The 11th month

“No shade, no shine, no butterflies, no bees, no fruits, no flowers, no leaves, no birds. November” – Thomas Wood

With apologies to Southern Hemisphere readers, those of us in the North know that November (even with one day to go) can be a miserable month; and in Shanghai share prices showed the first month on month fall (-5.3%) since June. Further monetary tightening is imminent and, in many ways, it would be better if the Government simply got on with it, rather than sitting on its hands. In fact money market rates (after a pause for breath yesterday) are already there as the seven day repurchase rate rose 63 basis points today to 3.31%. Similarly, the Chinese Academy of Social Sciences says benchmark interest rates could rise 200 basis points (albeit with no timetable).

Nor does the background noise from Europe help; and let’s not forget that this is China’s single biggest (albeit multi-national) market taking around one fifth of exports. Tensions on the Korean Peninsula continue, too, albeit WikiLeaks points to evidence that China may be beginning to distance itself from, North Korea and in one exchange between China and the US - apparently - China’s Vice Foreign Minister said the Government in Pyongyang was acting “like a spoiled child”.

In real estate, Moody’s gives with one hand and takes away with the other i.e. the property market was given a stable outlook but with a moderate downward correction. “The improved liquidity positions of developers, resulting from robust sales over the last year, and the low debt leverage of buyers together reduce the risk of any panic sales”; and this will help “avoid any drastic correction”. However, the latest set of regulatory measures will be “progressively enforced”.

Moody’s also says that contracted sales values, or a combination of sales volumes and prices, for the 23 Chinese developers tracked by the credit rating company will drop 15 to 20% in 2011. But this is “manageable” for most of the real estate companies. Similarly, home sales volumes in 17 of 35 major cities increased last week from the previous week, according to SouFun, which operates China’s biggest real estate website. That said, the dollar bonds of China real estate companies had their first loss (-0.35%) of this half year after the PBOC imposed restrictions intended to limit developers’ access to bank loans and slow mortgage growth.

Back in the stock market, only Citigroup remains positive. “The liquidity driven rally will likely carry on in the next six months. We remain bullish on China in coming months”. Given the inflationary environment and prospects for further Yuan appreciation, Citigroup recommends an “overweight” allocation for cement companies, automakers, heath care companies as well as technology stocks.

“Happiness is an attitude. We either make ourselves miserable, or happy and strong. The amount of work is the same” - Francesca Reigler

Shanghai Composite:
Today: -1.61% to 2,820.18 at close
This week: -1.8%
In November: -5.3%
Since 5 July: +19.5%
YTD: -13.9%

Hang Seng:
Today: -0.68% to 23,007.99 at close
This week: +0.6%
In November: -0.4%
YTD: +5.2%

Oil futures: $85.64
Gold futures: $1369.80
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3103

EQUITIES & MONEY

• Stocks set to show first month’s fall since June; Citigroup remains positive
• Seven day repurchase rate rise 63 basis points to 3.31%
• “Prudent” monetary policy advocated by former banker
• Yuan trades near three week low
• Emerging markets attract new record level of funds at $84 billion; as China has best week since September

KOREA

• China is beginning to distance itself from North Korea, according to WikiLeaks

REAL ESTATE

• Moody’s sees stable outlook property but also a 15 to 20% drop in contracted sales values in 2011
• Real estate US dollar bonds show first loss

DOMESTIC

• China will cut prices of 17 medications
• Rolls-Royce pushes $990,000 cars among China’s new rich
• China approves 5.6 gigawatts of hydropower projects in Sichuan Province

HONG KONG

• China’s Yuan 3 billion debt sale in Hong Kong to individuals may offer 2% yield
• PBOC is unlikely to expand Yuan quota for Hong Kong

IRON & STEEL

• Baltic Index drops for three days running as capesize vessel supply increases
• Seaborne iron ore volumes set for 6% rise in 2010
• Chinese steel prices rise 7.2% in November; as production rises
• Vale may invest $158 million in Malaysia next year, says Business Times

Über alles?

In the first seven months of this year, China’s two way trade with its three largest trading partners - the US, Japan and South Korea - was $484.7 billion. During the same period, trade between China and North Korea amounted to $1.65 billion (okay, this makes the PRC the North’s largest trading partner and supplier of much of its foreign currency, fuel and food). From a pure economic point of view, then, there would appear be a huge, relative economic benefit to China in keeping sweet with the ‘Big 3’ rather than the ‘little Northern 1’.

People a lot smarter than me (some say it is not difficult) at the Brookings Institution and Center for Strategic and International Studies (CSIS), both in Washington DC, say the following. The Chinese Government’s principal goal is to preserve regional stability by preventing the collapse of Kim Jong-il and his regime, which might lead to a flood of refugees into north east China along a 1,415 kilometre (880 mile) border. Additionally, it might also create a unified and democratic Korea allied with the US i.e. “the Chinese worry about refugees and chaos from a North Korean collapse in the short term and, in the long term, of the magnetic effect of having a strong modernised Korea of 75 million people on their border” concludes CSIS. However, Professor Zhu Feng at Peking University adds that the recent attack by North Korea on the South has “injected growing anxiety about the stability of North Korean behaviour among Chinese diplomats and officials”. This will most likely put more pressure on the five day visit to China - which begins tomorrow - of Choe Tae Bok, Chairman of North Korea’s Supreme People’s Assembly.

In the short term, too, China’s call to resume six party talks (the two Koreas, the US, Japan, Russia and itself) has fallen on deaf ears. But there are two views on this. Brookings says China wants to look like it is taking “some initiatives on this important matter”; and North Korea also would like to resume the talks, so this is “the best possible action for China, from China’s perspective”. However, CSIS believes the initiative is “totally useless. People have been calling for getting back to talks for the past three years. It’s typical no risk, no cost, no commitment China”.

In other news, the Yuan recorded its biggest weekly loss (-0.42%), last week, since December 2008 as investors eschewed Asian currencies and plumped for the US dollar as South Korea, in particular, resisted calls for six party talks (as above). The currency was also off today to 6.6745 and Yuan Forwards are forecasting just 1.5% appreciation over the next 12 months. That said, analysts estimates range to 6%+ over the same period. Capital adequacy at China’s banks has also been increased by the regulator to 8% plus two lots of 2.5% - one as a “surplus” and one as a “counter-cyclical buffer”. The Government will also meet, it is reported, on 11 and 12 December to discuss monetary and fiscal policy and may introduce a new inflation rate of 4.0% (the old one was 3.0%). However Dazhong Insurance lamented that the past weekend was almost a vacuum for news on Government policies – and this added to uncertainties regarding the future control measures in the market. “Investors remain cautious on speculation of tighter policies including interest rate hikes. The fluctuations will continue with downward pressure”.

“We must always seek to ally ourselves with that part of the enemy that knows what is right” - Mahatma Gandhi

Shanghai Composite:
Today: -0.19% to 2,866.36 at close
Last week: -0.6%
In November: -3.8%
Since 5 July: +21.3%
YTD: -12.5%

Hang Seng:
Today: +1.26% to 23,166.20 at close
Last week: -3.1%
In November: +0.3%
YTD: +5.9%

Oil futures: $84.78
Gold futures: $1367.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3285

KOREA

• China calls for six party talks as US and South Korean naval exercises begin

MONEY

• Yuan sees biggest weekly loss (-0.42%) since December 2008
• Yuan declines to three week low today; with Yuan Forwards now at +1.5%
• Capital adequacy raised to 8% plus 2.5% (surplus) plus 2.5% (‘counter-cyclical buffer)
• Yuan positions at China’s banks rise most in 30 months
• Futures traders will need to hold more cash

ECONOMY

• China’s Government is to meet on 11-12 December to discuss monetary and fiscal policy, it is reported; this may include a new inflation target of 4.0%
• China to increase supplies of sugar, cooking oil and cement (mixing not advisable)
• China’s coal prices rise to two year high
• Gas prices increases halted in some provinces

INTERNATIONAL

• Black Friday sales in the US rise 0.3% as shoppers wait for retailers to cut prices
• Chinese firm wins contract for $46 million Ethiopian highway

REAL ESTATE

• Wharf Holdings buys residential land in Wuhan for a total of Yuan 1.02 billion
• Hubei to invest in $27 billion in port expansion

DOMESTIC

• Cnooc JV to buy Pan American Energy stake for $7.1 billion from BP
• China Huaneng to acquire 50% stake in InterGen in a deal worth $1.23 billion

HONG KONG & TAIWAN

• Huge demand for Yuan debt in Hong Kong
• Taiwan’s relations with China may improve after ruling KMT party’s election win
• Hong Kong home sales look like slowing further

IRON & STEEL

• Rio and BHP may increase iron ore quarterly contracts by 7%, says MB…..….while the Steel Index says +7.7%
• Sweden to invest $2.9 billion iron pellet production to meet demand from China

"Black Friday"

The day after Thanksgiving in the US (which is always a Friday), is known as ‘Black Friday’ – because it is the biggest shopping day of the year ($18 billion last year) and the day on which the majority of US retailers move (from the red) into the black profit-wise. It is also a lead indicator for the entire Christmas season. This year, too, there appears to be an unprecedented level of price discounting in order to attract buyers. Subsequently, the US Retail Federation predicts a gain of 2.3% for the entire holiday season (to $447 billion) which is also consistent with an incipient recovery in consumer spending: +2.8% in Q3; the best since Q4 2006. For the record, too, consumer spending accounts for more than two-thirds of US GDP.

