Mexican Stand-off

A Mexican Stand-off or MS is a stalemate/impasse i.e. a confrontation in which neither side is sure of winning and which is, thus, exceptionally dangerous for all parties involved. In the movies, an MS is usually portrayed as two opponents with guns drawn and ready but neither is willing to shoot for fear of being shot in return; yet neither one is prepared to relinquish his weapon for fear that his opponent will shoot him.

On the Korean Peninsula we have a KS or Korean Stand-off. On 23 November, North Korea attacked the island fishing community and military outpost of Yeonpyeong. This was the first shelling of South Korean soil since the 1950-53 war and it left four dead. Today, South Korea proceeded with a live firing drill – the threat of which has prompted North Korean to threaten retaliation; the latter said this “would make it impossible to prevent the situation on the Korean Peninsula from exploding”. Nor could an emergency session of the UN Security Council ease tensions i.e. it ended last night without agreement as China blocked moves to condemn the North and Russia urged the drills be scrapped.

Amid such waves of bellicosity, I admire the buoyancy of RBC Investment Asia, which said: “there’s also a slight concern on escalating tensions in the Korean Peninsula, though it’s unlikely to develop into a major skirmish”. The Shanghai Composite, however, was off 1.4% today (albeit above its worst).

In other news, you will be comforted to know that the Governor of the PBOC, Zhou Xiaochuan, keeps a weather eye on the stock market when determing economic policy..... The Nation will also have to learn to live with higher inflation (4 to 5% next year) if the State Council is taken at its word. Domestically, too, China has decided to reduce 658 drug prices by an average of 40%, it is reported. Elsewhere, Komatsu is selling many more excavators than expected in China with now a 25% forecast increase in Q4 sales versus an estimate of 15% in October. “Komatsu is less vulnerable to a shift to tightening policies as its operations are related to the area that needs spending” said Retela Crea Securities. “There’s no change in the trend that the Country will invest in construction projects and resources”. Similarly, Taiwan’s AU Optronics is to build a $3 billion LCD plant in China. Finally, I am also, palpably, encouraged by Shanghai Jin Jiang and its plans to build the World’s tallest hotel in Shanghai at 632 metres – and the World’s number two tower. There is life after war.

Internationally, China continues to throw money around like a man with no hands,as Premier Wen returns from Pakistan boasting his agreement to $25 billion of Chinese investment there. Similarly, Citic intends to build 10,000 housing units in Venezuela which will be funded by using some of the $20 billion loan which China made to the South American nation earlier; President Hugo Chavez also says that this loan is “renewable”. Meantime, in Greece, China Development Bank is opening a branch in the port of Piraeus, near Athens. The move is partly the result of a decision by the Chinese government to set up a $5 billion fund to facilitate purchases of Chinese-built ships by Greek owners.

“Creating an undesired stalemate is the height of stupidity” - Anon

Shanghai Composite:
Today: -1.41% to 2,852.92 at close
Last week: +1.9%
December: +1.2%
Since 5 July: +20.7%
YTD: -12.9%

Hang Seng:
Today: -0.33% to 22,639.08 at close
Last week: -1.9%
December: -1.6%
Since 25 May: +19.2%
YTD: +3.5%

Oil futures: $88.00
Gold futures: $1385.80
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3160

KOREA
• Stocks drop on tension in Korean Peninsula – shadowed by interest rate Concerns
• China says it is “deeply” worried about Korea

ECONOMY
• PBOC Governor says China is trying to consider economic policy impact on stock market
• 2011 inflation to be 4 to 5% (with peaks of 6%) says State Council
• US Ambassador Huntsman says it is in China’s interests to allow Yuan to appreciate

MONEY
• Derivatives rules increase risks in new market for swaps
• South Korea imposes levy on FX borrowings

REAL ESTATE
• Shanghai's Jin Jiang to build World's tallest hotel – and World’s number two tower

DOMESTIC/INTERNATIONAL
• Taiwan's AU Optronics to build $3 billion LCD plant in China
• Komatsu's quarterly sales of excavators in China surpass estimates
• Wen commits to $25 billion of investment in Pakistan
• Chinese fisherman dies with one missing after clash with South Korea patrol boat
• Russia pipeline to supply 15 million tons of oil per year to China
• China may reduce drug prices by an average of 40%

HONG KONG/TAIWAN
• Hong Kong stocks fall to two month low, with developers weak
• Mixed views on weekend existing home sales in Hong Kong, as prices weaken
• Taiwan may raise Chinese tourist daily limit to 4,000

IRON & STEEL
• ArcelorMittal raises bid for Baffinland by 14% to $485 million; and reduces acceptance level
• Nunavut says lower acceptance conditions in Baffinland bid battle are unfair

Poor's & Standard

The renowned credit rating agency could be mistaken for a description of social strata, with the “Standard” being the middle class and the “Poor’s” being, well, the poor; with the sole omission, in this mythical society, being an upper class. More accurately, too, in China, it might be better to call in “Poor’s & Standard” - such is the weighting to the former.

Nonetheless, in its day job, Standard & Poor’s likes China and it has raised the Nation’s credit rating to the fourth highest level. This comes on the back of record foreign currency holdings ($2.65 billion or around 3% of GDP) and the long term rating has risen from A+ to AA-; with A-1+ short term. Similarly, the outlook is stable. Ironically, the higher ratings may attract even more hot money which would make it harder for the Government to control inflation.

S&P also said that economic growth may average about 8% over the next five years and that China’s rating may be raised again if structural reforms lead to sustained economic growth and a hike in average income levels. Conversely, it could go the other way if growth/reform eases and/or the banks wobble.

