Shanghai surprises

While avoiding the literality of the title, if you left work early in Shanghai on Tuesday you would have missed a trick or two. First off, the Shanghai Composite jumped 60-odd points in the last hour of trading to close above 3,000 for the first time in six months. Then, even later, interest rates went up for the first time since December 2007; effective from today.

The latter move was a genuine shocker, especially as PBOC Governor Zhou Xiaochuan had said, as recently as 8 October, that bank reserve requirements and bill sales were sufficient tools to control inflation. Similarly, 13 from 19 economists in a Bloomberg survey last month forecast that lending rates would stay unchanged this year. However, policy makers most probably acted ahead of what are expected to be feisty inflation data tomorrow: the median September CPI estimate is 3.6% but some estimates range as high as 4.0% (August was 3.5%). They authorities must have also anticipated the surge in industrial production of +16.3% in the first nine months of the year (and data were promulgated today); albeit they ignored the probable easing in Q3 GDP growth from double digits to 9.5% (figures are out tomorrow).

The collective noun for surprises could be ‘party’ and it continued today with, first, the Yuan falling by the most in four months (-0.3% as measured by the daily reference rate); and then the stock market did not tank - and sustained the 3,000 level. The logic here is that the first interest rate increase in nearly three years will help tame inflation and prevent asset bubbles. Certainly Goldmans, JPMorgan and UBS (who said the rate hike was a “speed bump”) are all bullish, albeit Deutsche is more circumspect. There is also a risk that hot money may flow into China and stoke inflation. But, as Credit Suisse said capital controls can deal with the former; and capital flows are the “lesser evil” when compared with inflation anyway.

Strangely, the Hang Seng did not join in and shares closed almost 1% down, with property stocks the hardest hit of the Index’s four industry groups.

Finally, I am also indebted to Reuters who pointed out that the increase in one year interest rates of 25 basis points was the first time in modern history that Beijing adjusted deposit and lending levels by a number that was not a multiple of nine. In the past, the PBOC typically raised rates by 27 basis points. “The reason is that on the abacus, adding multiples of nine was much easier than adding multiples of 10. So the modern PBOC inherited that special character from the old days” observed Ken Peng at Citigroup.

There is another big day tomorrow; and remember as both Kung Fu and Oscar Wilde said: “expect the unexpected”

Shanghai Composite:
Today: +0.07% at 3,003.95 at close
(best since 21 April 2010)
This week: +1.1%
October: +13.1%
Since 5 July: +27.1%
YTD: -8.3%

Hang Seng:
Today: -0.87% at 23,556.50 at close
This week: -0.9%
YTD: +7.7%

Oil futures: $80.12
Gold futures: $1340.20
(new ‘immediate delivery’ high of $1387.35 on 14 October)
Euro/$ spot: 1.3795

Headlines

• China raises interest rates as higher inflation anticipated
• Industrial output rises 16.3% in first three-quarters of 2010
• Yuan falls most in four months after surprise interest rate rise (-0.3% at reference rate)
• Rate move may attract capital and fuel inflation
• Five year bond sale yield at 15 basis points higher (to 2.91%) - after interest rate rise
• IMF says China could raise rates further
• Abacus superceded, says Reuters as increases divisible by nine are abandoned
• Buy Chinese shares after interest-rate-induced dip, says Goldmans; most others agree
• Ikea plans to add $300 million to its investment in China
• State-owned companies see their nine month profit rises 46% to Yuan 1.4 trillion ($211 billion), year-on-year
• Lending to small and medium-sized firms is rising sharply; +19% in H1
• The development push is West to benefit from lower wages; and the Yangtze gets even busier