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