We have also learned this week the ‘real’ reason why China has not yet raised interest rates (in the fight against inflation) i.e. PBOC Governor Zhou Xiaochuan said that it was due to the turbulence in the global economy. Now, why didn’t I think of that? Zhou also pledged more policy measures to control liquidity and inflation; and, perhaps most interesting of all, added that increased bank reserve requirements do not rule out interest rate rises.

Elsewhere China’s money market rates look like recording their biggest weekly gain since October 2007. The seven day repurchase rate, which measures lending costs between banks, rose 123 basis points 3.72% this week. Similarly, China’s banks are paying broadly twice the interest rate for Government funds now that they were in December last year 2010 - after increases in reserve requirements have led to a shortage of cash in the financial system and faster inflation damped deposit growth. For example, the PBOC charged a rate of 5.4% for Yuan 30 billion ($4.5 billion) of six month money this week, which compares with 2.35% in December 2009.

Meantime, share prices of real estate companies have moved the other way, and are now down 26% since 1 January, which is pretty much twice the fall in the Shanghai Composite. This means that despite robust trading, the bears - like James Chanos - are winning. He says, for example, that property in China is “a treadmill to hell” or "Dubai times 1,000”. However, Cushman & Wakefield say Chanos’s view is “a little extreme” and “the economy is growing, and has been growing, and the real estate market is increasing in value. The Government knows this and they are getting ahead of it”. Similarly, Citigroup adds that the Country’s plan to boost social welfare housing should be positive for real estate as the Government will want a “stable” property market. Tha Bank has also maintained its “bullish view”.

More broadly, Nomura says “for China, we are bullish, we are expecting 9.8% growth next year. Even though China is now the World’s second biggest economy, it’s still a low income economy with GDP per capita of about $4,500, which is similar to Japan in the mid-1970s. China is still very much in the sweet spot of economic development, still a lot of room to build out the central-west of China with investments. But we are particularly bullish on consumption”.

“One benefit of being poor is that it doesn't take much to improve the situation” - Anon

Shanghai Composite:
Today: -0.15% to 2,893.74 at close
This week: +1.9%
December: +2.6%
Since 5 July: +22.4%
YTD: -11.7%

Hang Seng:
Today: +0.20% to 22,714.85 at close
This week: -1.9%
December: -1.3%
YTD: +3.9%

Oil futures: $88.16
Gold futures: $1376.30
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3320

ECONOMY
• China's credit rating raised from A+ to AA- by Standard & Poor's with outlook stable; meantime, Hong Kong goes from AA+ to AAA

YUAN
• Yuan Forwards rated Asia's best 2011 bet by two leading banks - both Goldman Sachs and Nomura

RATES
• PBOC Governor Zhou indicates global turbulence as reason for delaying any move on interest rates
• Money market rates gains most since 2007
• Banks doubles Government rates
• Interest rates to rise six times in 2011, says Mizuho Research
• Halt to lending to companies buying fixed assets before 31/12

REAL ESTATE
• Chanos remains bearish on Chinese real estate, while others - including Cushman & Wakefield plus Citigroup - are positive
• Real Estate Sector’s share prices are off 26% this year to date
• Property tightening will remain in place, says China Vanke
• China may seek to prevent local governments from forcing people out of their homes to make way for new development
• China Tong Jian to build luxury hotel in Mozambique
• Shui on Land has sold Yuan 3 billion of three year notes at 6.875%

INTERNATIONAL
• Wen’s charm offensive in India and Pakistan continues
• China and India to account for half of World growth, says Nomura
• Cameroon gets $736 million Chinese loan for water supply

DOMESTIC
• China to cut 2011 energy consumption per unit of GDP by 3.5%
• McDonald's to open some 200 restaurants in China in 2011

HONG KONG
• Datang Renewable Power declines on Hong Kong debut as Huaneng Renewables cancels IPO
• Hong Kong to launch mortgage income pilot scheme for the elderly

IRON & STEEL
• China imports 26% more iron ore in November; prices to rise 7% in Q1 2011
• ArcelorMittal sees its bid for Baffinland superior to Nunavut’s increased offer
• Baffinland former CEO says Chinese bidder is interested

50,000 bicycles and one rabbit

50,000 public bicycles may be offered at 1,000 stations in Beijing as a means of easing the World’s worst traffic jams i.e. a global poll of more than 8,000 motorists conducted by IBM ranked the City as having the most “onerous” commute. Other ideas include building tunnels and zonal-congestion-charging in addition to journey-rationing based on licence plates. But, there is little respite on the horizon as, in the first week of December, Beijing saw more than 20,000 vehicles sold, which is double the number sold in the same week a year ago.

As always in China, the numbers defy comprehension. Secondly, the consumer is alive and well; okay - as we found out today - he is also worried about inflation (says a PBOC survey of 20,000). But the monetary authorities are clearly less apprehensive. This means they have not been bundled into an interest rate rise and this is supported by the yield curve where the difference in yields between China’s short and long term bonds has shrunk to the least since 2008. For example, China’s benchmark 10 year bonds currently yield 77 basis points more than two year bonds – and this shows a dip from 123 at the end of November. Meantime, rates on bonds due in 2012 increased 32 basis points this month.

JPMorgan said “the 10 year yield shows the Government is starting to win the inflation battle. Two year notes reflect strongly tighter liquidity in the market after multiple reserve ratio increases”. It also says that inflation will cool to 3.8% by the end of next year and that the gap between two and 10 year yields will narrow to 60 basis points. JPM added, too, that the PBOC will raise lenders’ reserve ratios by 1% by mid-2011 and interest rates by 50 basis points. Major banks currently have to set aside 18.5% of their deposits as reserves and smaller lenders 16%. Meantime, Citigroup said “while rate hikes will come, reserve-ratio hikes will remain the preferred tool to mop up excess liquidity. It is possible the yield curve will steepen a little over the next few months as typically the curve only goes very flat towards the end of a rate hike cycle”.

