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