To my knowledge, China does not celebrate Thanksgiving - and while it is good news for China’s exporters that US consumer spending is on the up - today is not ‘Black Friday’ either. In fact, it is more like ‘Moribund Friday’ as China’s Finance Ministry failed to draw enough demand at a bill sale for the first time since June i.e. it placed 58% of the Yuan 20 billion on offer. In turn, this reflects a cash shortage at the banks after the PBOC increased their reserve requirements twice this month. Similarly, the money markets continue to point the way to higher interest rates; and the seven day repurchase rate, which measures lending costs between banks, rose 25 basis points to 2.73%, the highest level since 30 September. In addition, Guotai Junan Securities, China’s largest stockbroker by revenue, is forecasting a hat trick of increases in benchmark rates by end-June next year.

Unsurprisingly, the Shanghai Composite drifted as investors adopt a ‘wait and see’ stance although consumer staples and cement stocks were in demand. Indeed, it is reported that cement prices in eastern China have risen 40% since August – and Anhui Conch had its best day (on Thursday) since the end of August. Elsewhere, the Asian Games in Guangzhou close tomorrow and the event has had a very significant economic benefit on the City with its budget of $18.3 billion. Did you know, too, that Guangzhou has a GDP greater than many small countries, including Vietnam and Morocco?

“Only Robinson Crusoe had everything done by Friday” - Anon

Shanghai Composite:
Today: -0.92% to 2,871.70 at close
This week: -0.6%
In November: -3.6%
Since 5 July: +21.5%
YTD: -12.4%

Hang Seng:
Today: -0.77% to 22,877.25 at close
This week: -3.1%
In November: -1.0%
YTD: +4.6%

Oil futures: $85.58
Gold futures: $1367.60
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3237

EQUITIES & TRADING

• Stocks drop on tightening concerns
• Cement stocks advance on demand and prices (+40% in eastern China since August)
• Shanghai Futures trading is being tightening up
• Dalian Exchange to lift margins and daily trading limits to stabilise prices
• China’s credit-default swaps trading begins as the regulator seeks to implement tighter controls

MONEY

• Money markets continue to point way to higher interest rates
• PBOC fails to complete bill sale for first time since June

REAL ESTATE

• Guangzhou is to close Asian Games tomorrow as the City booms with $18.3 billion of spending

HONG KONG

• Hong Kong’s debt rating is raised by Fitch on economic growth and fiscal strength

IRON & STEEL

• Vale seeking depositary receipt listing in Hong Kong
• Brazilian steelmakers under pressure
• South African Government seeks agreement on iron ore prices with ArcelorMittal and Kumba
  

Children

My son turned 23 yesterday which stimulates a panoply of emotions, atop of which is the shiver of ancientness and the realisation that you are, at the very least, MA (i.e. middle-aged). I am sure too that, psychosomatically, my perambulation over the last 24 hours has been a little slower and a little stiffer. Second, is that feeling of responsibility and the very clear memory of the very first moment you have a child; this is the day that you stop being one yourself and become an adult for the very first time.

North Korea (NK) is a child and a naughty one at that; and although not a direct descendant of China, it is - at the very least - a step child. ‘Father’ Wen Jiabao (who is on a visit to Russia) also finally said something about NK’s recent bellicose behaviour towards its southern relative (and the death of four people). He called for stability on the Korean Peninsular but, at the same time (through filial loyalty, perhaps) did not find fault with NK. Coincidentally or not, China’s foreign minister (aka NK’s Godfather) cancelled a visit today to South Korea due to scheduling issues (yeah, right).

As for the rest of the family, the Yuan rose for the first time in four days to 6.6502, albeit that it’s recent weakness (-0.31%) has had more to do with dollar strength on the back of Korean hostilities. Yuan Forwards are pointing to +2.2% over 12 months, albeit Standard Chartered says it is more likely to be +7.0% annualised in H1 next year; at the same time 2011 inflation is forecast to rise to 5.5% against 3.2% in the current 12 months. Similarly, money markets are presaging higher interest rates as the PBOC pledged to strengthen liquidity and “normalise” monetary conditions. The seven day repurchase rate, which measures lending costs between banks, jumped 15 basis points to 2.48% which is the highest level since 8 October. And as DBS Bank said “enough has been done on the supply side, but work needs to be done on the demand side”. In the same vein, new loan targets for next year may be as low as Yuan 6.0 to 6.5 trillion (down from Yuan 7.5 trillion+ in 2010).

Meantime, our cousins in real estate took a bit of a battering as the State Council said that it needed to introduce “harsher” measures to restrain speculation. It also pushed for an increase in the supply of affordable housing for low and middle income families. At the same time, the Government also plans to carry out a nationwide property inspection with a focus on local government land supply, affordable housing targets, idle land and misuse. Juxtaposing this, though, are number one developer China Vanke and its doubling of sales in October plus the property sector sub-Index rising 2.4% in early trading in Shanghai.

The bonds playground - Government and corporate - remains busy and Caterpillar has sold Yuan 1 billion of debt in Hong Kong. It is the second US corporate to do so after McDonalds. Chinese IPOs, however, have lost their shine both in Hong Kong and New York with two delayed (Bluestar Adisseo and China Datang) and one falling 15% on debut (Syswin, which provides services to property developers in 17 Chinese cities) respectively.

On a brighter note, Credit Suisse says China’s stocks may climb about 20% in 12 months as “abundant” liquidity and profit growth overshadows the risk inflation. Similarly, while a little more cautious in the short term, JPMorgan has maintained its medium term “positive stance”. It also says that the risk of inflation running out of control has been “exaggerated” while China still has a “solid” economic and corporate growth outlook”.

“Children are like wet cement. Whatever falls on them makes an impression” - Dr Haim Ginott

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: +0.13% to 23,054.68 at close
This week: -2.3%
In November: -0.2%
YTD: +5.4%

Oil futures: $83.65
Gold futures: $1372.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3312

KOREA & EQUITIES

• Wen calls for stability on Korean Peninsula
• Stocks may gain 20% in 2011 on liquidity and profit growth, says Credit Suisse

MONEY

• PBOC says it will strengthen liquidity management and normalise monetary conditions
• Money market rate climbs to highest level in a month
• Yuan rises for first time in four days; with Yuan Forwards pointing to +2.2%
• Yuan appreciation to quicken with inflation, says Standard Chartered in HK
• Commodity exchanges in China increase fees to combat threat of speculation
• Shanghai Futures Exchange to suspend preferential trading fees by charging both sides of transactions

BONDS

• PBOC sells three month bills at static yield of 1.8131%; and same for three year offer at 3.0%
• Seven year bonds sold at 3.83%
• Caterpillar raises $150 million in Hong Kong sale of Yuan bonds
• Chinese State-owned companies look set to double US dollar bond sales

REAL ESTATE

• China needs “harsher”property restraints and increased supply of lower cost housing, says Cabinet official
• Cheng says China may curb developers further
• Ministries to carry out property inspections
• Shimao Property and China Vanke (especially) see very good sales advances in October
• Developers shares rise 2.4% in largest gain since 13 October (but still 5% down in November to date)

INTERNATIONAL

• Syswin shares retreat as Chinese IPOs lose momentum on the New York Stock Exchange
• Tokyo follows Hong Kong with shorter stock market lunch break - back to one hour

DOMESTIC

• China builds French-designed nuclear reactor for 40% less
• China may face power supply issues this winter
• Citigroup may double number of staff in China to 10,000 over three years
• China to encourage foreign investment in “high level” manufacturing
• Machinery industry to grow at 15 to 20%, with focus on items for use in construction

HONG KONG

• Bluestar and Datang delay $2.6 billion Hong Kong IPOs on worries about volatility

IRON & STEEL

• Iron ore investment opportunities abound on London’s AIM
• Steel and cement output to rise as power limits ease, says CICC; selling prices to fall
• Hunan Valin sells $189 million stake in Fortescue Metals

"Lunch is for wimps"

"LIFW" was the disdaining description of business mores from Gordon Gekko in Wall Street 1. And, in Hong Kong, they are clearly listening as the traditional two hour lunch break will be cut by 30 minutes next March and then by a further 30 minutes in March 2012 to a single hour. Was this the reason that Hong Kong fell 2.7% today to its lowest level since 7 October? I don’t think so. The market fell because of worries over the border in China and a domestic property sector being hammered by Government constraints. By way of a kindred spirit, the Shanghai Composite joined in with a near 2% drop to its lowest since 11 October as it - amazingly – settled at 2828.28…..Lucky for some?

Investors are worried that the Chinese Government will ratchet up its fight against inflation. This was evidenced by a People’s Daily editorial on its front page saying that the Nation should designate more goods as important commodities and intervene in prices where necessary. Citigroup also talked about the ‘supper cycle’ (as opposed to the ‘super cycle’). By this it meant that “when iron ore prices double, it hardly touches rural Chinese workers. But when food prices rise by 10-15% every year, it does”. Similarly, Standard Chartered is forecasting a consumer price index peak of 6.3% in June.

