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
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