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