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