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