Already, too, the money markets are anticipating a further interest rate rise as the seven day repurchase rate, which measures lending costs between banks, advanced to 2.22% as at 10.23 hours in Shanghai, which is the highest since 8 October. That said, China International Fund Management believes that China’s economy may bottom out in the second quarter next year; and that “the market will seek support at a lower level in the short term as we are in the midst of very severe tightening”. Similarly Tesco remains positive on the PRC as it plans to quadruple sales by 2015 to £4 billion; and Rolls-Royce has just sold $1.8 billion of jet engines to Air China. Plus a 1,920 kilometre high speed rail link between Yunnan and Yangon, the capital of Myanmar, is due to commence construction work in two months.

It is also reported, but not confirmed, that - with 38 days to go in 2010 - China’s banks have already lend their PBOC limit of Yuan 7.5 trillion; which is good and bad.

Finally, as South Korea scrambles fighter jets due to the fact that its northern neighbour lobbed artillery shells into its backyard this morning (actually one of its back-islands called Yeonpyeong), it maybe time to don your tin hat, actual and figurative.

“The most valuable commodity I know of is information” - GG

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: -2.67% to 22,896.14 at close
This week: -3.1%
In November: -0.9%
YTD: +4.7%

Oil futures: $81.07
Gold futures: $1363.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3558


EQUITIES, BONDS, YUAN & BANKS

• Stocks fall to a six week low on tightening
• One year bill year sold at same yield of 2.3437%; but less of them are offered
• Yuan Forwards now at +2.6% as US dollar strengthens
• Yuan/Ruble trades begin
• China's bank “has reached” its limit of Yuan 7.5 trillion this year with a month-and-a-bit to go
• PBOC adviser Li says China can consider selling US Treasuries, as price rises

DOMESTIC

• China will meet 2010 energy reduction goal, says NRDC
• Rolls-Royce wins $1.8 billion engine contract for Air China
• Tesco plans to for a four-fold rise in sales from double the number of stores by 2015
• China to start work on Myanmar high speed rail project
• China’s rare earth exports fell by 77% in October

HONG KONG

• Hong Kong stocks decline for a third day
• Centaline halts expansion as is predicts Hong Kong home sales may halve from peak
• Hong Kong brokers see their lunch cut by 30 minutes (to 90) and an extension of trading hours from 7 March; a further 30 minutes will be cut in 2012

29 and 29

29 miners remain trapped in a coal mine in New Zealand while 29 were rescued in Sichuan in south west China. At the same time, national financial efficacies are equally divergent. For example, Standard & Poor’s has lowered its credit rating outlook for New Zealand (incidentally, also the Nation of my birth) to negative; albeit that it remains at AA+, the second highest grade and the same as Hong Kong. At the core of this view is the danger of a “prolonged” struggle to recover from the global recession due to diminished demand for its goods and services in the US, UK and Japan; and a widening current account deficit which leaves the country increasingly dependent on foreign capital.

Earlier in November, Moody’s raised China’s debt rating to its fourth highest Aa3 (from A1) with a positive outlook. China, of course, also has a massive current account surplus (at the end of last year it was just shy of $300 billion) plus foreign currency reserves of $2.45 trillion. But it also has inflation (with some 2011 estimates now north of 6%). In turn, this led, after hours on Friday, to the PBOC raising the reserve ratio for banks for the fifth time this year by 50 basis points (to 18.0% for the larger banks); which removes as much as $53 billion of cash from circulation.

Typically, the PBOC did not do what the market expected i.e. raise interest rates. Nonetheless, the smart money says this is a matter of time; and by the ‘smart money’, I mean HSBC, BNP Paribas, Citigroup, Credit Suisse, UBS and ANZ who all say that the central bank will raise rates before the end of the year by at least 0.25% (the benchmark one-year lending rate is currently 5.56%). ANZ, too, expects another 150 basis points on the reserve ratio.

More smart money at RBC added that, prior to Friday, people had thought we were nearer the end of the China tightening cycle. But the tightening is being extended further than the market expected. But this means that “China is now giving a very clear indication that they’re very intent on conquering inflation”. And, “there will be a very attractive opportunity to buy Chinese stocks as we get towards the end of the China tightening cycle, particularly those sensitive to interest rates. It’s probably early now, but we’re brewing towards quite an attractive opportunity”.

Elsewhere, the Yuan is firm and Non-deliverable Forwards are pointing to +2.9% over 12 months from the spot rate of 6.6378. However, consensus forecasts point to +6.1% to 6.26 by year-end (note, too, that the currency briefly touched a 17 year high on 11 November of 6.6173). Similarly, one year Yuan interest rate swaps climbed to the highest level since October 2008 in Hong Kong on Friday. As we mentioned on Friday, too, an appreciating Yuan is likely to be an important weapon in fighting inflation (and Li Daokui from the PBOC agrees).

The State Council has highlighted the “importance and urgency” of tackling inflation; and at the same time the PBOC Governor Zhou Xiaochuan said China is under “pressure” from capital inflows and that the central bank will “strengthen liquidity management” (which it is doing). By way of background noise, too, there are also signs that the Chinese economy is maintaining momentum and both the World Bank and the OECD are forecasting 10% growth this year; and the latter is on the same number in 2011 and 2012. Similarly, the newly IPO-ed General Motors Company of Detroit expects sales in China to rise 15% next year.

And, finally, UBS says Shanghai and Beijing’s luxury home prices may increase 15% each year to overtake Hong Kong (where new controls have been introduced) in the next five to 10 years. China’s tightening measures will not stop prices from rising and may only “delay” the gains, it said. Similarly, “monetary policies may also be eased over time to avoid a rise in unemployment. It doesn’t matter what the Government is doing, whether we have 100 new measures or 10,000 new measures. In the long term, all these are noises and will disappear, and only one variable matters - and that's money supply”.

“When you say one thing, the clever person understands three” – Chinese proverb

Shanghai Composite:
Today: -0.15% to 2,884.37 at close
Last week: -3.2%
In November: -3.2%
Since 5 July: +22.0%
YTD: -12.0%

Hang Seng:
Today: -0.35% to 23,524.02 at close
Last week: -2.6%
In November: +1.9%
YTD: +7.6%

Oil futures: $82.42
Gold futures: $1361.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3737

RESERVES ETC

• China to raise bank reserve ratio by 50 basis points from Monday 29 November 2010
• Inflation fighting by China and higher reserve ratios may harm equities and bonds
• UBS says liquidity is the issue; interest rates rise to follow
• Obama repeats call for surplus nations to allow currency gains
• Credit-default swaps for Chinese companies build in greater risk than their for their US counterparts

YUAN & BONDS

• Yuan Forwards point to +2.9% over 12 months; albeit consensus forecasts point to +6.1% by year-end
• Yuan appreciation can reduce inflation, says PBOC Advisor
• Merrill Lynch starts Yuan services as hedge fund demand grows
• China to sell $1.2 billion of Yuan bonds in Hong Kong

REAL ESTATE

• Shanghai and Beijing's luxury house prices to over-take Hong Kong, says UBS
• CIC holds 7.4% of General Growth Properties

INTERNATIONAL

• Food prices to rise by only 2% after crop costs surge, says US Agriculture Secretary

DOMESTIC

• Japan military deployment near disputed islands may damage further relations with China
• GM expects sales in China to rise 15% next year
• China’s corn stockpiles are “ample”, says State Administration of Grain; same goes for other grains
• All 29 trapped Chinese coal miners are rescued alive

HONG KONG & TAIWAN

• Hong Kong increases tax on property re-sold within two years to cool market
• Weekend home sales collapse
• Developers fall by a further 3.3% - biggest drop since May
• Yuan loses out to Taiwan Dollar as GDP rates converge

IRON & STEEL

• Indian iron ore export ban from Kanataka upheld by court
• Fortescue approves $8.4 billion iron ore expansion
• The ‘Big 3’ to expand capacity by 400 million tons

China buys Ireland

Okay, I made that headline up; but it could. Irish GDP this year is around $227 billion, although its enterprise value is much larger. Officially the budget deficit is 14.3% of GDP, but some estimates put it as high as 24% which would add a further $50 billion or so to the purchase price. But this is small beans when compared with China’s reserves of $2.45 trillion.

Capacity is one thing, inclination another and right now the Chinese Government’s proclivity is domestic (aside from taking a near 1% stake in GM in its IPO). Inflation is rampant, especially in food and not only are interest rates almost certain set to rise, but also price controls and the mobilisation of food reserves are imminent.

The latter measures are, of course, artificial and may only have a short shelf-life. More fundamental is the issue of liquidity both imported and domestic. This has led a number of commentators to recommend treating the ‘illness’ not the ‘symptoms’. For example, Sandford Bernstein expects new bank loans to fall 12% next year to Yuan 6.6 billion (and other estimates are lower). Similarly, Standard Chartered sees three interest rate rises next year (in addition to the probable one of 0.25 to 5.56% before end-December). What’s wrong, too, with letting the Yuan appreciate further, which is a pretty painless way to reduce inflation?

