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
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