That said, China’s benchmark money market rate rose to a two year high today. This follows yesterday’s rise by the most since June 2008 due to tighter liquidity. The seven-day repurchase rate, which measures lending costs between banks, was up 29 basis points to 3.58%, following a 72 basis point hike yesterday. At the same time, one year interest rate-swaps based on the repurchase rate saw a three basis point move up to 3.12%. They have also gained 94 basis points since 19 October’s increase in borrowing costs; this is double the 46 basis point advance in 10 year yields.

And so it is a question of “when” not “if” and while the former remains the gift of the PBOC, interest rates, nonetheless, remain the elephant in the room. This is despite near term support from the Yuan where Non-deliverable Forwards saw their biggest fall (-0.13%) in a week today (albeit they continue to point to +2.4% over the next 12 months).

More broadly, too, the economic performance in China remains on steroids with FDI rising by a staggering 38% in November, on a year ago, to $9.7 billion. Similarly, an indicator of China’s economic outlook rose for a sixth month in October, climbing 0.9% to 152.1, according to the New York-based Conference Board.

Equities, however, remain moribund. What we could do with is an unqualified Rabbit out of the conical hat. In Chinese astrology, too, the Rabbit is well known for its ability to attract good fortune and be lucky; and many well known Chinese politicians and diplomats were born in the years of the Rabbit.

Shanghai Composite:
Today: -0.54% to 2,911.41 at close
This week: +2.5%
December: +3.2%
Since 5 July: +23.2%
YTD: -11.2%

Hang Seng:
Today: -1.95% to 22,975.35 at close
This week: -0.8%
December: -0.1%
YTD: +5.0%

Oil futures: $87.56
Gold futures: $1392.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3303

RATES
• Yield curve flattens as central bank exhibits no rush to raise interest rates
• Interest rate pause may reflect policy maker split, says Deutsche Bank's Ma Jun
• China is to extend increase in reserve ratio for some banks
• 2020 Government debt sold at 3.77%

YUAN
• Yuan Forwards drop most (-0.13%) in a week as US economic outlook pushes dollar up
• Forwards now point to 2.4% appreciation over 12 months from 6.6579 per US dollar

ECONOMY
• FDI rise 38% in November to $9.7 billion
• Conference Board sees China’s economic outlook improve further in November, for sixth month in a row
• Chinese consumers show the most concern with inflation since 1999

REAL ESTATE
• Beijing may introduce taxes and credit controls on housing

INTERNATIONAL
• Wen heads for a three day visit to India together with 400 business executives in tow
• US senators seek vote on anti-Yuan measures
• WTO rejects Chinese complaint against US anti-dumping tariffs on imported tyres or tires

DOMESTIC
• China aims to develop $10 billion software firms, says a Shanghai News report
• China’s smart grid spending to reach Yuan 2 trillion

HONG KONG
• Soaring Hong Kong rents prompt financial firms to shift

CLIMATE
• China was “very, very smart” in climate negotiations, says Orbeo

China's Secret

Victoria’s Secret is the World’s most glamorous lingerie shop and we all know how important its products are in terms of allure and foundation. By not raising interest rates last weekend, China’s Government must be confident about both.

On Saturday, November’s CPI number was released and - as widely leaked - it was 5.1%, the fastest in 28 months, and this included food at +11.7%. Similarly producer prices rose by 6.1% last month. On a happier note, industrial output moved up 13.3% and retail sales soared 18.7%; and, finally, urban fixed asset investment was ahead 24.9% in the first 11 months of 2010.

What didn’t happen, though, was the widely expected increase in interest rates. The prime reason for this was so to avoid attracting more hot money, which would simply add to the inflation rate. Perhaps, too, the authorities had one eye on the Yuan (on the one hand, appreciation will help inflation, but on the other it makes exports more expensive). On Friday, though, it did increase bank reserve requirements for the third time in five weeks.

Macquarie Securities said that “the Government knows quantitative measures like the reserve ratio work immediately and, consequently, are controllable and understandable. Raising interest rates creates much more uncertainty”. The reserve movement “clearly shows that the Government is more constrained in raising interest rates. The message seems to be that they don’t want to raise rates. Raising interest rates is difficult while raising the reserve ratio isn’t”.

“The reserve ratio and interest rates are tackling two different problems. If the Government thinks the biggest problem is credit growth it uses the reserve ratio because that will constrain bank lending and they don’t need to raise interest rates to change bank lending. If the biggest problem is asset market prices, then they will use interest rates. The way to affect the flow of deposits in and out of the banks is through interest rates. The stock market is down, the property market is not so hot and the release of bank deposit data from the central bank suggests there was a pickup in deposit growth in November. If we had seen a massive outflow of deposits they would probably have raised rates”.

Perhaps, too, the Government can see inflation abating in 2011. On Friday and over the weekend, the great and good were gathered for the Central Economic Work Conference, presided over by Messers Hu and Wen. No official release has been made but, again, there have been leaks. For example, it is likely that China has set the following targets for 2011: 8% GDP growth; 4% inflation; and 16% money supply expansion for next year. It may also set a target of at least Yuan 7 trillion ($1.1 trillion) for new bank loans for 2011. However, no final number has been set, it is also reported. Analysts’ estimates range from Yuan 6.5 to 7 trillion.

In 2010, the PBOC had a target of Yuan 7.5 trillion of new loans but this was virtually used up by the end of November (bar Yuan 50 billion). However, the total figure could be about Yuan 9 trillion, when off-balance sheet credits and short-term financing bills are converted into loans are included.

