Death and taxes.....

.....are life’s only two guarantees. Fatalistic and sardonic? Yes. True? Also yes. There is a third sure thing in life, too, but propriety prevents from mentioning it here. In terms of who said it, there is something of a debate and the list includes Daniel Defoe (author of ‘Robinson Crusoe’ in 1719), Benjamin Franklin (1706-90) and Margaret Mitchell in ‘Gone With the Wind’ (1936).

In China, the real estate market is not dead; in fact it is in rude health (and was the World’s number one again last year with 34% of global transactions). But it is going to be taxed (finally) and the Government, from yesterday, has implemented a trial property levy on some houses in Shanghai and Chongqing. In the Capital, the charge will be 0.6% for all taxable residential properties (reduced to 0.4% for some cheaper units), while in Chongqing (the World’s largest City with some 32 million souls) only homes bought at more than twice the average price will be taxed (with units purchased at more than four times the average taxed at 1.2%). Property tax revenue, however, will be used to build more low income housing.

In fact it has been a busy week for real estate legislation as on Wednesday the Government announced that it will raise the minimum down-payment for second home purchases (from 50 to 60%) and ask local authorities to set price targets for new properties based on regional economic growth and disposable incomes. The Cabinet also asked local governments to boost land supply.

Reactions have been mixed, with developers shares prices up, down, up and then down again. Similarly, if you are Goldman Sachs you welcome it: “given the limited scope and moderate tax rate, we expect this new policy to have limited incremental impact on transaction volume and price”; and “the policy uncertainties are now substantially lowered”. Conversely, Credit Suisse’s view is that the sooner-than-expected implementation of the property tax trials will further weaken market sentiment and reduce transaction volume. Similarly, Housing Ministry officials have apparently told CS that more cities may implement the tax soon. Meantime, Citigroup called the measures “harsh”, while Deutsche was somewhere in the middle.

In my view it is good news for the plans to be both promulgated and implemented i.e. any policy over-hang is gone. The levy itself, too, is minimal – especially when compared with the China Business TV’s 4.0% story earlier this week. Similarly, as JLL has commented, Government policies are intended to prevent prices from rising too quickly rather than driving prices down. Finally, more supply of both land and units is good news all the way around. My only slight concern is just how the setting of prices by local authorities will work in practice.

In the broader market, the repo rate has increased 84 basis points this week to reach a very sporty 8.14% ahead of the New Year vacation (and at one stage was 8.30%). High School economics tells you that if demand for something is high, and supply constrained, then the price of that good or service will rise. For example, lending through 24 January is reported (by China Business News) to have reached Yuan 1.2 trillion ($182 billion) which compares with Yuan 481 billion for the whole month of December. Similarly, the Yuan (6.5852 this morning) continues to trade near a 17 year high and Yuan Forwards point to +2% over the next 12 months.

In the rarified air of Davos - and the World Economic Forum - there have been mixed-to-positive views so far. For example, the IMF has increased its forecast for World economic growth from 4.2 to 4.5% this year (the 4.5% for 2012 remains unchanged); okay it comes with a raft of health warnings. Also in Davos, Li Daokui, an academic advisor to the PBOC, said that he did not expect a “hard landing” in China and that growth will be about 9.5% this year.

Equities, meantime remain moribund (-2% YTD) but off their worst (+2.8%) for January, albeit Citic Securities says we are at a “valuation bottom” akin to that of 2008 (when the Shanghai Composite was 1700). That said, a Bloomberg poll of 1000 of its customers found that 45% of them expect a financial crisis within five years; and a majority (53%) think the Nation is in a bubble.

In defence of China and its - long term consumer - though, Apple’s four stores in China generate higher revenue than anywhere else (even Fifth Avenue) and Morgan Stanley says the Company will triple sales this year in China to $9.4 billion. In the same vein Prada is to launch a $10 billion IPO in Hong Kong on the back of luxury Chinese demand which is set to rise 20 to 25% over the next 10 years. Plus, McDonald’s (‘Hamburger’) University in China is harder to get into than Harvard.

And finally, plaudits go to Li Na, the first Chinese player to reach a Grand Slam tennis singles final, in Melbourne.

“Life is like a game of tennis; the player who serves well seldom loses” – Anon

Shanghai Composite:
Today: +0.13% to 2,752.75 at close
This week: +1.4%
Since 5 July: +16.5%
Since 8 Nov: -12.9%
December: -0.4%
2010: -14.3%
YTD: -2.0%

Hang Seng:
Today: -0.68% to 23,617.02 at close
This week: -1.1%
Since 25 May: +24.4%
Since 8 Nov: -5.4%
December: +0.1%
2010: +5.3%
YTD: +2.5%

Oil futures: $85.41
Gold futures: $1314.90
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3684

REAL ESTATE

• China approves property tax trials in Shanghai and Chongqing
• China increase down payments on second homes (up from 50 to 60%) and outlines plans to boost land supply and set new property price targets
• China is World number one on real estate transactions, for second year running, with $197 billion worth in 2010 and a 23% increase year-on-year
• Xinyuan to Seek private investors in absence of bank loans

MONEY

• Money market rates rise ahead of New Year vacation
• Yuan trades near 17 year high
• Domestic lending to real estate hit Yuan 2 trillion in 2010; plus Yuan 80 billion borrowed from foreign sources
• Bank rates rise up to 1.45 times the benchmark, says Securities Journal

EQUITIES & ECONOMY

• China will face crisis within five Years, say 45% of investors
• IMF's Zhu warns US and China in global imbalances
• Stocks are at a “valuation bottom”, says Citic Securities
• China will let foreign funds use index futures

DOMESTIC

• China's electricity demand growth may slow to 9% in 2011, says NEA Reduction in import taxes from 20 to 10% on personal computers and digital cameras
• Apple stores in China outsell all others including Fifth Avenue

INTERNATIONAL

• IMF raises global 2011 GDP estimates on stronger US growth
• South Korea proposes first talks, on 11 February, with North since the island shelling incident
• China is leading in the ‘green economy race’ says UN

HONG KONG

• Hong Kong is World's most expensive housing market
• Prada plans Hong Kong IPO on back of rising China luxury demand which will rise 20-25% over 10 years

IRON & STEEL

• Steel futures in Shanghai rise to new record level on price of iron ore
• China’s list steel prices may rise after the holidays, says CISA; as spot prices continue to rise daily
• China top 10 steelmakers increase market share in 2010
• Kumba has request for Sishen Mine rights rejected by the South African Government
• ArcelorMittal and Nunavut waive minimum yendor condition on bid for Baffinland
• Glencore is to target raising some $2.5 billion in Hong Kong and London IPO
• Zijin Mining may convert Glencore bonds into IPO stock

4 less 5 plus 3

The first “4.0%” is the amount proposed by the City of Shanghai as its property tax based on new homes comprising more than 60 square metres (646 square feet) per person. If true, this is way above preliminary estimates of 0.6 or 0.8%. Okay, we only have China Business News Television’s word for it; and any proposal will have to be approved by the Ministry of Finance. Nonetheless, a rational man would conclude that this is the direction it is going. Indeed, Shanghai’s Mayor, Han Zheng, is particularly hawkish: “high prices severely distorted the living function of homes”. The same goes for Premier Wen who said earlier this month that the Government will “resolutely” implement controls on the real estate market in Q1.

