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