Nonetheless credit default swaps are a worry. For example, five year default swap contracts on China’s bonds have risen to 71.5 basis points, from a two year low of 52 basis points on 13 October, according to CMA. Similarly, RBS predicted this month that the swaps may trade as high as 150 basis points next year and recommended investors buy them as a hedge. “China is trying to cool things down and manage a deflation of the bubble. If that fails then that’s how CDSs get driven up, because concern will be that the sovereign balance sheet will have to bear the costs of restructuring banks”. Similarly, Citigroup added that “China’s golden era of low inflationary growth, underpinned by compliant domestic savers and enthusiastic external consumers, could well be at an end”.

Somewhat at odds, it seems, the stock market rose by 1.1% today, which the best one day gain since 25 November. A number of commentators, including CICC, are cautiously positive; and this, despite more sabre-rattling in the northern part of the Korean Peninsula.

“There are three secrets to managing: the first secret is have patience; the second is be patient; and the third most important one is patience” - Chuck Tanner

Shanghai Composite:
Today: +2.88% to 2,922.95 at close
Last week: no change
December: +3.6%
Since 5 July: +23.7%
YTD: -10.8%

Hang Seng:
Today: +0.67% to 23,317.61 at close
Last week: -0.7%
December: +1.4%
YTD: +6.6%

Oil futures: $88.89
Gold futures: $1391.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3245

NEW DATA FOR NOVEMBER
(year on year change unless noted)

- Saturday 11 December
Consumer prices +5.1% (+1.1% on month)
Food prices: +11.7%
Producer prices +6.1 %
Industrial output +13.3%
Urban fixed asset investment +24.9% (first 11 months of 2010)
Retail sales +18.7%

- Friday 10 December (business hours)
Exports +35% to $153.3 billion
Imports +38% to $130.4 billion (a new record)
Trade surplus $22.9 billion

-Friday (after hours)
New bank lending: Yuan 564 billion ($85 billion)*
M2 +19.5%
50 basis point increase in bank reserve requirement ratios to 18.5% (in most case; and effective from 20 December)
*total lending this year is now just Yuan 50 billion short of the Government’s target maximum of Yuan 7.5 trillion

ECONOMY

• Media reports say Government has the set the following targets for 2011:
  - 8% GDP growth;
  - 4% inflation;
  - 16% money supply expansion; and
  - no target set on new bank lending but maybe Yuan 7 trillion
• China pledges to change growth model in 2011
• Inflation tops 5%
• China risks a “rush” to tighten in 2011 after inflation spikes

RATES

• Interest rate speculation splits analysts
• China may delay raising rates, says RBS
• China is constrained in increasing rates, says Macquarie
• Credit default swaps in China climb the most among the BRICs

YUAN

• Yuan weakens as Europe debt crisis lead to US dollar strength
• China is said to be considering Yuan options trading by banks
• Yuan potential appreciation of 10% per annum is “still modest”

EQUITIES

• Stocks advance
• No interest rate rise is “positive” for stocks, says former Golden Bull Prize winner, He Zhen of Shanghai Huli
• Stocks will not see a “major correction” on data, says CICC; albeit an interest rate rise before year-end cannot be ruled out

INTERNATIONAL

• North Korea says the US and its allies are provoking an “all-out war”
• China and US military talks are making progress, says the Pentagon in Washington
• China's Sky-mobi and Bona Film posts record largest first day drop since 2007 in New York IPOs

DOMESTIC

• Power output in China gains at slowest rate in 16 months on restriction to industry

HONG KONG

• Hong Kong residential property prices may be entering a bubble, says JPMorgan; but prime CBD office rents to rise 24% next year

CLIMATE

• UN talks endorse $100 billion climate aid fund and forest protection programme

IRON & STEEL

• Baoshan Steel raises prices for the first time in three months
• Iron ore prices set to rise 7% in Q1 2011, says UOB
• Anglo is awarded permit for Minas Rio iron ore project
• BHP lobbied to block Rio and Chinalco transaction, is reported via WikiLeaks

Jigsaw

Mr Lin of Taipei had a bad day when he accidentally shredded $200,000 worth of Taiwan dollars ($US 6,645), according to Reuters. However, he was also lucky that a local forensic scientist pieced together the remains of 200 bills. “The “jigsaw expert”, Liu Hui-fen, is a 30 year veteran with the Justice Ministry's special investigations unit who also described the task as “difficult” and that it “required patience”.

As they gathered this morning for the so-called Central Economic Work Conference, President Hu, Premier Wen and their cohorts are faced with a “monetary jigsaw” and will need similar degrees of diligence and patience as shown by Liu above. But they have also been counting the pieces ahead of time. For example, tomorrow’s announcement of inflation data for November has been brought forward from next Monday. Furthermore, two newspapers, today, both said that the CPI will be a gut-busting 5.1%. This compares with a consensus forecast of 4.7% and October’s two-year peak of 4.4%. It must have been a leak (albeit a non-Wiki one).

Similarly, after hours today the PBOC released November’s new lending figures which were also ahead (13%) of forecast at Yuan 564 billion ($85 billion). The number also means that this year’s total lending is now just Yuan 50 billion short of the Government’s target maximum of Yuan 7.5 trillion.

Also after hours today, China told its banks that they will need to lodge more money with the PBOC (the third such request in five weeks) – as a means to counter inflation. The increase in the reserve requirement is 0.5% which takes the number to 18.5% for the biggest banks (excluding any additional non-promulgated moves). Market debate ensued, too, about the timing of this move and whether it might be a substitute for an interest rate hike – which most analysts believe will come tomorrow. The Yuan and swap rates agree, whilst equities shrugged it off and rose 1%.