With the other hand, though, Mayor Han says his City will offer 5 million square metres of affordable housing (80,000 units) and a further 2 million square metres (40,000 units) of public rental residences. Jones Lang Lasalle said “the Mayor is reflecting the view of central government, which is to suppress demand and increase supply. It’s policies are intended to prevent prices from rising too quickly rather than driving prices down”.

The second numerical reference is actually “4.7%” (which is pretty much 5%). In any event, 4.7% is how far the Shanghai Composite has fallen in 2011 to date. And you know why i.e. something along the lines of speculation that further policy tightening will crimp demand for commodities - and smaller companies, in particular, will fall further because they are ‘overvalued’. Similarly, demand for prospective IPOs is said to be dwindling.

In reality, too, any of the money market rates supports the imminent realisation of an interest rate rise hat trick in China. In particular, the benchmark, six month deposit rate which commercial banks pay to borrow from the PBOC has increased by the most in three years from 5.4 to 5.9%. In addition, the repo rate (seven day repurchase rate) soared 2.85% today to a three year high of 7.65%. And, finally, the wonderfully named SHIBOR (Shanghai Interbank Offered Rate) was fixed 20 basis points higher today at 5.25%. Rational man (as above) sees this as sufficient evidence for the next fast ball to be bowled.

That said, the bond market tells us that it has confidence in China’s leaders - relative to the other BRICs (or BRIs) - to sustain the fastest economic growth in the group together with the slowest inflation. For example, 10 year Government of China bonds currently yield 4.01% versus 12.6% in Brazil, 5.91% in Russia and 8.18% in India.

The third number, actually “3.3%” and conveniently rounded down to 3%, is how much the Hang Seng has risen so far this year. Reputedly, this is driven by raw material suppliers, in particular, on optimism in Hong Kong that demand in China (and Europe) will continue to increase. Go figure!

In other news, China continues to (neo) 'colonise' - with the luxury of setting its own pace and choices - and ICBC has taken it first majority stake in a US based business (Bank of Asia’s American unit). Plus, CIC has opened its first international representative office (in Toronto, Canada). In the same vein, Citigroup says that “the Chinese have taken a page out of the Japanese playbook” by building a regional US manufacturing presence; and Hu’s trip last week has galavnised this strategy (which is also more important than what is said on Capitol Hill). Finally, over the last two years (and not many people know this) China has lent more money - i.e. $110 billion in total - to developing countries than the World Bank.

Closer to home, SOEs (State-owned Enterprises) saw net income rise collectively by 36% to Yuan 562.2 billion last year on revenue of Yuan 16.7 trillion (+32%); which also meant margins inched ahead to 3.4%.

Finally, the up-coming Chinese New Year vacation (from 2 February) is blurring economic clarity right now, just as the snow is impeding travel; although the Government is committed to keeping the first clear and the second totally functional.

“Only he that has travelled the road knows where the holes are deep” - Chinese proverb

Shanghai Composite:
Today: -0.68% to 2,677.43 at close
This week: -1.4%
Since 5 July: +13.3%
Since 8 Nov: -15.3%
December: -0.4%
2010: -14.3%
YTD: -4.7%

Hang Seng:
Today: -0.05% to 23,788.83 at close
This week: -0.3%
Since 25 May: +25.3%
Since 8 Nov: -4.7%
December: +0.1%
2010: +5.3%
YTD: +3.3%

Oil futures: $87.65
Gold futures: $1330.30
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3642

EQUITIES & BONDS

• China’s mutual funds boost share of equity holdings to near record high; which points to a further stock market decline
• Equity market falls will be limited, says CICC
• Aberdeen Asset Management likes China’s macro story, but prefers non-domestic stocks with businesses in China
• Chinese corporate bond sales have reached a new record in 2011, to date, of Yuan 100 billion; and may reach Yuan 1 trillion for year as a whole
• China's Government has the lowest 10 year yields among the BRIC nations; and there is optimism that the PBOC will win the battle of the fastest growth/lowest inflation

MONEY

• China's banks pay record deposit rate for Government cash; and the SHIBOR climbs
• Yuan continues to trade near a 17 year high (6.5808); its strength may help with controlling inflation
• PBOC halts bill sales for a second week

REAL ESTATE

• Shanghai plans a 4% property tax, its is reported by China Business News Television

INTERNATIONAL

• Hu's trip to the US may be precursor to Japanese-style investment push by China
• ICBC buys a majority stake in Bank of East Asia's US business; the first such majority stake ever
• CIC opens first foreign representative office in Toronto
• China has lend more to developing countries in past two years than World Bank
• China announces anti-dumping tax on X-ray scanners from European supppliers

DOMESTIC

• SOE’s net income rise 36% in 2010, as margins inch forward to 3.4% (vs 3.3%)
• Wenzhou suspends programme for individuals to invest internationally
• China pledges to keep road and rail links open as snow disrupts journeys home for New Year

HONG KONG

• New home sales may reach 26 month low, says Centaline

IRON & STEEL

• Steel price rise is forecast to rise by an average 32% this year, according to FT industry panel; with the bulls on twice that amount
• Global steel volumes to rise 6.2% this year, says FT panel; with China at 5.2%
• Iron ore stocks in China rise to a four-and-a-half year high on concerns about supplies
• Iron ore prices fall for first time in China this week since 30 December - to $185
• India may ban more iron ore exports
• India’s largest iron ore exporter, Sesa Goa, see net profit rise 29% in December quarter on higher prices
• Coking coal contract price may rise as much 78% after floods in Australia, says Merrill Lynch
  

Incense and incensed

“It is better to perform a kindness near home than to go far away and burn incense”, according to the Chinese proverb (and, okay, I may have para-phrased it a little). In any event, while Hu had them rocking in the aisles in America, it was not so funny back home. Most telling of all was a near 3% fall in the Shanghai Composite in the week (albeit saved a little by today’s +1.4%); and the Index remains mired at the levels of early October. No prizes for guessing why, though. Yes, it all comes down to interest rates and the perceived need for them to rise to restrain inflation.

CPI data along with a slew of other figures were released on Thursday – albeit there were leaks on Wednesday (something which is becoming increasingly common). In any event the number was 4.6% for December. Thankfully down on November’s 5.1% but believed also to be a temporary respite. Note, too, that producer prices were up 5.9% in December, too, with retail sales ahead by almost one fifth (19.1%). It is also reported (21st Century Business Herald) that local currency lending has already exceeded Yuan 1 trillion. In December, lending was Yuan 481 billion.

