economy
• China's credit rating may be raised by Moody's
• Shanghai restrains real estate market
• China digs its toes in on rapid Yuan appreciation
• IMF says that China and Asia should set about allowing stronger, flexible currencies
• Geithner highlights currency and risk
• Don’t expect currency accords, says IMF
• Italy and China agree to more than double trade to $100 billion in five years
• China to strengthen local demand in five year plan, says Goldman and JPMorgan
• Asia’s reserves rise at $2 billion per day
• China to face water shortages
• Hainan Province evacuates 130,000 people due to flooding, says Xinhua
• $33 million paid for Chinese vase at auction in HK

Church & chips

Wall Street “does a lot of good things and then it has this casino. It’s like a church that’s running raffles on the weekend”. So said Warren Buffett to Fortune magazine. Fair enough, I guess, but the World’s third Richest man has benefited both on week days and at the weekend, such is his skill as an investor. As noted here on Friday, too, Warren (he said I could call him ‘Warren’) is bullish on China saying that it’s transformation is “unlike anything that’s ever taken place in history”.

A number of his country men (in the House of Representatives) are not so kind and have passed incipient legislation to try and pressure China to appreciate the Yuan (and this despite US business of $150 billion per annum at risk). And, as Premier Wen continues his European tour, a number of EU officials have jumped on the up-hill Yuan charabanc, including Europe’s central banker Jean-Claude Trichet who said that China’s moves to boost the Yuan are “not exactly what we would have hoped ourselves”. This has also led to the spectre of further EU tariffs on Chinese imports.

For their part Wen and PBOC Governor Zhou Xiaochuan (who is traveling with the Premier) have been robust in defence, pointing out that Europe (and the US) is barking up the wrong tree. A view agreed with today by the renowned Jim O’Neill, Chief Economist at Goldman Sachs.

Whilst on his travels, too, Wen managed to make up (although there was no kissing) with the Japanese Prime Minister Naoto Kan. Subsequently, two Chinese gun boats from the disputed waters in the South China Sea have been withdrawn. That said, there is now a new dispute with Vietnam about the latter fishing with explosives, also in the South China Sea. Nine crew and a boat have been detained.

“I like the silent church before the service begins, better than any preaching” - Ralph Waldo Emerson

Shanghai Composite:
Today: closed
Thursday: +1.72% at 2,655.66 at close
Last week: +2.5%
YTD: -18.9%

Hang Seng:
Today: +1.07% at 22,880.41 at close (new 11 month high)
This week: +2.3%
YTD: +4.6%

Oil futures: $82.62
Gold futures: $1346.90
(new immediate delivery ‘high’ of $1349.80)
Euro/$ spot: 1.3844

Headlines

• EU pleads with China on the Yuan
• China may be target of more subsidy complaints in Europe
• Chinese banks agree to extend $267.8 million of loans to three Greek shippers
• China’s market is worth $150 billion to US companies
• Wen and Kan move to resolve China-Japan dispute; as gun boats withdrawn
• Vietnam asks China to release fishing boat
• Malaysia will joins Trans-Pacific Partnership with US – to counter China
• MSCI China Index may fall by 10 to 15% in Q4 on stimulus exit, says RBS
• Electricity blackouts ‘used’ to meet China’s energy targets
• Central China Real Estate plans sale of US dollar bonds
• Hong Kong home sales decline 41% in September

Wen wins 'away from' and 'at' home

Posted on Monday, 4 October 2010 [GMT+1]

There’s an old Chinese proverb which says something like “better to do a good deed near home than to go far away and burn incense”. But is Premier Wen clever enough to do both?

Currently he is in Europe, and began with a visit to Greece on Friday and the weekend; thereafter, he moves on to Italy, Belgium and Turkey. Wen is also the first Chinese Premier to visit Greece for 24 years and, here, he signed a co-operation agreement on tourism, infrastructure, technology and shipping. He also said that China will buy Greek bonds when the Nation begins tapping the international markets again. On the larger European pitch, an increasingly sure-footed Wen said that China supports a stable Euro and will not reduce its holdings of European bonds. “We are passengers in the same boat”.

Simultaneously, on Sunday, CNN screened an interview which Wen gave in New York on 23 September. Here, he focused, primarily, on domestic affairs and said that China realises that it has structural issues in its economy and that the Government will be taking steps to stimulate domestic demand; whilst also being especially vigilant on both inflationary pressures and corruption. However, he also underlined the success of Government spending in China and its role in “the continuance of steady and relatively fast economic growth”. Since then, manufacturing, in September rose at its fastest pace in four months and, on Saturday, another PMI survey showed that non-manufacturing also gathered momentum in September with construction particularly strong; its sub-index rose 3.6 points to 69.5. Real estate did well, too, although it is also reported that Shenzen has introduced greater restrictions on home purchases, while in Beijing, Suzhou and Hangzhou, unit sales in the second hand housing market tanked in early October. That said, in Hong Kong, its two largest developers sold $1.42 billion worth of homes over the National Day holiday weekend.

In other news, the biggest is Sinopec’s $7.1 billion investment in Repsol’s off-shore oil unit in Brazil. Meantime, closer to home China is being nice to both Korea’s, whilst its relationship with Japan has ameliorated. Finally, Taiwan has raised its benchmark interest rate by 0.125 to 1.5% to cool its real estate sector.

“Zeal without knowledge is a runaway horse”

Shanghai Composite:
Today: closed for National Day holidays
Thursday: +1.72% at 2,655.66 at close
Last week: +2.5%
YTD: -18.9%

Hang Seng:
Today: +1.17% at 22,618.66 at close
Last week: +1.1%
YTD: +3.4%

Oil futures: $81.48
Gold futures: $1320.80
(new immediate delivery ‘high’ on Friday of $1320.70)
Euro/$ spot: 1.3772

Headlines

• Wen visits Greece to sign co-operation deals and display confidence in EU
• China supports stable Euro and will not reduce European bond holdings, said Wen
• China will stimulate more domestic demand, says Wen
• China non-manufacturing PMI rises in September on demand for construction
• Shenzhen introduces restrictions on home purchases, reports the SCMP
• Beijing second hand home sales fall
• Nomura stakes “cautious” stance on China property; with 5-10% price falls by year-end
• Cheung Kong and Sun Hung Kai sell more than $1.42 billion of homes in Hong Kong
• Sinopec invests $7.1 billion in Repsol’s Brazil unit to tap off-shore fields
• Hu says China will boost ties with new North Korean leaders, says Xinhua
• China triples holdings of South Korean Government bonds to $4.6 billion
• China calls on Japan to maintain diplomatic relations
• Taiwan raises key rate as it seeks to restrain property speculation
• China hosts 200 nations in climate change meetings in Tianjin, says the SCMP
• France denies Financial Times report of secret talks with China on the co-ordination of currency