In the broader economy, China reported a larger-than-forecast November trade surplus as exports reached a record. This, too, adds to the case for higher interest rates and an appreciating Yuan as steps to containing inflation. Exports rose 35% to $153.3 billion year-on-year and imports advanced 38% to an unprecedented $130.4 billion, leaving a $22.9 billion excess. The surplus was the fifth this year over $20 billion which have all added flammable cash to the inflation pyre. Nor will the US be best pleased but then as Bloomberg’s William Pesek has said, with holdings of US Treasuries of some $884 billion, isn’t China “America’s Banker”?

Two enlightened US academics (Alberto Alesina and Luigi Zingales) have, this week, also said that China’s surplus is due to its excessive saving, not to its undervalued currency. China saves some 54% of GDP versus an average of 33% among developing countries and 17% among OECD economies. What is more, most of this doesn’t come from household savings, but from the corporate sector, especially State-owned enterprises. Thus, “a redistribution of income would benefit the Chinese people and the world alike”.

More in the here and now, is the real estate market where, although price increases are slowing, volumes remain voluminous. In November, home prices in 70 cities climbed 7.7% from a year earlier (the slowest in 12 months) and increased 0.3% from October. However, sales volumes increased 14.5% from a year earlier (to 10.1 million square metres or 1.09 billion square feet – the most in 11 months); and month-on-month the rise was 9% in November from October. More broadly, too, China’s property investment rose 36.7% to Yuan 462.8 billion ($69 billion) in November from the same month a year earlier and, for the first 11 months of the year, the gain is 36.5% to Yuan 4.27 trillion.

“Beijing will be pleased that house price inflation is continuing to ease” said RBC. “But the pick-up in volumes suggest that conditions are still buoyant in the property sector and that more policy measures are required”. However, CLSA Asia said the month-on-month data “is more relevant and appears quite modest”, while China Real Estate Information added that “the Government is trying to control the home prices, but they certainly don’t want to see the death of developers”.

Elsewhere, China’s top diplomat, Dai Bingguo, met with Kim Jong-il in North Korea and talks were said to have ”reached important consensus”. No such luck in Oslo, where there was an empty chair at today’s Nobel Peace Award to Chinese dissident Liu Xiabo. This does China no favours and indelibly underlines the disparity between economic and social wealth. However, it is also significant that 19 from 64 countries are not attending the ceremony; and the Norwegian Institute of International Affairs said that this reflects China’s growing global influence as its economic power expands. Would you bet against it?

“If you’re good at anticipating the human mind...it leaves nothing to chance” – Jigsaw

Shanghai Composite:
Today: +1.07% to 2,841.04 at close
This week: no change
Since 5 July: +20.2%
YTD: -13.3%

Hang Seng:
Today: -0.04% to 23,162.91 at close
This week: -0.7%
YTD: +5.9%

Oil futures: $88.60
Gold futures: $1386.40
(new ‘immediate delivery’ high of $1431.25 on 6 December)
Euro/$ spot: 1.3239

ECONOMY

• November inflation rate maybe 5.1%, say two newspapers – ahead of tomorrow’s release
• China trade surplus exceeds estimates
• Surplus raises tension with the US

EQUITIES

• Stocks rise as export gain overshadows interest rates

MONEY

• Bank reserve requirement ratio raised for the third time in five weeks
• New lending of Yuan 564 billion in November leaves the total just Yuan 50 million short of the full year target
• Government sells Yuan 10 billion of 273 day bills at 2.8451%
• Yuan has weekly gain on bets interest rates will rise; Forwards point to +2.2% appreciation over 12 months
• China swap rates gain as trade data point to rate increases; but money market rates weaken as PBOC injects funds
• China credit “bubble” set for to burst, says Blackhorse

REAL ESTATE

• China property prices rise at a slower pace
• Homes “over-priced” by 30%

INTERNATIONAL

• North Korea’s Kim Jong Il meets Chinese diplomat and reaches “important consensus”
• China’s economic growth lifts ROW, says IMF
• Sinopec to buy Occidental’s Argentina Unit for $2.45 Billion
• Youku.com leaps 161% in best rise for a US IPO since Baidu some five years ago
• Russia’s VTB is the first company from emerging market, outside Asia, to issue a Yuan bond
• China to lend Sri Lanka $760 million for road development
• Absentees from Nobel Peace Prize ceremony underline China’s growing global influence

DOMESTIC

• China orders a freeze on 2011 thermal coal contract prices
• Crackdown yields 3000 cases of commercial infringement
• Bayer to double sales in China to $6.7 billion by 2015
• Agricultural growth may not be sustainable, says State Council
  

Shoes

“The market is waiting for the next shoe to drop” quipped Shanghai Kingsun IM this week. It may have to wait less time than it thought, though, because the Statistics Bureau has volunteered to work this Saturday and bring forward the promulgation of November’s economic data, including the widely anticipated inflation figure. Here a Bloomberg survey of 29 analysts puts November’s CPI at 4.7%, up from 4.4% in October - which itself was the most in two years. This admittedly sporty number, however, is not the shoe; and the real ‘Jimmy’ is interest rates. China has held off executing a series of interest rate increases, in part because it has sought to shelter exports. However, the China Securities Journal said in a front page article on Tuesday that the period around this weekend may be a “window” for China to raise interest rates (most probably by 0.25% immediately; and then a further 0.75% to end-2011). The one year lending rate is currently 5.56% while the one year deposit rate sits at 2.5%.

Nonetheless, money market rates have moved the other way and, on Tuesday morning, they fell by the most in three years i.e. the seven day repurchase rate, which measures lending costs between banks, fell 1.01% to 2.08% which is the steepest slide since December 2007. At the same time, the PBOC has injected a combined Yuan 166 billion into the financial system over the last three weeks through open-market operations. That said, Societe Generale observed that “from past patterns, the central bank usually adds cash to the market for a bit and then hikes interest rates”. It is also estimated that China’s banks advanced some Yuan 600 billion ($90 billion) of new loans in November and have, thus, already exceeded the Government’s target of Yuan 7.5 trillion for this year - with a month to go - according to the Shanghai Securities News.