Deutsche Bank, JPMorgan and UBS are forecasting GDP growth of 9.2 to 9.6% this year with inflation at 4.4 to 4.6%. The official target is 4.0%. Most commentators also expect interest rates to go up again, most likely after the Chinese New Year holiday (which begins 2 February). Similarly, the seven day repurchase (repo) rate, which tracks inter-bank money availability, has risen a staggering 4.7% during this week to 7.3% (having touched 8.8%).

There are contrarians, of course, and Carl Weinberg, of High Frequency Economics is one. He believes that China remains on track and his prime reason for this is 30 years of GDP growth of 9.75% per annum and annual average inflation of 4.5%. Exactly where we are now and “on track for continued growth”. Nor does he subscribe to the ‘food price inflation scare’. This is not ‘inflation’ it is simply price increases due to shortages, particularly of perishable goods. It can be cured by agricultural policy, but not interest rates. Ex-food, too, Weinberg reminds us that inflation is 2.1%. Finally, he is not hawkish on interest rates, which he says have little impact. Instead, he supports the policy of raising banks’ reserve requirements which is the most effective way to rein in lending. We will have more of these, he said, and not more increases in interest rates. Fidelity’s Anthony Bolton also remains positive on Chinese equities (which looks increasingly brave).

Also, on a positive note, is FDI which rose to a record level of $105.7 billion in 2010 – a 17.4% increase (and this included a 15.6% rise in December to $14 billion). Rural incomes are also rising at their fastest pace since 1984: +10.9% in 2010 to (a still paltry though) $898. More generally, too, South Korea has accepted an invitation to speak with North Korea in the first contact since the latter shelled one of the former’s islands, killing four people.

Turning to real estate, Goldman Sachs and the very successful China Asset Management (the Nation’s largest mutual fund) have both moved “overweight” in property shares. And, what do you know, the real estate sub-Index of the Shanghai Composite was up 4.7% today. It is also the best performer (+4.3%) of the market’s five industry groups this year (albeit 2010 saw a deficit of 28%). Not to be outdone, the Duke of Westminster (the 45th wealthiest man in the World) is planning to raise a $275 million fund to invest exclusively in Chinese property.

Little will be conclusive, in my view, ahead of the New Year and (as I said earlier), while it is increasingly brave to be a bull – Weinberg and Bolton are no mugs. Nor is Rudyard Kipling, who counselled “keep your head when all about you are losing theirs”.

Shanghai Composite:
Today: +1.41% to 2,715.29 at close
This week: -2.7%
December: -0.4%
2010: -14.3%
Since 5 July: +14.9%
Since 8 Nov: -14.1%
YTD: -3.3%

Hang Seng:
Today: -0.53% to 23,876.86 at close
This week: -1.7%
December: +0.1%
2010: +5.3%
Since 25 May: +25.8%
Since 8 Nov: -4.4%
YTD: +3.7%

Oil futures: $90.07
Gold futures: $1343.20
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3527

SCORES ON THE DOOR

• GDP growth in Q4 = 9.8% (which compares with 9.6% in Q3)
• Annual GDP growth in 2010 = 10.3% (fastest in three year; 2009 was 9.2%)
• CPI in December = 4.6% (down 5.1% in November)
• Annual CPI in 2010 = 3.3% (versus Government target of 3.0%)
• Urban fixed asset investment rose 24.5% in 2010
• Retail sales in December grew at an annual 19.1%
• Industrial production in December rose 13.5%
• Producer prices in December jumped 5.9%
• FDI in 2010 rose 17.4% to record $105.7 billion
• FDI in December rose 15.6% to $14 billion
• Outbound investment by non-financial companies in 2010 +26.3% to $59 billion

ECONOMY (other)

• GDP growth accelerates to 9.8% in Q4 with December inflation at 4.6%
• December’s electricity generation rises at slowest rate in almost 18 months
• FDI rise to a record level in 2010
• Outbound M&A from China to rise 50% in 2011, says PwC
• China’s rural incomes are rising at the fastest rate since 1984

EQUITIES

• China is on track and performing in line with its 30 year averages, says High Frequency Economics
• Fidelity’s Bolton wagers on a rally in Chinese equities
• Shanghai Composite falls below 200 moving average, says BGC
• Share dealing accounts rise 31% in week ending 14 January

MONEY

• Money rate is at its highest since 2007
• Yuan eases today to 6.5873 from this Wednesday’s near 17 year high
• China’s 2010 budget deficit was 1.6% of GDP
• PRC banks will be constrained from buying bonds
• China limits loans from four Banks in Q1, says Caixin
• China may allow offshore Yuan to be used for direct domestic investment

REAL ESTATE

• China’s real estate stocks increased to “overweight” by Goldman Sachs
• China Asset Management is buying property stocks
• Shanghai Forte's share price soars on Fosun bid
• Shanghai property market is headed for a “correction” says the local office of the PBOC
• Tax of up to 0.8%
• Shanghai targets supply of 80,000 social housing units
• Duke of Westminster and Grosvenor Group seek to invest $270 million in Chinese real estate

HONG KONG

• Home completions hit a four year peak
• Residential rents are also rising faster than in London: +15% in 2010 with +13% forecast this year

IRON & STEEL

• China’s steel production roses 9.3% in 2010 to a new record level; as UBS forecasts a further 5.3% in 2011
• Spot iron prices in China rise 43% in 2010
• Iron ore may hit $250, says Credit Suisse
• BHP Billiton’s iron ore production rises 4% to a new record level in Q2
• Rio Tinto see record iron ore shipments in Q4
• Kumba sees record share price as profits set to double
• Baffinland recommends acceptance of ArcelorMittal and Nunavut and their joint bid
• BC Iron Ltd’s shares rise after Regent Pacific Group bid
• Citic Pacific delays iron ore shipment from Australian project
• India targets iron ore in Afghanistan
• Dry bulk shipping falls to two year low

Hu done it

If it was a boxing match, China’s first full state visit to the US since 1997 would be a win on points; and clearly this comes down to Hu Jintao. Okay, there were hiccups, such as his claim that certain questions (on human rights) had been ‘lost in translation’. But Hu also showed that he has a sense of humour, which is more than can be said for three or four members of Congress. Not only did a number of them eschew social events with the Chinese President, they also launched extraordinarily vitriolic verbal attacks from the Congress pulpit. The should realise, however, the veracity of a quip by Kevin Rudd, former Aussie PM. He said Hu is America’s bank manager, because the PRC is the largest holder of US Treasury stock (a short $900 billion at the last count).

