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