Morgan Stanley Asia Chairman Stephen Roach said China’s inflation cycle is at a “critical point,” requiring “disciplined and comprehensive policies”. The Nation needs to convince the market that its shift to a “prudent” monetary policy “has teeth” by adopting tougher anti-inflationary measures.

Unsurprisingly, share prices in both Shanghai and Hong Kong drifted and dropped, respectively, with developers, in particular 'under the pump' as it was reported by (a busy) China Securities Journal that Shanghai will be among the first group of cities to undertake property tax trials sometime between the beginning of next year and the annual National People’s Congress meetings in March. This was also despite news that Shanghai Greenland will build the World’s third tallest building (606 metres) in Wuhan. Greenland is also growing so fast that, with expected revenue of Yuan 120 billion this year, it will begin to rival number one China Vanke.

The Yuan was also lower despite interest rate expectations, although it was given a push by the US dollar. In morning trade, the Yuan was down 0.19% at 6.6575, the lowest for almost two weeks. That said, Non-deliverable Forward contracts are still pointing to 2.4% appreciation over the next 12 months, while other commentators expect more than double that appreciation and underline the currency’s importance as a tool against inflation.

Elsewhere, straws in the wind include the Chinese Academy of Social Sciences (in its blue book) forecasting 10% GDP growth next year. Plus passenger car sales which rose to record in November of 1.28 million i.e. a 27% increase year-on-year (and 10.5% up on October, which was no slouch). With one eye, on the latter, too, the wonderful Jim O’Neill from, Goldman Sachs says that consumer spending in the BRICs (Brazil, Russia, India and China) may climb by more than $500 billion per annum and surpass US purchases in 15 years; and companies which sell to emerging market shoppers are some of the best investments “of our lifetime”.

Finally, Morgan Stanley says that Chinese companies which are dependent on economic growth may outperform the market next year as inflation will be “mild,” valuations are “cheap” and the outlook for earnings is “solid”. Investors should switch to so-called cyclical stocks, such as banks, developers, steelmakers and energy producers. It has a 2011 year-end target for the MSCI China Index at 94.5 (+40%) and that for the Hang Seng China Enterprise Index at 17,682 (+38%). But the last word must go to Shanghai - which has the smartest 15 year olds in the World according to an OECD test of 470,000 students in 65 countries.

“A lie can travel halfway around the world while the truth is still putting on its shoes” - Mark Twain

Shanghai Composite:
Today: -0.95% to 2,848.55 at close
This week: +0.2%
Since 5 July: +20.5%
YTD: -13.1%

Hang Seng:
Today: -1.43% to 23,092.52 at close
This week: -1.0%
YTD: +5.6%

Oil futures: $87.81
Gold futures: $1392.60
(new ‘immediate delivery’ high of $1431.25 on 6 December)
Euro/$ spot: 1.3195

DATA

• China brings forward November data release to Saturday the 11th of December (from 13th)

EQUITIES

• Stocks fall on interest rates and possible property tax
• Morgan Stanley looks for China’s cyclical stocks to drive 40% appreciation in two key indices
• China “see-saw” stocks signal that a false rally will falter, says Chart Partners
• Easier to de-list on ChiNext

ECONOMY

• GDP may grow 10% in 2011, says CASS

MONEY

• Yuan drops (to 6.6575) as US tax cuts bolster dollar and growth prospects; as Non-deliverable Forwards point to +2.4% over next 12 months
• Money market rates reduces by the most in three years on Tuesday as PBOC injects more cash
• Biggest bond slump since 2004 is not over
• One year bills sold at unchanged yield of 2.3437%
• China outstrips Federal Reserve in liquidity stakes and, thus, risking a 2011 inflation spike

REAL ESTATE

• Shanghai Greenland to develop World's third tallest building in the city of Wuhan

INTERNATIONAL

• BRIC consumer spending offers the investment of a lifetime, says O’Neill
• US teens lag as China soars on international test
• China purchases Japanese debt as Yen beats US dollar/Euro
• IPO of China Dangdang makes elegant debut and raises $272 Million in US – more than expected
• Clinton says China has a “special role” with North Korea
• US Senate may pass measure on China's Yuan

DOMESTIC

• Passenger car sales rise to record in November
• Tax to be levied on sulphur dioxide and sewage water
• Citigroup to triple its China outlets to 100 within three years
• Google's revenue in China is increasing on advertising demand

HONG KONG

• Stocks slump by the most this month, especially developers
• Domestic shares to do better than the mainland in H1 2011

IRON & STEEL

• Vale commences tradings its depository receipts in Hong Kong
  

....of timing (and plumbers)

“A wise man makes his own decisions, an ignorant man follows public opinion” is a Chinese proverb and, at this time, the PRC Government is marking its judgment by taking time to decide on what do next with interest rates. There maybe an inevitability ability about it – or there may not.

For example, today China’s benchmark money market rate dropped to a five day low after the PBOC, last week, added cash into the financial system for a third straight week. In total, it has injected a combined Yuan 166 billion ($25 billion) in the last three weeks through open-market operations, after taking out a combined Yuan 153.5 billion in the previous four weeks. Historically, it has also added more funds in December than in other months to complete its budget (Yuan 986.3 billion last year), which will increase finance companies’ cash holdings, according to China Merchants Bank “We’ll see an enormous increase in liquidity this month and the money market rate will decline to below 3%”; albeit a further hike in higher bank reserve requirements may follow.