For his part, Obama was more polite although he did go ‘yuan’ about the currency. Much was also made of some $45 billion of US export deals, including $19 billion for Boeing. These are real but a number had already been signed and their incidence had little or nothing to do with Hu’s visit. The smart companies, such as GM and GE, just get on with it. China also reminded the US that it more than doubled its investment there last year to $4.9 billion. But this is relatively small and accounts for less than 10% of US FDI, according to Rhodium Group. However, it also said that “in the years ahead these numbers are going to turn heads”. In addition, Commerce Minister Chen said that Hu’s visit will lead to an extra $3.5 billion of Chinese investment in the US.

It is also interesting that China has chosen to air a 60 second promotional advert in Times Square and on TV in the US. It seeks to present a more positive image of the Nation and its people. It will be shown in Europe, Latin America and the Middle East later.

I also liked Charles Freeman’s quip. He is a specialist in China studies at the Washington-based Center for Strategic and International Studies: “jobs equals trade equals China”. Similarly, David Cote, the CEO of Honeywell had this to say: “you always get this question: are they a partner; are they a competitor; are they a customer; are they a supplier? And of course the answer is ‘yes’. You need kind of a nuanced, broad based, thoughtful approach to our relationship with them, and I’m very hopeful that this visit took one more step to having that broader, more nuanced relationship”.

But the final word goes to Coca-Cola’s CEO Muhtar Kent who when offering a toast to Hu at the first State dinner, using the Japanese “kampai” instead of the Chinese “ganbei”. Unlike Queen Victoria, though, Hu was amused.

Headlines

• Obama and Hu focus on their Nation's commercial relationship in Washington
• Minister of Commerce says US trade deficit with China is not caused by the Yuan
• Geithner says stronger Yuan will remove “unfair” advantage in trade
• Members of Congress use Hu’s visit to push for action over China competition
• Hu is “fully confident' about the future of US and China’s relationship
• China doubled US investment to $4.9 billion in 2010
• Promotional advert on the Nation launced by China in Times Square and on TV in the US

Game reserve

The elephant in the room was identified some time ago and the Chinese have commissioned a veritable arsenal to floor ‘Jumbo Inflation’. This included, after hours on Friday, the seventh increase in bank reserves requirements since October. This one was a further 50 basis points which will raise the ratio for the large banks to at least 19%. I say ‘at least’ because it is reported that there have been a number of private PBOC edicts delivered individually to some of China’s big banks. Taking it at face value, though, this means that if a large bank is to lend Yuan 100 it must hold Yuan 19 in its coffers. Axiomatically, this will crimp the volume of loans and, thus, spending and, thus, inflation. So I am told.

It is reported that lending in the first seven days of 2011 was Yuan 500 billion, which was more than the whole of December. Similarly, HSBC believes that the reserve ratio could go to 23% this year, while CICC is looking for 25 basis points on interest rates in both February and in Q2. For its part, the PBOC is targeting growth in M2 (the broadest measure of money supply) of 16% this year after 2010’s 19.7% increase.

Nor is China alone in hunting down inflation. For example, its neighbours, India, Thailand and South Korea have all implemented successive increases in interest rates in recent weeks (South Korea last week).

Perhaps, too, the PBOC had sight on Friday of China’s 2010 property data ahead of today’s official release i.e. prices rose 6.4% in December, year-on-year, for the 19th consecutive month (although on November the gain was just 0.3%). Similarly investment in real estate last year rose 33% to $728 billion. Already, too, Shanghai and Chongqing are revving up to road test a Q1 property tax (perhaps 0.8% says Nomura) with Beijing likely to follow.

Regrettably, this has had a palpably awful effect on the Shanghai Composite which fell more than 3% today. This is the worst one day fall since 12 August and the lowest close since 7 October. No surprise, too, that developers were the worst performing of the Index’s five industry groups (even by 11.30 hours they were off 3.8%). This prompted Changjiang Securities to say (lyrically): “no doubt more shoes are going to drop and no one knows when this will all end”.

On a brighter note, the Conference Board’s leading index rose for a seventh consecutive month in November (+0.5% to a preliminary 155.4) which suggests continuing growth through the first half of 2011. Similarly, RBS remains positive on Chinese equities. “Rising rates are more illustrative of a more robust growth outlook while rising inflation spurs nominal earnings. The market will likely take this move in its stride”. Similarly, “Excess liquidity” in the economy is rising through “accelerating money supply” and foreign exchange reserve growth. “These indicators have strong positive correlations with share prices”. Goldman Sachs is also bullish saying that the CSI 300 Index (the 300 largest stocks in Shanghai and Shenzhen) may advance 28% this year to 4,000, as investors shift to equities from banking deposits because of accelerating inflation and earnings growth prospects.

Elsewhere, President Hu Jintao replied, selectively, on-line to a series of questions from the WSJ and Washington Post. Here, he robustly defended the value of the Yuan and China’s economic policies. There was also the odd smack on US monetary policy and sabre-rattling (my words here not his). What is more Nobel Prize winning economist Robert Mundell agrees with Hu on the Yuan. Hu arrives in Washington tomorrow.

China faces a classic Hobson’s choice on inflation right now (i.e. a free choice in which only one option is offered). But there is a short term price to be paid as can be seen today in the Shanghai Composite. But as the barrels cool on the policy rifles and the smoke clears, the smart money says China will be standing ramrod straight.

Shanghai Composite:
Today: -3.03% to 2,706.66 at close
Last week: -1.7%
December: -0.4%
2010: -14.3%
Since 5 July: +14.5%
YTD: -3.6%

Hang Seng:
Today: -0.52% to 24,156.97 at close
Last week: +2.5%
December: +0.1%
2010: +5.3%
Since 25 May: +27.2%
YTD: +4.9%

Oil futures: $91.08
Gold futures: $1362.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3289day: -1.29% to 2,791.34 at close

MONEY

• China raises bank reserve ratio again (by 0.5% to at least 19.0% for the large banks)
• Reserve ratio move is one step in Asia’s fight against inflation
• Hu answers written questions from the US press and is robust on the Yuan
• Nobel prize winner Mundell agrees with Hu

ECONOMY

• Leading economic index for China rises for a seventh consecutive month
• UBS boss says China should ring the changes
• Morgan Stanley’s Roach says China needs to tame inflation before restructuring
• Power capacity rises 10%
• 4,157 arrested as Government focuses on copyright infringement and similar crime

EQUITIES

• RBS remains positive on Chinese equities
• The China CSI 300 is forecast to advance 28% in 2011, according to Goldman Sachs

REAL ESTATE

• Shanghai set for trial property tax
• Beijing will swiftly to restrain property prices, say Xinhua
• Property prices rise 6.4% in December
• Investment in real estate in 2010 rises 33% to $728 billion
• Vanke and Shimao see sales rise 71% and 34% in 2010
• Chinese Estates buys Goldman headquarters building in London for £280 million

IRON & STEEL

• The price of steel has risen by 37% since early November; with iron ore up 20% to $178.30 per tonne
• Arcelormittal and Nunavut launch new joint bid for Baffinland at C$1.50 per share
• Kumba objects to ICT mine right application being accepted by the RSA Government

Birthday gifts

Michelle Obama’s birthday is on 17 January (she will be 47) and there is no truth in the rumour that President Hu Jintao was not asked to the party; he arrives for a State Visit on the 18th – and it was simply that he had too much to do ahead of shipping out Stateside. Michelle, however, made it very clear (by way of Mrs Hu) that there was only one thing she wanted; and, altruistically, this was ‘an appreciated Yuan’.

