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