Meantime, the seven day repurchase rate, which measures lending costs between banks, fell 24 basis points to 3.09% this morning, which took it to the lowest level since 29 November (last week it rose 60 basis points). Meantime, the one year interest-swap rate, the fixed cost needed to receive the floating seven-day repo rate, dropped nine basis points to 3.02%, the lowest level since 24 November. This followed a 27 basis point drop last week (the first decline since October) albeit the prior week’s closing level of 3.38% was the highest since August 2008. Watch this space.

The Yuan has also risen to its highest level in eight weeks (6.6528 in morning trade) on optimism about Europe’s problems and the Head of the PBOC Statistics Department says gradual and small gain will help inflation. Similarly, the NDRC says that December’s inflation will be below 5%; and, to help this along, the local council in Kunming has imposed temporary price ceilings on retailers

Elsewhere, stocks rose as Federal Reserve Chairman Ben Bernanke said he may continue the purchase of Treasury securities beyond the $600 billion announced last month. And Nomura, for one, is looking for China’s stocks to rise more than 20% in 2011 and it is bullish on industries including oil and gas, financial, property and consumer. However, to show that it takes two views to make a market, CICC says that an early interest rate increase would be good for stocks as it reduces the risk of policy over-tightening in the future, while Deutsche Bank sees 75 extra basis points in seven months and Mizuho expects the first one on 10 December.

Finally, tensions continue on the Korean Peninsula, while at the same time China is hoovering up South Korean Government bonds. China is also flexing its muscles in Cancun at the UN climate summit as its more local neighbour, Taiwan, booms.

“One does not allow the plumbers to decide the temperature, depth and timing of a bath” - Jack Gould

Shanghai Composite:
Today: +0.52% to 2,857.18 at close
Last week: -0.8%
Since 5 July: +20.9%
YTD: -12.8%

Hang Seng:
Today: -0.36% to 23,237.69 at close
Last week: +1.9%
YTD: +6.2%

Oil futures: $89.62
Gold futures: $1417.50
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3343

MONEY & RATES

• Money rate drops to five day low as PBOC injects cash
• China may raise interest rates by 75 basis points in seven months, says Deutsche Bank; Mizuho says 10 December
• PBOC advisor points to higher reserve requirements at banks
• Yuan climbs on optimism that Europe’s debt crisis is easing

INFLATION

• NDRC says December’s inflation will be below 5%
• PBOC official says gradual and small Yuan gains can help with controlling inflation
• Retailers face temporary price controls in the south western city of Kunming

INTERNATIONAL

• North Korea says tensions are at an “uncontrollable extreme phase” as South Korea continue with live-round multi-national military exercises
• Chinese “patriotic hackers” hit US government sites and Google, says NYT
• China buys more Korean bonds

HONG KONG & TAIWAN

• Hong Kong’s weekend sales of existing homes rise after sellers move to reduce their prices
• Buy Taiwan options as trade and tourism with China surge, says Morgan Stanley

CLIMATE

• China seeks climate compromise on “disastrous” debate to extend Kyoto

Cream cheese

“There are three rules that I live by: never get less than twelve hours sleep; never play cards with a guy who has the same first name as a city; and never get involved with a woman with a tattoo of a dagger on her body. Now you stick to that, and everything else is cream cheese”. So said the indomitable US basketball coach Bobby Finstock as he eschewed playing fast and loose.

The Chinese monetary authorities sleep well and heed sensible advice; they also know their semantics and what the opposite of “fast and loose” is. It should come as no surprise, then, that Xinhua News reports today that China will shift to a “prudent” monetary policy next year as the PBOC seeks to rein in liquidity, combat accelerating inflation and limit the risk of asset bubbles (it had previously described its stance as “moderately loose”). The Government “will (also) adopt proactive fiscal policies and prudent monetary policies” continues Xinhua referencing a meeting of the ruling Communist Party’s Politburo. Nonetheless, the latter is also reported as saying that China has a sound base for stable and fast growth next year even as difficulties and challenges remain. Here, Merrill Lynch has penciled in 9% GDP growth for next year.

The IMF also jumped on the band-wagon saying that China should raise interest rates further and impose a property tax to curb the risk of asset bubbles and a “disorderly fall” in home prices. Existing measures “at best only treat the symptoms of high residential real estate inflation and not the underlying structural causes”. Similarly, RBC says interest rate hikes are imminent, while Mizuho Securities adds that one may come today or next week at the Annual Economic Work Conference.

Elsewhere, Yuan Forwards also look set to have shown their largest weekly (+0.95%) gain in four and are pointing to +2.3% over the next 12 months from a spot of 6.6597 today.

More worrying, though, were two non-manufacturing PMI surveys which showed a nine month low (National Statistics/Federation of Logistics) and a two year low (HSBC) in October; with the former dropping from 60.5 to 53.2

In real estate, there was a push/pull of news flow with SouFun, the Nation’s largest real estate website owner, saying that home prices in 100 cities rose 0.8% in November despite higher interest rates for a full month (plus higher bank reserve requirements). What’s more, China Vanke, the number one developer, also became the first to hit Yuan 100 billion annual sales. This also meant that it had reached its 2014 target, four years early. It has done so too by targeting smaller cities, smaller units and cash buyers (total household deposits in China in September were Yuan 29.9 trillion or $4.5 trillion). Similarly, the IMF added that there is no sign of “a broad based and significant over-valuation” of residential property in China. Nonetheless, a sub-index of developers' share prices are off 27% this year in a stock market down 13%.

Finally, infrastructure spend marches on, as it must, with 25 new nuclear power plants being built (which is 50% of what it being built worldwide) – against 14 now. The Nation also plans to spend Yuan 2 trillion per annum on alternative energy and the like. Plus 16,000 kilometres of high speed passenger rail network races to a 2020 completion. This will give China as much track - even by 2012 - as the entire rest of the World. The very smart Jing Ulrich from JPMorgan adds, too, that this will alter “the landscape of consumer and property markets” in the same way that the bullet trains did in Japan in the 1970s and 1980s.