Wise men say ‘be careful what you wish for’ but, nonetheless, Michelle may very well have hers fulfilled as the Yuan rose close (6.5919) to a 17 year high today. Momentum, too, is building (aided by Tim Geithner) and forecasts from a clutch of investment banks are for a Yuan of 6.0 to 6.37 by the end of the year or, broadly, +9.0 to 3.5%. That said, Yuan Forwards are still only looking for +2.7% and actually dipped today for the first time since 7 January.

Of course, a higher Yuan would have benefits at home, too, in terms of reining in inflation (which could be 4.5 to 5.0% this year); a fact not lost on either Hu or the PBOC. By way of lead indicators are the central bank’s three month bill sales (where yields moved from 2.1777 to 2.2588%) and the repo rate which saw its largest rise today since 29 December (+22 basis points to 2.56%). This meant that the Shanghai Composite was spooked (down 1.3% today; as Hong Kong bounces) by the expectation of a further interest rate rise and, perhaps, a seventh move in bank reserve requirements. Bank lending growth also looks to be constrained to +14% this year after 2010’s above-target-surge of 19.9% to Yuan 7.5 trillion.

On a brighter note, China’s foreign currency reserves are now at £2.85 trillion having risen 18.7% last year; they may also top $3 trillion by mid-year according to UBS. Similarly, (and with the help of statistical jiggery pokery), the Peterson Institute says that China overtook the US last year as the largest global economy in terms of purchasing power: $14.8 plays 14.6 trillion. Elsewhere, the World Bank says China’s GDP growth will slow this year from 10 to 8.7%, although a median estimate of 18 economists (in a Bloomberg survey) is at 9%; which is still fine to be getting on with. Note, too, that vehicle sales, last year, soared 32% to 18 million and will rise by a further 10 to 15% this year.

In real estate, the expected tax in Shanghai is reported to be 0.5 to 0.6% for buyers of new homes exceeding 70 square metres per person. I could live with that and so, probably, can the market. More broadly, Cushman & Wakefield says that 2010 saw “the first year of the era of commercial property” as it morphs from a residential focus to malls, office and industrial buildings. Last year real estate investment jumped 42% amid a volume of transactions 20% larger. Keep the faith.

“Everything comes down to China. That’s where the growth is” - Seiuemon Inaba, Chairman of Fanuc of Japan, the World’s largest maker of robot controls

Shanghai Composite:
Today: -1.29% to 2,791.34 at close
This week: -1.7%
December: -0.4%
2010: -14.3%
Since 5 July: +18.1%
YTD: -0.6%

Hang Seng:
Today: +0.18% to 24,283.23 at close
This week: +2.5%
December: +0.1%
2010: +5.3%
Since 25 May: +27.9%
YTD: +5.4%

Oil futures: $90.97
Gold futures: $1371.90
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3436

ECONOMY

• China pips US to become the largest global economy by purchasing power
• GDP growth in China to slow to 8.7% in 2011 (from 10%), says World Bank
• ….other commentators are more positive
• CNPC says net imports of oil product may fall 23% as GDP slows
• 2010 vehicle sales hit 18 million (+32%); forecast for 2011 are at +10 to 15%
• 2011 inflation may exceed target say leading commentators

MONEY

• Yuan rises to near 17 year high ahead of Hu’s visit to Washington next week
• PBOC raises three month bill yields
• Money rate see largest rise since end-December
• Currency reserves rise to record $2.85 trillion
• Largest banks ‘expect’ to limit growth in lending to 14%
• New loans beat target in 2010
• Monetary policy in China exerts strong push/pull on international capital flows

REAL ESTATE

• Shanghai property tax to 0.5-0.6% on new homes exceeding 70 square metres per person
• Chinese developers shift focus to commercial properties, says Cushman & Wakefield
• Developers are using ‘synthetic’ bonds to raise funding internationally; and so so more easily
• Disney’s Park in Shanghai Park may attract 7.3 million visitors per annum
• Property results soar with 2010 sales at Poly Real and Gemdale ahead by 53% and 35% respectively

INTERNATIONAL

• BlueStar to buy Orkla silicon business for $2 billion in one of largest ever Chinese acquisitions in Europe

HONG KONG

• Hong Kong office rents increased 32% last year

IRON & STEEL

• Baffinland bidding involves Chinese company, says Government official
• North America’s largest iron ore producer, Cliffs, also buys in Canada: Consolidated Thompson for $4.97 billion
• Iron ore prices to rise after Queensland floods
• Baoshan Steel sees its 2010 net income more than double
  
  

A marathon not a sprint

It is difficult to believe today - looking at the Shanghai Composite’s 1.7% drop - that there are good things happening. Okay, stocks fell, led by lenders and commodity producers, on concern that banks’ capital raising will harm the market and the Government will continue to tighten policies to contain inflation and real estate. But is this new news? No. Similarly, the fabled economist John Maynard Keynes said that inflation cannot acceptably control itself without government intervention. I agree, as does the PBOC and there are already signs of success.

On a similarly brighter note, China’s trade surplus eased to $13.1 billion against expectations of $20 billion. This is positive because it will serve to calm international (especially US) criticism and because of its composition: exports rose 17.9% while imports were up 25.6% i.e. China is moving towards balanced trade and increasing domestic consumption. As HSBC said the full year gap also narrowed 6% to $183.1 billion even as trade bounced back from the financial crisis with both exports and imports rising to records in December. “China lowered last year’s whole year trade surplus to around 3% of GDP, from the 2007 peak of over 11%. In other words, China has already rebalanced its trade surplus, weakening the case for a fast Yuan appreciation”. For its part the Yuan fell for a fifth day, declining 0.1% to 6.6326 per US dollar as of 11.24am; and Forwards suggest just 2.7% appreciation over the coming year.

Turning to real estate, the imminence of property taxes is nigh as Chongqing and Shanghai look at targeting luxury properties and new homes, respectively, this quarter. However, Daiwa Securities says that only about 10 to 20% of new homes in the two cities may be affected by the taxes. Similarly, RBS adds that Chongqing is likely to impose a 1% tax on properties priced at three times the average. “This is quite low”.