Understandably, the Shanghai Composite is not a happy camper and, even after today’s respite, it has fallen almost 9% since its November high on the 8th (when it was also back to April’s level). And while I might sit on my hands for a day or two, I would not panic.

The OECD says China will grow by “about 10%” in 2011 and 2012. It also says that China’s current account surplus will stabilise at about 5.5% of output, and that the Government should allow the Yuan to strengthen further. “The stability of the domestic economy would be enhanced if the exchange rate policy were more oriented to allowing an appreciation against a basket of currencies. In addition, Government spending should continue to be reoriented to social objectives”. Note, too, the OECD has just reduced it global economic outlook bringing down its GDP forecast from 4.5 to 4.2% and is talking about a “soft spot” as stimulus spending fades – before investment spurs revival in 2012.

“Ireland is where strange tales begin and happy endings are possible” - Charles Haughey

Shanghai Composite:
Today: +0.81% to 2,888.57 at close
This week: -3.2%
In November: -3.0%
Since 5 July: +22.2%
YTD: -11.9%

Hang Seng:
Today: -0.13% to 23,605.71 at close
This week: -2.6%
In November: +2.2%
YTD: +7.9%

Oil futures: $85.42
Gold futures: $1359.50
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3684

HEADLINES

EQUITIES

• Buy A-shares and ‘short’ H-shares as prices drop, says Credit Suisse; while JF is more positive

YUAN & RATES

• Money market rates point the way to higher rates
• Interest rate rise around the corner because price controls may be “insufficient”
• Yuan fails “freely usable” test for SDR basket, says IMF
• Bank lending target may be reduced 12% to Yuan trillion, says Sanford Bernstein
• China to raise rates twice more and Yuan to rise, says Aviva

ECONOMY

• OECD says China will grow by “about 10%” in 2011 and 2012

INTERNATIONAL

• OECD cuts Global growth outlook for next year to 4.2% and predicts “softspot”
• GM sells $500 million (0.97%) stake to Chinese partner SAIC as part of IPO
• World food import costs are $1 trillion+ this year says UN
• Nobel Committee may not present its Peace Prize to Liu (as it must be made to him of family member)

DOMESTIC

• China pledges adequate grain supplies
• China to give local governments more power on taxes
• Tibet lures hoteliers as China's big cities are over-supplied
• Chinese man uses SUV to knocks down 11 officials who were demolishing his house

HONG KONG & TAIWAN

• Hong Kong is said to be planning new property curbs
• IMF says Hong Kong economy risks boom and bust
• Yuan's Hong Kong premium shrinks from 2.6 to 0.6%
• Taiwan's GDP grows 9.8% in Q3 which underlines Asia’s recovery and capital flows

IRON & STEEL

• Baosteel and Taiwan’s China Steel in iron ore move
• Wuhan and Angang reduce steel prices for December, according to Mysteel
• Rio Tinto’s CEO says Governments face “populist pressures” on foreign bids; but adds that China’s economic strategy is “sensible”
• Baosteel expects quarterly iron ore pricing to stay
  

Quod ali cibus est aliis fuat acre venenum

This Latin aphorism was coined in the First Century BC by Lucretius and was first translated into English in 1604 by the Jacobean playwright Thomas Middleton: “what is food for one man may be bitter poison to others”.

And so it is with China - and while Japan (or even the UK) would give its right arm to have some inflation, China is just the opposite. Inflation in the PRC hit a two year high in October (4.4%) and UBS, for one, thinks that it could top 5.0% in November. And, food (not poison) is the issue (it accounted for three-quarters of October’s gain). For example, corn and rice have hit new record prices this week and not only are vegetables 18% up year-on-year, they also jumped 62.4% in the first 10 days of November, says the Financial News. Even McDonalds has raised prices across its product range by Yuan 0.5 to 1.0 per item.

Little wonder, too, that Premier Wen is drafting measures to counter excessive price gains. In typically Chinese fashion, too, it is seeking to punish speculators and hoarders. Similarly, the Dailan Commodity Exchange has become the third in China to announce measures to restrain speculation.

On the other hand, commodities have tanked in price on the prospect of higher interest rates and lower economic growth (and the CRB Index in New York has just completed its biggest five session slide in 15 months). Investment legend - and head of Fidelity’s China Fund - Anthony Bolton says that last month’s interest rate rise may be the first of several. He also highlights the international flow of hot money (which is yet another irksome problem for the Chinese monetary authorities). “I have never before witnessed the current situation whereby money created in one country is leaking at a rapid pace into assets in another part of the World. This is a phenomenon that I think is only in its early stages and could be the big investment story of the next year or so”. However, he remains positive on China, saying that economic growth may slow to 7 to 8% although that will still look pretty interesting in an economic environment where much of the World is growing at about 2%.

Similarly positive was the Conference Board’s leading indicator index which rose by 0.6% to 150.8 in September for a fifth consecutive month. This suggests that the economy will expand steadily through early 2011. Similarly, FDI rose 7.9% in October (the third month of acceleration) to $7.7 billion; and for the first 10 months of the year it is ahead 15.7% at $82 billion. In addition, Adidas has just announced plans to open 500 new stores in China next year (worth $1.4 billion) to take it tally to 6,100.

Okay, consumer confidence has unsurprisingly taken a battering and the latest Neilson/Statistics Bureau index shows the first drop in six quarters (from 109 to 104 in Q3) on expectations that the price of goods and services will keep rising. Only first-tier cities such as Beijing and Shanghai were spared. In the same vein, the Shanghai Composite is now off almost 5% this week; and it’s only Wednesday. Plus, stock index volatility is at a six month high and Nomura has turned bearish. That said, investors last week opened 565,972 accounts to trade equities, the most in 15 months.

On brighter note, too, Citigroup says that further Government restraints on real estate are unlikely as its focus shifts to inflation i.e. it does not want Yuan 1 trillion of liquidity flowing out of property and into other areas. Thus, Citigroup reiterates it overweight stance on property stocks saying that current share prices have factored in much of the bad news. The Government’s draft plan on the real estate market, 2011-15, will also be completed at the end of this month. Similarly, the Chairman of CCCB says that his bank is unlikely to have stopped loans to property developers (as was reported in the media). Finally, 13 million low income apartments are planned to be built over the next two years and Governments (central and local) will use at least 10% of the net proceeds from land sales to develop low cost housing.

“The food here is terrible and the portions are too small” - W. Allen

Shanghai Composite:
Today: -1.92% to 2,838.86 at close
This week: -4.9%
In November: -4.7%
Since 5 July: +20.1%
YTD: -13.4%

Hang Seng:
Today: -2.02% to 23,214.46 at close
This week: -4.2%
In November: +0.5%
YTD: +6.1%

Oil futures: $81.66
Gold futures: $1335.00
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3483

HEADLINES

EQUITIES

• Nomura turns “bearish” on Chinese shares as policy tightens
• China stock index volatility is at a six month high – which means investors should refrain from buying, says CICC
• Stocks decline as inflation measures may reduce earnings
• Investors open more account in any week for 15 months

MONEY & BONDS

• Money market climbs to a three week high on rate risk
• China may raise interest rates several more times, says Fidelity's Bolton
• Yuan “okay” (for now) says Geithner and Germany’s CFO
• UBS forecasts Yuan 7 billion as the new bank lending target for 2011 (after Yuan 7 billion in this year); Credit Suisse says Yuan 5 billion
• Finance Ministry sells 50 year bonds at 4.4% yield (up from 4.03% in May)
• PBOC’s Yuan 10 billion worth of one year bills sold at unchanged at yield of 2.3437%

ECONOMY

• UBS sees 5% inflation in November
• Consumer confidence has first drop in six quarters on prices
• China's leading economic index rises for fifth month as growth stabilizes
• Faster gains in FDI as economy rebounds
• China may introduce measures to curb food and cotton price, says China Securities Journal
• PBOC should increase rates twice, says researcher
• Zhou targets liquidity as price controls are discussed
• Commodities fall by largest five session slide since July 2009
• Agricultural commodities decline in China as Wen says he will cool inflation
• McDonald's raises prices in restaurants in China

REAL ESTATE

• 13 million low income apartments in two year
• Draft property plan to be finished this month
• Construction Bank Chairman says halting loans to developers is unlikely
• Policies cannot contain the rise in residential prices
• Property policy risks to stabilise, says Citigroup

INTERNATIONAL

• Pacific Basin Shipping will expand its fleet by 10 dry bulk vessels worth $284.4 million
• Shipping costs fall
  

DOMESTIC

• China may introduce measures to curb food and cotton price, says China Securities Journal
• Adidas plans 500 net store openings in China next year
• Gap and JCPenny see dramatic rise in cotton prices
• 2011 natural gas supply may not meet demand
• China orders stricter fire controls after Shanghai blaze kills 53

HONG KONG

• IPOs are Beijing's next export for Hong Kong Exchange
• Yuan-denominated debt - or “dim sum” bonds - rise in popularity on competitiveness in HK

Fruit salad

My sixth grade algebra teacher said that the golden rule was not to create fruit salad. By that he meant “don’t mix up the letters to the point of insolubility”. The G20 is similarly multifarious and, last week, simply swished around on its summit plate and, may be even curdled. Certainly its communiqués lacked any bite or fresh taste.

