"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