More broadly, CLSA says that China’s property market is not a bubble because household incomes are rising in line with prices. House prices in so-called second tier cities, where most urban Chinese live, are about 75% lower than in larger cities such as Beijing and Shanghai, and increases are slower. Larger cities, where house price gains are excessive, account for about 5% of China’s new transactions, it added. Property prices nationwide have risen by an average 10% per annum over the past six years, compared with an average 13% increase in household incomes. “That’s really a pretty healthy balance and people tend too much to focus on first tier cities. When people talk about bubbles, they are not looking at details. They are just looking at headlines”. CLSA is also sanguine about property taxes, “if you look at all the rumours going around, the tax rate is not that big. Our view is that they are not going to put in place a property tax which adds a big new burden for the average home owner. That’s part of the process of creating a normal economy in China”.

It is also significant that Shanghai is now the World’s busiest port as it pushed Singapore into second place in 2010. This achievement has also come 10 years ahead of the Government’s target. Note, too, that capsize shipping rates are forecast, by Clarkson, to fall 34% this year - which is good news for both inflation and margins (unless you are a shipping company). Iron ore imports to China also rose to a nine month high in December (despite dipping in 2010 as a whole) and steel exports soared by a staggering 73% last year. Finally VW is to invest Euro 10.6 billion in China (which is its biggest market) through 2015.

And, yet another forecaster, S&P, has come out with a bullish forecast for the Shanghai Composite this year i.e. +34% in value.

“Character, in the long run, is the decisive factor in the life of an individual and of nations alike” - Theodore Roosevelt

Shanghai Composite:
Today: -1.66% to 2,791.81 at close
Last week: +1.1%
December: -0.4%
2010: -14.3%
Since 5 July: +18.1%
YTD: -0.6%

Hang Seng:
Today: -0.67% to 23,527.26 at close
Last week: +2.9%
December: +0.1%
2010: +5.3%
Since 25 May: +23.9%
YTD: +2.1%

Oil futures: $88.73
Gold futures: $1373.90
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.2995

ECONOMY

• Trade surplus for December is smaller than expected at $13.1 billion as imports out pace exports
• PBOC show support to EU and Euro
• Shanghai is officially the World’s busiest port, as Singapore slips to number two
• Volkswagen to spend Euro 10.6 billion in China as its 2010 sales rise 37% to 1.92 million vehicles

MONEY

• Yuan dips again to 6.6326 as Forwards point to +2.7% over the next 12 month
• FX reserves set for nudge $2.8 trillion in Q4
• Money market rate falls to lowest in a month
• Wenzhou to let individuals invest outside China

REAL ESTATE

• Chongqing considers tax on luxury property, as Shanghai looks at taxing new homes
• House prices are rising in line with incomes and there is no bubble, says CLSA

EQUITIES

• S&P says China’s shares will rise 34% in 2011

IRON & STEEL

• December’s iron ore imports to China rise to a nine month high; although 2010 saw a dip for first time since 1998
• Iron ore prices at $172.6 - the highest since May
• China’s steel products exports rise 73% in 2010
• Global seaborne iron ore shipments to rise 7.5% in 2011 to record 1.04 billion tons, says Clarkson
• Shipping rates are forecast to fall 34% this year as supply of new capsize vessels rises by around 200 (or nearly a fifth) - from Clarkson again

Real green 27% Friday

+27% is the average forecast from 13 investment banks and stockbrokers for the increase this year in the value of Chinese equities as measured, principally, by the Shanghai Composite. Note, too, there is only one Jonah (at Guotai Junan, China’s number two broker) who is on zero; and without him the average increase would be almost 30%. Cynics will say, okay but the market fell 14.3% last year – to which I would retort that it rose 80% in 2009.

I also like the rhetoric from JPMorgan Asset Management. “When noise is at its highest we’d want to invest on those days, those lousy Friday sell-offs. We’ll wait for that day when rumours go around about CPI reaching 6.5% and we’ll go buy that day. That’s how we operate on a conceptual basis - buy when there’s bad news on inflation”. Chinese stocks “look extremely cheap”.

JPMAM also likes property developers and points out that their shares on the Shanghai Composite trade at an average 13.0x estimated earnings, compared with 16.4x on the Hang Seng Property Index and 21.5x for companies on the MSCI World/Real Estate Index. “There are always big opportunities in China’s property space. Overseas investors love buying Chinese properties. They always look for excuses to buy”.

There has been good macro news today, too, with Soufun saying that real estate prices in Beijing rose 37.1 % and 13.4 % in Shanghai in 2010 from a year earlier. Similarly, JLL predicts that home prices will rise 5 to 7% in 2011. It also says that while the Government is expected to introduce a property tax in Shanghai this year, the impact will be minimal because the levy is expected to be low. This meant that the sub-index of property stocks rose 2.4% in today’s trading, which was the second best among the Shanghai Composite’s five industry groups. What’s more the measure has also jumped 8.8% this year which is the best among the five industry groups (and, yes, it was off 28% in 2010 and the worst performing industry).

Large scale developers are also liked by the investment bank boutique Jefferies – and to back up its view the research team has visited 300 property projects in China over the past year. “We expect policy to remain tight and prefer developers going for scale, like Wal-Mart. The tightening policies are focusing on curbing excessively high prices, not high volume. Actually, the Government encourages homeownership”. Nor does Jefferies expect a lot more tightening measures targeting the property market because overall inflation remains the Government’s top concern. The increase in property prices may be capped at 5% in 2011, Jefferies added, with housing transactions expected to increase 5 to 10 %. But the bigger developers may post volume gains exceeding 20% because of a lack of supply of homes in the Nation, where buyers wait as long as two years for their properties to be built. “We definitely haven’t seen that big bubble that some other people may be concerned about”.

In other news, President Hu Jintao has confirmed that he will visit the US from 18 through 21 January, which will follow what will most likely be a $20 billion+ trade surplus for December (data are out next week). This would be the sixth time in seven months clear of the £20 billion mark and it would take the full year tally to $191 billion. Surprisingly, perhaps, the Yuan fell for a third day, declining 0.11% to 6.6265; similarly Non-deliverable Forwards currently point to appreciation of just 2.7 % over the next year.