That said, China looks like being the G20 cherry and ING said “We have to give this round to the Chinese. In an international negotiation like this China has seized on QE to its advantage and managed to deflect any kind of criticism the US might have been able to give”. Similarly, Fortress Investments added the following: “the Chinese have done a masterful job of playing the cards on this one. They’ve turned a problem of them having a pegged currency into our problem”.

In fact the Yuan has declined since last week’s two summits, first the G20 in Seoul followed directly by APEC in Yokohama. And Hu said that currency reform will continue at a steady pace. Yuan Forwards point to +2.75% over the next 12 months, while others, such as Citigroup, are nearer +6%.

In any event finance ministers from the G20 will work on a set of “indicative guidelines” designed to identify large economic imbalances and the actions needed to fix them, according to a joint statement released in Seoul. The indicators will be selected with the help of the IMF and developed next year when the G20 presidency will be held by France. The G20 also said that emerging markets facing a surge of capital inflows can adopt regulatory steps to cope; or as it called them ‘macro prudential measures’.

In addition, the IMF said exchange rate flexibility in major emerging countries was “essential” to achieving “strong and balanced” growth. It also said that G20 growth forecasts are “distinctly more optimistic” than would be supported by past recoveries. Finally, APEC said that its leaders had taken “concrete steps” towards creating a “comprehensive free trade agreement, albeit without setting a timetable. Meantime, the US is pushing its own version of the same with its Trans-Pacific Partnership.

In other news, the Shanghai Composite regained some poise with a gain of almost 1% to clear 3,000 again today, after Friday’s interest-rate-driven 5.2% drop (the largest since August 2009). Similarly, both Goldman Sachs and HSBC are positive on equities, with the latter saying it was a buying opportunity and forecasting a 15% rise by July. Today’s gain was also made despite a report that China’s four largest banks have stopped new loans to developers.

On a positive note, too, China surpassed Japan in Q3 in terms of GDP to be the World Number 2 and Standard Chartered says that by 2020, China will have overtaken the US to be Number 1.

“Well, there won't be any berries in the fruit salad now, so we all lose” - Oh in ‘Year One’

Shanghai Composite:
Today: +0.97% to 3,014.41 at close
Last week: -4.6%
In November: +1.2%
Since 5 July: +27.5%
YTD: -8.0%

Hang Seng:
Today: -0.76% to 24,027.18 at close
Last week: -2.6%
In November: +4.0%
YTD: +9.9%

Oil futures: $85.29
Gold futures: $1364.50
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3654

HEADLINES

EQUITIES & YUAN

• Stocks recover from Friday’s 5.2% drop
• After stocks have their biggest fall in more than a year, HSBC says “buy”
• Yuan Forwards dip and point to 12 month appreciation of 2.75%; BoA says 6.4 next year and Citigroup 6.25

G20, APEC ET AL

• Yuan appreciation eases after “masterful” job at G20
• G20 supports regulatory steps to combat capital flows
• China promises to adopt “steady” currency reform after G20
• Banks win a year reprieve as G20 holds back on introducing new measures on risk
• “I’ll give this round to the Chinese” says ING
• Commerce Minister attacks QE and “imported inflation”
• IMF tells G20 that exchange rate flexibility is a key foundation for growth
• IMF says that G20 forecast may be optimistic
• US and South Korea fail to agree trade pact on cars and beef
• China’s trade with Brazil and Portugal is rising fast
• US wants more Yuan appreciation by Hu’s visit in January
• APEC leaders speak of “concrete steps” towards free trade
• Japan and China make up (but no kissing)
• US push to conclude Asia Pacific trade talks by next year

REAL ESTATE

• Four largest domestic banks to make no more loans to developers this year

DOMESTIC

• Interest rate forecasts see 6.31% at end-2011
• China’s economy was bigger than Japan in Q3 to be World Number Two
• China may over-take US by 2020, says Standard Chartered
• China's annual $26 billion diabetes cost is to skyrocket
• Starbucks sets up coffee facilities in Yunnan

HONG KONG

• Hong Kong GDP expands by higher-than-expected 6.8% in Q3
• Hu says worst is over for Hong Kong

IRON & STEEL

• Xstrata to invest $6 billion in Mauritania iron ore mines
• New issues, including Zanaga Iron Ore, highlight appeal of AIM
• Anglo offloads steel units in Canada and Chile

The one about the expensive vase and Obama

$83.2 million was paid by a Chinese buyer, at auction, for a Chinese vase which was found, by accident, in an attic in north London. Apart from the wonderful good fortune for the owner, it also shows that Chinese bidders are prepared to pay ever-higher prices for rare and precious artifacts associated with Chinese emperors; and this one was from the 18th Century Qianlong-dynasty. It also shows that some, at least, can afford to.

Value, like most things, is relative and subjective. I, for example, would rather invest $83.2 million in contemporary China; as would Barack Obama. He said “in the US we should be able to agree now that it makes no sense for China to have better rail systems than us. And we just learned that China now has the fastest supercomputer on Earth. That used to be us. Do you think China is cutting it by 20%? They’re playing for first place, and we need to play for first place”.

President Obama has also been busy at the G20 summit, where he met face-to-face for 80 minutes with President Hu. Gossip suggests, too, that if it had been a boxing match, Hu probably won on points. For example, China rejected policy prescriptions which find fault with its exchange rate policy and, in turn, directed criticism at monetary easing in the US. Off the record, too, the US has said that it is encouraged by the recent appreciation of the Yuan. It also seems that G20 leaders will endorse only gradual changes in currency values, in its official statement. They have also agreed to develop early warning indicators to monitor policies which exacerbate trade imbalances and threaten to disrupt the global economy.

But all is not that smooth for Hu and, back home, he will have seen that the Shanghai Composite dropped 5% today (to below 3,000) as expectations grew that interest rates will rise, perhaps even today (after hours). In any event, a Bloomberg survey said that the consensus view of 11 analysts was that the one-year borrowing rate would rise from 5.56 to 5.81% by year-end. This follows yesterday’s inflation number of 4.4%, the highest in two years and Credit Suisse, for one, thinks that it could go to 6.0% by the middle of next year. Meantime, the Yuan has completed a second week of advances and along the way touched its strongest level (6.6173) since 1993. However, the Non-deliverable Forwards market is pointing to further gains of just 2.1% - the lowest since September.

Unsurprisingly, real estate shares took a thump added to by new proposed restrictions on foreigners being able to own only one house; and despite a bullish survey. The latter said that while two-thirds of Bloomberg users canvassed see a bubble inflating property values in China, 33% of them also say that it is the best country for investment. JPMorgan adds, too, that it thinks the worst may be over for Chinese property stocks based on the view that market restrictions will not be repeated in the second half of next year.

“Don’t make other people take the medicine for your disease” - Yu Jianhua who is a Director-General at China’s Ministry of Commerce (speaking at the G20)

Shanghai Composite:
Today: -5.16% to 2,985.44 at close
This week: -4.6%
Since 5 July: +26.3%
YTD: -8.9%

Hang Seng:
Today: -1.93% to 24,222.58 at close
This week: -2.6%
YTD: +10.7%

Oil futures: $85.86
Gold futures: $1382.20
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3631

HEADLINES

EQUITIES

• China’s stocks drop most in three months on prospect of immediate interest rate rise
• Goldman Sachs tells investors to close their position on China stocks after an 11.3% gain since April

YUAN, BANKS & MONEY

• Yuan sees second week of gains
• China set to raise interest rates again, says survey
• Finance Ministry sells 182 day Treasury bills at 2.0387% yield; compared with 1.99% in secondary market
• Finance Ministry sells the last of 2010 local government debt as yields rise

G20

• G20 takes baby steps towards currency accord
• Obama cites China as role model

REAL ESTATE

• Foreigners to be limited to one property for self use
• China real estate bubble fails to put off investors, says survey
• Buy China property stocks, says JPMorgan: the “worst” appears to be over

HONG KONG

• Hong Kong’s Q3 GDP growth may top 6%
• Hong Kong is to take action on property speculation

IRON & STEEL

• China’s iron ore imports dip 2.2% in 10 months to end-October
• Steel inventories in China fall 24% from peak
• Baoshan holds prices despite inflation
• China to increase use of scrap steel use to lower iron ore reliance, says Nanjing Iron & Iron
• African Minerals raises £191 million from placing for iron ore project; China Railway Materials Commercial is already an investor and Shandong Iron and Steel is thinking about it
  

"Up, up and away"

Jimmy Webb wrote the song, “Up, up and away” (in my beautiful balloon) which was made famous by The Fifth Dimension. It was also most certainly where all the arrows are pointing in China today

First off inflation was top of the leader board at 4.4% in October (three-quarters of this driven by food prices). Producer prices at 5% were also ahead of expectations. New lending in the month, too, was bigger than thought at Yuan 588 billion and M2, the broadest view of money supply, rose 19.3%. Bank reserve requirements have also been hiked by 0.5% times two (at least for some); and higher interest rates will most certainly follow.

Meantime industrial production added 13.1% last month (which was a little less than estimated) albeit retail sales advanced 18.1%. Added to this was urban fixed asset investment which leapt 24% in the first 10 months of 2010. The Yuan was also close to record strength at at one stage today touched 6.6173.