“Your dresses should be tight enough to show you're a woman and loose enough to show you're a lady” - Edith Head

Shanghai Composite:
Today: -0.04% to 2,842.43 at close
This week: -0.8%
Since 5 July: +20.2%
YTD: -13.3%

Hang Seng:
Today: -0.55% to 23,320.52 at close
This week: +1.9%
YTD: +6.6%

Oil futures: $87.79
Gold futures: $1393.60
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3154

EQUITIES & MONEY

• Stocks decline
• China is changing to a “prudent” monetary policy, says Xinhua
• Yuan Forwards set for largest weekly gain (+0.95%) for a month; and point to further 2.3% gain over 12
• China is “scared” of US monetary policy
• Bill yields too low compared with inflation
• Nation must raise deposit rates to 12 year in order to protect savers, says Andy Xie
• Channel savers cash away from bank deposits into stocks, says PBOC adviser
• China should consider increasing gold reserves to boost trade in the Yuan

ECONOMY

• Non-manufacturing PMI falls to nine month low

REAL ESTATE

• Home prices rise 0.8% in November
• China Vanke is first domestic developer to record Yuan 100 billion of annual sales
• Property stocks have fallen 27% this year
• IMF says China should use property tax and interest rates to avert bubbles
• Rail boom which will do for China what the bullet trains did for Japan; especially real estate
• Shanghai's housing rents and hotel rates fall by up to 50% after Expo

DOMESTIC

• China may ease limits on industrial energy usage
• Country is set for a nuclear boom
• Alternative energy boom

INTERNATIONAL

• China’s refusal to condemn North Korea at UN narrows US and allied options
• India to overtake China as World’s fastest growing major economy by 2015

CLIMATE

• China turns negotiating tables on US in stalled climate talks

30 Seconds to Mars

“TSTM” are well on the way to being ‘the next big thing’ in music and on an artic night in London they played a truly outstanding gig at the O2 Arena – the World’s most successful live venue. The name apparently comes from a Harvard University thesis which examines expediential growth of technology as it relates to humans and predicts that it will, one day, literally take thirty seconds to travel all the way to Mars.

Expediential can be both a compliment and a pejorative. For example: using what you have at hand to gain a result - advantageous; or taking what you can rather than doing what is right – self interest rather than principle.

China’s growth has been a bit of both, depending where you sit, and today’s two sets of PMI data show that it is continuing - as manufacturing hit its highest level for seven or eight months. There was, however, a little sting in the tail insofar as input prices rose to their highest level since June 2008 or 2004 depending on which survey your read (Logistics Federation or HSBC/Markit). Credit Suisse calls this “alarming”.

Others were more sanguine. For example, Nomura said that China is in “a solid growth phase” even as inflation concerns rise, while Citigroup said that while inflation, mainly driven by food and global commodity costs, is “a critical policy worry,” the economy is not overheating as it did in 2007-08. Similarly, the NDRC said yesterday that nationwide price controls are not needed yet.

That said, China’s benchmark money market rate advanced to the highest level in two years with the seven day repurchase rate, which measures lending costs between banks, rising five basis points to 3.355% (this compares with 3.420% on 10 October 2008).

Standard Chartered forecasts one more increase in interest rates this year and three in the first half of 2011; it also predicts that Chinese banks’ reserve requirement ratios will be boosted by 50 basis points as many as five times. Credit Agricole has also doubled its projections for the number of interest rates increases by mid-2011 to four. In fact, inflation may have accelerated to 4.8% in November, says CICC. It may also average 5.5% in 2011, up from an estimated 3.2% this year, adds Standard Chartered.

But Nomura (again) is looking through the inflationary haze – and says that it will begin to clear next year, allowing the Government to unwind measures intended to cool the economy. “CPI is likely to peak out soon, which damps the need for drastic monetary policy action. We expect the room for monetary easing will emerge in the latter half of 2011”. Both Morgan Stanley and RCM Capital Management also like equities, especially emerging ones.

“A visitor from Mars could easily pick out the civilized nations. They have the best implements of war” - Herbert Prochnow

Shanghai Composite:
Today: +0.12% to 2,823.45 at close
This week: -1.5%
In November: -5.3%
Since 5 July: +19.4%
YTD: -13.8%

Hang Seng:
Today: +1.05% to 23,249.80 at close
This week: +1.6%
In November: -0.4%
YTD: +6.3%

Oil futures: $85.31
Gold futures: $1392.80
(new ‘immediate delivery’ high of $1424.60 on 9 November)
Euro/$ spot: 1.3103

ECONOMY & MONEY

• China's manufacturing growth accelerates, according to PMI
• Money market rate rises to two year high
• Yuan little changed on overheating concerns and Europe’s debt crisis; Forwards point to +1.9%
• Five year bonds sold at 3.64%

EQUITIES

• Stocks rise on economy's resilience
• Nomura says China may ease policy as inflation cools
• Morgan Stanley targets a 19% rise in emerging market shares next year; but is worried about inflation
• Global stocks to rise 15% next year, says RCM Asset Management; likes China in 2011

KOREA

• China blocks UN security council action against North Korea
• Chinese State Councillor to visit North Korea today

DOMESTIC

• Acer says China will be the World's largest computer market within three years

HONG KONG

• China to increase the number of companies involved in cross border Yuan trade settlement, says HKMA
• China’s Yuan bond sale in Hong Kong is 10 times over-subscribed
• Sandy Hendry Shui On Land aims to sell PRC homes in Hong Kong buyers
• Hong Kong retail sales rise 21.6%