“I had heard my father say that he never knew a piece of land run away or break” - John Adams

Shanghai Composite:
Today: +0.52% to 2,838.80 at close
This week: +1.1%
December: -0.4%
2010: -14.3%
Since 5 July: +20.1%
YTD: +1.1%

Hang Seng:
Today: +0.41% to 23,686.63 at close
This week: +2.8%
December: +0.1%
2010: +5.3%
Since 25 May: +24.8%
YTD: +2.8%

Oil futures: $94.16
Gold futures: $1366.90
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.2988

EQUITIES

• Average increase in the value of Chinese equities this year is forecast at +27% by investment banks and brokers
• Stocks to rally in China, says JPMorgan Asset Management

REAL ESTATE

• Property boom
• Large scale developers favoured by Jefferies

ECONOMY

• Inflation rate for December 4.5 to 4.8% based on consensus
• GDP growth in 2011 at 9% says consensus

MONEY

• Longer term debt is cheaper than short term as market believe China will control inflation
• Commercial paper sales forecast to rise 20% as loan availability shrinks
• World Bank unit sells Yuan bonds for the first time

DOMESTIC

• Yuan 11.1 trillion to be spent on power plants alone
• Anti-price fixing measures to take effect on 1 February
• Walt Disney park to commence building in May
• Beijing-Shanghai high speed rail link to run from June

IRON & STEEL

• Australian floods may lead to a reduction in steel output in China, say Deutsche
• Hebei Steel agrees to investment in private mills
• Laiwu Steel shareholders turn down Jinan Iron & Steel bid

Holiday news 4: mainstream

Anglo Saxons wish ‘goodwill to all men’ at Christmas and, at first flush, the PBOC’s increase in interest rates (even 25 basis points) on 25 December looks like the opposite. But was it?

Note the Shanghai Composite’s bounce of 4.7% since 28 December and Monday was still a holiday (okay this follows a 14.3% slump in 2010 as a whole). There is also a plethora of bullish forecasts. For example, Deutsche Bank, CICC, PwC, ISIG, Morgan Stanley Huxain and Templeton’s Mark Mobius (now incredibly 74) are all positive on equities. And, as I have done before, shameless quote, probably, the smartest pensioner in the World.

Indeed, Mobius says that China’s stocks, the worst performing equities market among major developing countries last year, are poised to rebound as the Government keeps inflation under control, he said. “We are confident that the Chinese Government has the capability to control inflation at a reasonable level in 2011. If China can keep the CPI at about 4% in 2011, the equity market should perform well”.

“The negative impact on sentiment has already been factored in as the Chinese market underperformed. Going into 2011, we don’t think the Government will significantly tighten liquidity unless there is a hyperinflation, which we think is highly unlikely”.

Sure there will most likely be further interest rates rise (Morgan Stanley says three and JPMorgan two in the first half alone). But, if this continues to bring inflation under control, the bets are on.

Currency-wise, the consensus Yuan forecast is for 5.1% appreciation this year against the US dollar from 6.6 to 6.26. However, the 12 month Non-deliverable Forward market is pointing to only +2.3%. And, despite the fact that Hu goes to Washington later this month, there appear to be much less support for Yuan upward action.

As predicted, too, the Chinese economy is already responding to the medicine of tightening and not one but two PMI surveys said so. The first from HSBC/Markit on 30 December showed manufacturing growth slowing for the first time in five months (with the Index down from 55.3 to 54.4). Secondly, the Logistics Federation and Statistics Bureau, on 1 January concurred (55.2 to 53.9). More significantly, too, the latter’s measure of input prices fell 6.8 to 66.7 in November.

Not that this showed up in industrial profits which rose 49.4% in the first 11 months of 2010, on revenue ahead 31.8%. Both are robust numbers and, even better, net margins rose from 5.5% to 6.2%. Furthermore, the Ministry for Industry and Information Technology (or MIIT to its friends) said that industrial output is forecast to rise 11% in 2011 (after an expected 15% in 2010); and thereafter it should continue at +10% per annum for the next five years.

Domestically, too, President Hu took the unusual step of visiting low income families at the end of December in their homes in Beijing. The minimum wage is also set to rise by 21% to $175 per month. It needs to, of course, because the Gini coefficient, a measure of liquidity, reached 0.47 in 2009, exceeding the 0.4 mark used a predictor of social unrest, according to World Bank data. Domestic consumption must rise both per se and as a means to sustain economic growth as the more traditional impetus from exports ease. Government spending on healthcare is also set to be $128 billion this year, 2011.

Finally, on the international front, North Korea remains the enfant terrible but at, at least, it is a little quieter. Meantime, China continues to flirt with the Euro and the EU – perhaps it might simply buy Portugal outright for recreational use (a mere snip at $228 billion, net of debt).

“The majority of the people I have come into contact with are anxiously optimistic” - Glenn Thomas

Shanghai Composite:
Today: +1.59% to 2,852.65 at close
Last week: +1.0%
December: -0.4%
2010: -14.3%
Since 5 July: +20.7%
YTD: +1.6%

Hang Seng:
Today: +0.99% to 23,668.48 at close
Last week: +0.9%
December: +0.1%
2010: +5.3%
Since 25 May: +24.7%
YTD: +2.8%

Oil futures: $89.37
Gold futures: $1378.70
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3315

HOLIDAY HEADLINES:

EQUITIES

• MSCI China Index may rise 15% by end-2011, says Deutsche
• CICC is buying China’s cyclical stocks in H1
• China IPOs may raise more than $61 billion, says PwC
• Mobius sees China stock set for a rebound as PBOC keeps tabs on inflation
• Companies owned by Central Government are ordered to pay higher dividends
• China's stocks to rebound as inflation eases, says Morgan Stanley Huxain
• Shares to rally in H2 of 2011, says ISIG

YUAN

• China to slow Yuan gains in 2011; with consensus at 5.1%
• CEOs ease back on their support for a stronger Yuan

INTEREST RATES & BANKING

• What happened in 2010
• China raised interest rates by 25 basis points on Christmas Day: on year lending to 5.81% and deposits at 2.75%
• Risk weighting of loans is reported to have been increased by the CBRC
• PBOC may move from a general loan quota to individual bank assessment, says Reuters

ECONOMY

• China's inflation may cool with factory slowdown supported by PMI data
• Global oil demand driven by China (which set to rise 4.8%)
• SAFE to allow companies to keep exports income overseas
• Starbucks raises prices in China
• China to invest $605 billion in utility smart grids
• Manufacturing growth slows as Government policy is tightened, says HSBC/Markit PMI
• China Guangdong Nuclear plans to build two reactors
• China’s carmakers say vehicle demand growth to outweigh impact of no tax breaks
• China’s industrial net profits rise 49% in first 11 months of 2010, as revenue rises 32% -implying margins rising from 5.5% to 6.2%
• China targets 11% industrial output growth in 2011

DOMESTIC

• Beijing residents rush to register cars to meet quota system
• Hu visited poor Beijing families ahead of New Year, and minimum wage to rise 21% to $175 per month
• China to spend $128 billion more on health care next year, says Minister
• Government to raise 2011 water spend by 10% to $30 billion
• Wal-Mart and partners investors $500 million in Chinese on-line retailer
• CNPC natural gas pipeline from Shaanxi to Beijing is approved
• China may spend $1.7 trillion in a decade on power generation
• Government sets up a new company to manage smaller, less critical State-owned assets

INTERNATIONAL

• Restart six party talks on North Korea, says People’s Daily editorial
• China will continue buying Spanish debt, says Vice Premier in Spanish editorial
• Brazil’s new President males Yuan and trade a `priority' in talks with China
• Oil pipeline from Russia begins operation on 1 January
• China backs the Euro; despite Trade Minister describing Euro debt issue as “chronic”
  

Holiday news 3: Hong Kong, Macau & Taiwan

When I was a junior investment analyst in the early 1980s, my Head of Research sent me to a seminar on construction in Hong Kong. At this event, one of the speakers quipped that “the concrete never sets in Hong Kong”. I thought, “yeah right”; but some 30 years later – it is still true.