But the real gloss came from Moody’s which raised China’s debt rating to its fourth highest Aa3 (from A1) with a positive outlook. After a nervous start, too, the Shanghai Composite appeared to take it all in its stride and was up by more than 1%: and this, despite a bit of push/pull amongst market commentators with Morgan Stanley in the former, saying that stocks in China are still “cheap” relative to its neighbours (aside from South Korea).

Background noise is being provided by the G20 meet in Seoul where Obama and Hu have met face to face. In typically resolute tenor, too, Goldman Sachs Jim O’Neill eschews any notion that we are in a “currency war”. He also says that the US and China are much more in accord on currency and other issues that may be popularly believed; and that there will be further Yuan appreciation at a rate greater than the 3% suggested by the Non-deliverable Forward market.

“The World’s a nicer place in my beautiful balloon” - J Webb

Shanghai Composite:
Today: +1.04% to 3,147.74 at close
This week: +0.6%
Since 5 July: +33.2%
YTD: -4.0%

Hang Seng:
Today: +0.82% to 24,700.30 at close
This week: -0.7%
YTD: +12.9%

Oil futures: $88.43
Gold futures: $1407.00
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3771

HEADLINES

ECONOMY, BANKS & MONEY

• Inflation accelerates to 4.4% and the fastest in two years (with food accounting for three-quarter of the rise); producer prices rose 5.0%
• October new lending higher than expected at Yuan 587.7 billion; while M2 rises 19.3%
• China is reported to have raised reserve ratio twice by 0.5% each time for some banks: one unofficial and selective; the other official and multi-lateral
• Moody's raises China's debt rating to its fourth highest of Aa3; while Hong Kong goes from Aa2 to Aa1
• Industrial output rises 13.1 % in October
• Urban fixed asset investment rises 24%
• Retail sales gained 18.6 % in October
• PBOC sells three year bills at yield of 3.0% from 2.85%
• ICBC plans to raise $6.8 billion in a rights issue

YUAN

• Yuan close to record level at 6.6241
• Greenspan argues for limits on foreign exchange accumulation
• Goldman's O'Neill says China & US in Yuan “grand bargain”

EQUITIES

• Morgan Stanley buys “cheap” China & South Korea stocks

DOMESTIC

• Electricity output slows in China to 15 month low on energy efficiency targets
• Gap commences online sales as China as shops open in Beijing and Shanghai

HONG KONG

• Hong Kong sets first minimum hourly wage of HK 28.00 ($3.61); which is expected to become law next year

IRON & STEEL

• China's steel output falls 3.8% in October to 50.3 million tons due to power restrictions
• Iron ore pricing changes cause smaller shipments for mills says Baosteel

"There is no news today"

Once upon a time when the BBC was only a radio station, dinner suited news-readers would often announce “there is no news today”. This is unfathomable today and, especially in a country of 1.3 billion – where there is always news; and today lots and lots of it.

Most important, too, is the larger-than-expected trade surplus of $27.1 billion for October and the second biggest this year. And although imports rose faster than exports (despite lower domestic demand for oil), these data are unlikely to win friends and influence people when the G20 meet begins tomorrow. Not so GE, however, which is set to invest a further $2 billion in China or British Prime Minister David Cameron who oversaw a $750 million deal between Rolls Royce and China Eastern on his trade mission to the PRC.

In part recompense, the Yuan hit its highest level (6.6405) against the US dollar since 1993; albeit that it will still be a talking point. Behind the scenes, too, the PBOC is reported to have ordered some lenders to increase their reserves ratios by 50 basis points from 15 November. Merrill Lynch says the Bank wants to lock up money flowing into China and the odds of another interest rate hike might now be lower. In a belt and braces moves the wonderfully named SAFE (State Administration of Foreign Exchange) is to introduce new rules to tighten the control of overseas cash inflows, which include forcing the banks to hold more foreign currency and strengthening auditing of overseas fund raising. The measures underscore concern around the World that the US Federal Reserve’s expanded monetary stimulus will cause capital to flood into emerging markets. In what may be a fit of pique, too, one of China’s three largest credit rating agencies, Dagong Global, has downgraded the US from AA to A+.

Turning to real estate, home prices in 70 cities climbed 8.6% in October (year-on-year) and 0.2% on the month. This compares with 9.1% and 0.5% respectively in September. Property investment in China in the first 10 months of the year was also ahead by 37% to a staggering Yuan 3.81 trillion ($577 billion). Developers shares fell early on by around 3.0% because higher interest rates and other controls introduced by the Government have yet to have an impact; ergo there will be more to come, some of it organised at local level. That said, my view is that it might be more sensible to wait longer until the early medicine has had its full effect.

Unsurprisingly, the Shanghai Composite was off today by 0.6%. Investors also have a weather eye on the Nation’s inflation data which are released tomorrow and the CPI could be at 4.0% - the highest in two years - or even 4.4% according to Merrill Lynch. The Government’s full year inflation target is 3.0%. Rapid rises in food prices are to be blame. The swaps market has already discounted higher interest rates (in fact, four hikes in the next 12 months).

On a brighter note, Chinese stock investors opened 449,905 accounts during the week ended 5 November, which is the most in a year. Plus all vehicle sales rose 25% to 1.54 million in October, year-on-year, and the Government is to insist of increased dividends from SOEs or State-owned Enterprises. Last year the Government collected Yuan 98.9 billion ($15 billion) in this way and collecting even more of it from this source will make funding of the new five year plan so much easier.

Finally, I return to Anthony Bolton the master investor who is now directing Fidelity’s investments in China – and from early April to 9 November, his fund returned 27%. And with his apologies to Mark Twain, Bolton also said: “history never repeats itself, but it sometimes rhymes”.

Shanghai Composite:
Today: -0.63% to 3,115.36 at close
This week: -0.5%
Since 5 July: +31.8%
YTD: -4.9%

Hang Seng:
Today: -0.85% to 24,500.61 at close
This week: -1.5%
YTD: +12.0%

Oil futures: $86.93
Gold futures: $1401.30
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3780

HEADLINES

YUAN & EQUITIES

• Yuan rises to best level (6.6405) since 1993 as China allows gains ahead of G20
• Fidelity and Bolton defy China bears with 27% new fund return

BANKS, MONEY & BONDS

• China is reported to have ordered some banks to raise reserve ratio
• It will also tighten control on inflows of overseas funds
• The Nation should tax short term capital inflows, says PBOC advisor….and 2011’s monetary policy should be more prudent
• China’s Dagong lowers US credit rating on Fed monetary policy
• Convertible bonds leading market amid gains in Yuan and shares, says China Credit
• Swaps point to rates rising four times in next 12 months
• PBOC raises one year bill yield for second time in three weeks
• Finance Ministry sells one year bonds at 2.15% yield
• World Bank says Asia may need capital controls

ECONOMY

• China's trade surplus in October jumps to a larger-the-expected $27.1 billion ahead of G20 leader summit
• China’s October crude oil imports decline from record in September to lowest level in 18 months

REAL ESTATE

• China's home prices slow to 8.6% in October
• RCM sees surge in public housebuilding in China; but fears bubble in Hong Kong
• China to allow local governments to control home price gains

DOMESTIC

• China’s October passenger-car sales rise 27% on incentives
• Made-in-China passenger vehicles prices fall 2.4% in October
• State-owned firms to be ordered to pay more dividends
• China plans national freeway and a high speed rail network
• UK PM Cameron secures trade deals with China
• GE to invest $2 billion in China
• Timberland to at least double stores in China to more than 200
• Miramar to Spend $39 Million on China expansion

HONG KONG

• Hong Kong office sells for record $3,300 per square foot, reports Standard
• Hong Kong sales of homes worth $2.6 million or more soar 86% in seven months to end-October
• Can’t buy a house in China, therefore go to Hong Kong

Sunflower Seeds

Carpeted with a million hand-painted, porcelain, sunflower seeds is how the Turbine Hall in London’s Tate Modern looks right now. ‘Sunflower Seeds’ (sic), as the work is known, is the creation of China’s most renowned modern artist Ai Weiwei (who also helped create the Bird’s Next Stadium at the 2008 Olympics). Each seed, too, has been individually crafted and hand-fired in Jingdezhen, a town which once made porcelain for the imperial court and has now been saved from bankruptcy by this project.

“Sunflower Seeds refers to everyday life, to hunger (the seeds were a reliable staple during the Cultural Revolution), to collective work and to an enduring Chinese industry. But it is also symbolic……a lesson in Chinese history and western modernisation, and the price individuals in China pay for that” wrote Adrian Searle of The Guardian.

On Friday Ai Weiwei began three days of house arrest apparently on the orders of senior officials in Shanghai who were attempting to prevent him from hosting a reception in the City. That is, Ai was planning a “demolition party” for the public at his Shanghai studio to “celebrate” a government decision to demolish the building, which it says does not have the proper permits. Ai only built the expensive studio at this location on the invitation of the Shanghai government. He believes the decision to condemn it is retaliation by local authorities for his vociferous political activism. Ai told the FT that “the Chinese government is arrogant and incapable of dealing with fundamental issues of human rights”.

