....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