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