This incident and the continued imprisonment of dissident and Nobel Peace Prize winner Liu Xiaobo remind us that, while economic progress is rampant, the social side is still playing catch-up.

As we speak, too, the ink is drying on the PRC’s 12th five year plan and it is, apparently more socially aware than before and, in particular, intends to focus on consumption and income equality. Similarly, there are recommendations to raise the percentage share of GDP which goes to workers, while Boston Consulting points to a near tripling of middle class and affluent consumers over next 10 years. The State Council is also talking about a moderating level of GDP growth from 10 to 7%. Nonetheless, inflation and food prices in particular (restrictions are planned) remain a source of concern. Real estate, however, had a welcome fillip as CCBC spoke of what it describes as “formidable” foreign capital flows into China’s property market and developers are now at their best level, collectively, in seven months.

On a more macro plane, the Shanghai Composite continues to rise and is back to where it was in early April; it is also 34% up on early July and off less than 4% year-to-date. The Yuan has also eased for the first time in five days, but this has more to do with US dollar strength (and Yuan Forwards still point to +3.2% over 12 months). The G20 is to be held later this week (11-12 November) and already the kibosh has been put on Tim Geithner’s idea of adopting current account targets as a proportion of GDP. Similarly, Hu’s charm offensive in Europe continues and he and Sarkozy have called for the G20 to avoid currency confrontations. The Chinese President has also been nice to Portugal and said that China is “available” to support its economic recovery plans . At the same time, the UK is launching its largest ever trade delegation to China led by none other than PM Cameron. Finally, the IMF’s executive board has approved a plan which would make China the third strongest voice in the Fund.

“Reform is China's second revolution” - Deng Xiaoping

Shanghai Composite:
Today: +0.96% to 3,159.51 at close
(best since 14 April)
Last week: +5.1%
Since 5 July: +33.7%
YTD: -3.6%

Hang Seng:
Today: +0.35% to 24,964.37 at close
(best since 22 May 2008)
Last week: +7.7%
YTD: +14.1%

Oil futures: $86.31
(having nudged two year highs)
Gold futures: $1389.70
(new ‘immediate delivery’ high of $1398.60 on 8 November)
Euro/$ spot: 1.3928

HEADLINES

EQUITIES, YUAN & BONDS

• Shares at seven month high
• China is the World's largest market for commodities futures
  Yuan falls for first time in five days on US dollar strength; albeit Forwards still point to +3.2% over 12 months
• Sinochem bond yields are very close to Dow Chemical
• Mobius and Citigroup see record emerging market stock rally
• China banks have a “huge” fundraising requirement over next few years

ECONOMY

• New five year plan is et to make consumption and income inequality key priorities
• China's growth to slow to 7% in next three-to-five years, says State Council
• Inflation rate may exceed 3% this quarter and reach 4% in 2011, say Government economists
• Plans to stop rising food prices
• Zhou says China’s capital controls can block abnormal inflows
• China should raise worker earnings as percentage of GDP
• Middle class and affluent Chinese consumers may near triple in a decade

INTERNATIONAL

• G20 conflict risk eases as US says that Geithner's proposed current account targets are unrealistic
• Hu and Sarkozy say G20 should avoid currency confrontations
• China is “available” to support Portugal through it financial crisis, says Hu
• Prime Minister leads largest ever UK trade delegation to China
• Consider a role for gold in overhaul of Bretton Woods, says World Bank President in the FT
• IMF proposes China to be its third strongest voice
• Geithner says India sets example with a flexible exchange rate
• Chinese are interested in Metro-Goldwyn-Mayer

REAL ESTATE

• China must create capital raising channels for real estate, says CCBC Chairman;
  as “formidable” foreign capital flows into domestic real estate
• New home prices in Shanghai fall 5% in week ended 7 November, says UWin
• KWG and R&F to buy stake in Shanghai mixed-use development for $353.5 million

DOMESTIC

• High speed rail link questions and review
• China is to limit marine pollution in new five year plan
• China forecasts snowstorms in Northern Provinces as temperature set to plunge

IRON & STEEL

• China may invest Yuan 30 billion to explore mining resources, says Xinhua
• Sundance hires Citic to secure Chinese funding for West Africa iron ore mine
• Taiwan’s China Steel Corporation plans to buy iron ore resources and coal mines to reduce reliance on suppliers
• Zanaga Iron Ore has attracted all the shareholders it needs for $100 million IPO on AIM in London
  

Style français

Chateaux Lafite Rothschild wines were served at the Elysee Palace in Paris last night as President Hu was feted by President Sarkozy; but not just any old ones. For example, top of the bill was a 1942 CLR to celebrate the year of Hu’s birth. This was followed by wines from: 1949 to mark the establishment of the PRC; 1964 to commemorate Charles de Gaulle’s decision to recognise the Chinese communist regime; 1978 for the start of China’s economic reforms; 2002 for Hu’s ascension to power; and 2008 for the Beijing Olympic games. No one was left standing.

Earlier in the day Hu, who is on a three day visit, and Sarkozy sealed Euro 16 billion ($22.7 billion) of contracts benefiting Airbus, Areva, Total and Alcatel-Lucent. The Chinese leader also said he wanted to double trade between China and France to $80 billion by 2015.

This impeccably tasteful/sharply commercial tandem is typically French. It also serves to underline China’s rising global pre-eminence and its rising importance as a buyer/consumer. The latter, combined with $600 million of US Fed buying of Treasuries, has pushed the Shanghai Composite to its sixth weekly consecutive gain and to a level 32% up on early July. Similarly, the deficit for the year-to-date now is just 4.5%. The logic is that the Fed will stoke global growth and global demand for commodities (see oil futures below). Hong Kong has proved no slouch either and is now at its best level since May 2008; and 14% up year-to-date.

The World Bank also jumped on the band-wagon this week with raised GDP forecast for China from 9.5 to 10.0% this year and 8.5 to 8.7% next. It also said interest rates would have to go up; as did Standard Chartered Bank (with the key one-year lending rate rising from 5.56% to 5.81% before year-end). Not that this worries, Templeton guru, Mark Mobius who is “very bullish” on China which he says has “no big problems”. Goldman Sachs is also positive and, in Hong Kong, is looking for the market to rise by a further 16% (half of it by 31 December).

In other news, the sabre-rattling continues ahead of next week’s G20 Summit and the smart money says that Tim Geithner’s proposal to limit current account deficits to 4% of GDP has a snowball’s chance in hell. The Yuan has also had its first weekly gain (+0.11%) in three weeks as it girds its loins for the inevitable flow of inward capital (Yuan Forwards are pointing to +3.5% over 12 months). International trade transactions settled in Yuan also more than doubled in Q3 and China has, this week, commenced trading Yuan-denominated credit-default swaps but with tighter regulations than most other places.

Meantime, in real estate the market remains very buoyant and luxury home sales in Shanghai rose 82% in September (which is the highest monthly gain in five years); albeit the clouds of property tightening/tax continue to gather. More specifically, developers can now only borrow up to 50% of a project's value and additional rules have been applied to second home purchases. The smart money, again, says the property market can take this in its stride.

“Wait until it is night before saying that it has been a fine day” - French Proverb

Shanghai Composite:
Today: +1.38% to 3,129.50 at close
(best since 16 April)
This week: +5.1%
Since 5 July: +32.4%
YTD: -4.5%

Hang Seng:
Today: +1.39% to 23,876.82 at close
(best since 22 May 2008)
This week: +7.7%
YTD: +13.7%

Oil futures: $87.64
Gold futures: $1382.90
(new ‘immediate delivery’ high of $1394.40 on 5 November)
Euro/$ spot: 1.4120

EQUITIES & ECONOMY

• Stocks record sixth weekly gain
• Mobius is bullish and likes China
• Hu and Sarkozy sign Euro 22.7 billion worth of deals for Airbus and others domestic companies
• Geithner's 4% solution may Be “unworkable” as APEC gathers
• World Bank says China needs to raise rates further as increases GDP forecasts
• China's non-manufacturing Purchasing Managers Index falls from 61.7 to 60.5 in October
• PBOC estimates a 2010 annual inflation at about 3% but pressures remain
• ChiNext Stock Exchange tightens the rules for managers selling shares to prevent flood of seller

YUAN

• Yuan is set for weekly rise on speculation of more foreign pressure
• Yuan settlements jump 160% in Q3 as Nokia and Metro turn away from US dollars

BANKING ETC

• China says US Fed Reserve must explain bond buying or endanger recovery
• China begin Yuan-denominated credit default swaps: but rejects “naked swimming”
• Capital adequacy ratios rise at Chinese banks in Q3
• China is reported to be seeking changes in the way local government loans and made and managed

BONDS

• PBOC sells three year Government bonds at 2.68% yield
• PBOC sells three month bills at unchanged 1.7726% yield

REAL ESTATE

• Shanghai luxury home sales volumes rises in September by most (82%) in five years
• Shanghai will crack down on illegal new home presale practices, says Daily
• China property tax may lead to a 20% decline in house prices, says Citic
• China may introduce more property tightening steps in Q4, says Nomura
• Walt Disney signs JV with China's Shanghai Shendi Group to build new park
• Developer loans to be limited to 50% of project value, says Securities Times
• China to require a 50% down payment for second home for those using housing funds
• China Vanke's sales in October more than double from a year earlier to $2.33 billion
• Poly Real Estate’s contracted home sales were Yuan 8.9 billion in October

DOMESTIC

• Communist Party says Nobel Peace Prize award to Liu is a “political tool”

HONG KONG & TAIWAN

• Stocks hits highest level since May 2008 and has its best week for some 18 months
• Hang Lung Properties falls after placement
• Taiwan Dollar jumps most in almost 10 years on Fed easing

Plane and core

Boeing, the World’s largest aerospace company, raised its forecast for commercial aircraft demand over the next 20 years in China to $480 billion (from $400 billion a year ago). This translates to 4,330 new planes in the period, tripling the fleet as increases in personal wealth and urbanisation drive up demand for air travel. Apple, the World’s most valuable technology company, may triple revenue from China over two years as the maker of the iPhone expands its sales network in the Country and Chinese consumers become increasingly affluent, says Morgan Stanley. China may contribute more than $9 billion of sales to Apple in the year ending September 2012, compared with $2.9 billion in the last fiscal year. Last month, too, Apple started taking orders from customers in China via its website.

Both forecasts underline the inherent potency of the domestic economy and the ‘inevitability’ that it will become a vibrant demand-led one. Similarly, UBS is forecasting 9% GDP growth in 2011 and 2012.

After yesterday’s euphoria, though, equities had a wobble today, despite Citigroup looking for as much as a further 10% rise by year-end. This was due to concern on money supply and inflation, as the Government is reported to be shifting, subtly, from a “moderately loose” to “sound” policy. Similarly, the rate of growth is also expected to ease by 1-2% to 15-16% next year. It may also begin daily monitoring of bank loans, just as inflation looks set to hit 4% (for October) and maybe 5% in Q1 next year.

Cotton is also yet now another commodity to reach new record prices levels ($1.3176 per pound) and China’s coastal shipping rates, last week, jumped 26% from the previous week as cold weather spurred coal demand. Government bond yields and interest rate swaps both advanced, too, on the back of it whilst background noise came from Australia and India, which both hiked interest rates (first time in six months and sixth time this year respectively).

But the Yuan could be a leveller and President Hu, who was in Paris yesterday, reiterated China’s commitment to “fair and stable” exchange rate; and Yuan Forwards point to +3.6% over the next 12 months.

“He who would learn to fly one day must first learn to stand and walk and run and climb and dance; one cannot fly into flying” - Friedrich Nietzsche

Shanghai Composite:
Today: -0.28% to 3,045.43 at close
(best since 16 April)
This week: +2.2%
Since 5 July: +28.8%
YTD: -7.1%

Hang Seng:
Today: +0.08% to 23,671.42 at close
This week: +2.5%
YTD: +8.2%

Oil futures: $83.32
Gold futures: $1356.80
(new ‘immediate delivery’ high of $1388.10 on 14 October)
Euro/$ spot: 1.3953

HEADLINES

DEBT

• “Moderately loose” to “sound”: money supply growth target to be reduced from 17% to 15-16% next year, says China Business News
• China may ask banks for daily monitoring of loans, says China Business News
• China's US dollar borrowing costs fall on ratings expectations…..
  ……but Government bond yields rise and interest rate swaps advance on concern that inflation will quicken
• PBOC sells one year bills at 2.2913% which is unchanged after last week’s +20bp

YUAN

• Chinese President Hu reiterates Yuan reform commitment, says Le Figaro
• Yuan rises on speculation China will allow appreciation hand in hand with economic recovery
• Yuan Forwards point to +3.6% over 12 months

EQUITIES

• Citigroup bullish: further increase of up to 10% this year
• Shenyin & Wango plumps for stocks being range bound
• Kingsun say equity prices will be sustained by liquidity – but monetary policy is uncertain

GROWTH

• China’s share of global growth rises with average 7.8% per annum predicted for 2011-2020 (including 9% in 2011 and 2012), says UBS

DOMESTIC

• Guangzhou starts restricting car traffic for Asian Games, says Xinhua
• China to subsidise electric car battery development, says Business News

HONG KONG & TAIWAN

• HKMA buys Yuan assets to diversify reserves
• China draws Taiwan ever closer economically

Not Slim Pickens

Slim Pickens (aka Louis Burton Lindley Jr) was an American actor who epitomised the tough cowboy, but who is best remembered for his comic roles, notably in Dr Strangelove, 1941 and Blazing Saddles. Carlos Slim, on the other hand is the World’s richest man, estimated by Forbes to be worth $53.5 billion. He is also a Mexican-based telecommunications titan and something of an oracle.

He was speaking at an economic forum in New York at the weekend and advocated that China take steps to boost domestic demand rather than let the currency appreciate as a means of improving global trade. “Competitive devaluations won’t succeed and could spur inflation should commodity prices remain high. If China salaries get increased and people work less they will have more time and more money to spend. This domestic demand will also help other countries in the World”.

Slim also criticised the US for relying on Government spending rather than private investment. “In the new society you need competition, innovation, technology and flexibility and the private sector is who can manage that. The Government doesn’t have the flexibility”.

Rich food for thought and by way of desert we had two very positive PMIs today (Logistics Federation: 53.8 to 54.7 in October; and HSBC/Markit: 52.9 to 54.8) which showed Chinese manufacturing expanding at its fastest pace in six months. Then, the stock market added the cream with a rise of 2.5% to clear of the 3,000 mark once more. As if the data had been listening to Slim, too, while manufacturing was buoyant, a sub-index of export orders slipped by 0.2 (to 52.5); albeit a reading above 50 still indicates expansion. In the more worrying camp, however, input prices rose the sharpest of all 11 sub-indices by 4.6 points to 69.9.

Similarly, some commentators believe that CPI will have hit 4% in October, up from 3.6% in September. This may mean a further rise in interest rates before the year end. However, the consensus view is that the economy - and stock market - can take this in its stride together with an appreciating Yuan. For example, the NRDC has pencilled in 9.5% GDP growth next year and Goldman Sachs is forecasting a 27% rise in the CSI 300 Index next year to 4,300. Coca-Cola agrees and is likely to spend more than its allocated $2 billion in China in 2009-11. Similarly, Shanghai has just closed the World’s most visited Expo.

Finally, I will leave you with investment legend Anthony Bolton of Fidelity who is now based in Hong Kong and investing his firm’s cash in China. In a rare interview, he said “if I’m right about China - and like anything, predicting the future is a risk - I think it’s going to be the demand economy in Asia over the medium term. There is always pressure in this business and there is no automatic way to generate profit, but I didn’t want to be standing here in 10 years time thinking I could have done it”.

Shanghai Composite:
Today: +2.52% to 3,054.02 at close
(best since 16 April)
Last week: +0.1%
October: +12.2%
Since 5 July: +29.2%
YTD: -6.8%

Hang Seng:
Today: +2.41% to 23,652.90 at close
Last week: -1.8%
October: +3.3%
YTD: +8.1%

Oil futures: $81.88
Gold futures: $1362.60
(new ‘immediate delivery’ high of $1388.10 on 14 October)
Euro/$ spot: 1.3968

HEADLINES

NEW DATA and MONEY

• Manufacturing accelerated in October, says PMIs
• Stocks start November brightly
• World’s richest man calls on China to boost domestic demand
• Anthony Bolton on investing in China: “the demand economy in Asia over the medium term”
• Chinese economy to growth 9.5% next year, says NRDC’s State Information Center
• China clamps down on speculation in agriculture futures as prices hit record highs
• China's 2010 foreign trade will rise 25% to around $2.8 Trillion, says Ministry of Commerce
• Inflation to hit 4% in October says researcher; thereafter views differ
• China should buy gold and oil to avoid US dollar losses, says China Construction Bank
• CIC’s Zhou says that the US should spend much more on its own infrastructure

INTERNATIONAL

• Obama to meet Hu one-on-one on 11 November at G20
• China can agree with US on trade imbalance and move forward, says PBOC adviser
• Efforts are made by the US and Japan to calm tensions with China over territorial disputes ahead of G20
• EU says China needs to look to its global responsibility

REAL ESTATE

• Vanke’s property sales may exceed Yuan 100 billion this year with 58% rise
• Second homes loans to attract maximum floating rate

DOMESTIC

• China's investment in power is estimated that it will fall slightly this year to $99 billion
• China to cut taxes next year to improve employment, says Finance Ministry
• Coca-Cola may increase China investment faster than expected; it has allocated $2 billion for 2009-11
• Shanghai's World Expo closes after bringing in record 72 million visitors

HONG KONG

• Hong Kong currency peg to US dollar debate intensifies as Yuan deposits soar
• Hong Kong's mortgage approvals plunge 22% in September

IRON & STEEL

• Iron ore shipments to China rise 18% in September and growth will continue says Pacific Basin
• Shipping costs dip after surge since the summer
• India seeks ban on iron ore exports as domestic demand rises
• Baoshan Iron & Steel dips in Q3 but forecasts highest annual profit in three years
• South Africa sees iron ore exports recover and, in turn, drive unexpected trade surplus