The Hong Kong stock market is no slouch either and although it had a pedestrian 2010 with a gain of 5.3% in the Hang Seng (after 2009’s supernova of +52%), a record number of shares was traded at 34.99 trillion shares for the year as a whole. Average daily trading volume also reached a record 140.53 billion shares and both tallies beat 2008’s high: 27.1 trillion shares in total; and average daily volume of 110.63 billion. The City also completed its biggest ever year for IPOs with HK$789.5 billion ($102 billion) raised. And, this included the largest one-off with AIA Group’s $20.5 billion IPO in October. Looking forward, PwC is forecasting as much as HK$350 billion ($45 billion) - a diminution of around 20% - this year with 110 listings.

Finally, the domestic real estate continues to shadow that of the PRC i.e. despite Government action to restraint it, activity remains stubbornly buoyant.

Not far away in Macau, the World’s largest gambling centre (since 2006 when it edged out Las Vegas) enjoyed a bumper December with a 66% rise in revenues to Pactacas 18.9 billion ($2.36 billion). In 2009, annual revenue rose 58% to Pactacas 188.3 billion and when the data are finalised, 2010 looks set to have risen a further 10%. Macau’s visitor arrivals rose 15% to 22.7 million in the first eleven months of 2010, with more than 80% coming from the PRC and Hong Kong; including a 20.5% increase in tourists from the PRC.

Finally, the climate between Taiwan and China continues to warm up and, from today, China will cut duties on 557 items imported from Taiwan including fish and bicycles. Meantime, Taiwan will lower tariffs on 267 items such as tea and cement from the PRC as part of the “early harvest” accord.

“Hong Kong has created one of the most successful societies on Earth” - Prince Charles

Holiday headlines

• Hang Seng sees longest winning run since November
• Hong Kong share trading at new record level in 2010 due to IPOs and concerns about China’s polices
• IPO’s in Hong Kong forecast to dip this year by 20% - but should still be worth HK$350 billion, says PwC
• Hong Kong to build 15,000 public sector housing units a Year, says RTHK, the TV station
• Macau’s December casino revenue estimated to have risen 66% to $2.36 billion on China patrons
• China and Taiwan institute tariff cuts as relations warm

Holiday news 2: China real estate

Regular readers will know my penchant for the rhetoric of Mark Twain and this example dates from June 1897. At the time, a journalist was sent to interview Twain believing him to be near his death; in fact it was his cousin who was very ill. Writing later that month in the New York Journal, he said “the report of my death is an exaggeration”; note, too, that is oft misquoted as “the rumours of my death have been greatly exaggerated”.

And, despite the Christmas wreath from the PBOC of 25 basis points on interest rates, the same could be said of the Chinese real estate market. Similarly, its recovery was assisted by today’s news that Government departments cannot agree on how to institute the much-touted property tax. So it will be, at least, delayed and, in morning trade the property sub-index within the Shanghai Composite was up 4.8% (although, to be fair, this does follow a truly dreadful 2009 when the former slumped 28%, the most among the Composite's five industry groups).

I have also discovered two (admittedly) early contenders for ‘quotes of 2011’. The first comes from Jingxi IM: “speculations about the delay in the introduction of the property tax helped trigger the rally. Property prices are still at high levels after a year’s crackdown and that has led some investors to believe that prices won’t come down and property stocks are much undervalued”.

Similarly, CLSA Asia Pacific said: “China property is the cheapest property sector around Asia. Investors are starting to feel that risk-reward is looking pretty good”.

Plus as an extra, Guotai Junan Securities says property stocks could rebound 25% by the middle of January; albeit that there is sting in the tail here insofar as it expects constraints on the Sector to be added later in the first half.

That said, Premier Wen lamented on national radio in December that measures to control the Nation’s property market were not well implemented. “We introduced about 15 measures this year but it appears that they were not well implemented. I believe that after some time, the home market will return to a reasonable level with our efforts”. He also intends to ramp up public housebuilding with a unit target of 10 million (worth Yuan 1.3 trillion) in 2011 – which is a near three-fold increase on last year’s estimated outturn (3.7 million units). What’s more, some commentators say that this it not nearly enough with a backlog of some 20 million.

“He who fights and runs away will live to fight another day”
Demosthenes 338 B.C.

Holiday headlines

• China to delay property tax after Government disputes, says Century Weekly
• CIC backs Manhattan tower as China continues to favour investment in US property
• Hutchison Whampoa advances after $734 million port and property acquisition
• China to assess foreign property investment on a regular basis
• Beijing and Tianjin plan for urban integration
• China's land sales may have hot $302 billion last year; an increase of 33%
• Premier Wen says measures to restrain home prices were not well implemented
• New public housing units target of 10 million (worth Yuan 1.3 trillion) in 2011 – a near three-fold increase on last year’s estimated outturn; but it still needs more, says ISI
• State-owned companies agree to $45 billion of projects in Guizhou in south west China
• China property stocks may rebound 25%, says Guotai Junan
• Evergrande buys site for Yuan 1.4 billion in Guangzhou

Holiday news 1: global natural resources

Comment

Given the dearth of news over the holidays, it is clear that the natural resources sector had its feet up (and in Queensland, they were very wet ones). The exceptions were those nice people at: Baffinland (which is being pursued by rival suitors, Nunavut and ArcleorMittall); and Riversdale (which has agreed to be bought by Rio Tinto). But neither situation is a slam dunk at this time. In other news, too, note the highest December iron ore exports from Brazil in three years. “Happy New Year”


Nunavut raises offer for Baffinland to C$1.45/C$ 570 million - above ArcelorMittal

Nunavut Iron Ore Acquisition Incorporated raised its hostile bid for Canada’s Baffinland Iron Mines to C$1.45 ($1.46) a share, thereby beating ArcelorMittal’s offer of C$1.40. Nunavut, a venture formed in August to gain control of Toronto-based Baffinland (and backed by private equity group Energy and Minerals group or EMG), is seeking to buy 60% of the Company. However, Baffinland was last seen $1.52 in OTC trading in New York.

Nunavut’s bid raises the odds in a three month takeover battle for Baffinland’s Mary River iron ore project in Canada. ArcelorMittal, the World’s number one steelmaker, last week increased its semi-agreed bid for all of Baffinland’s shares to C$551 million. Both offers expire on 10 January.

ArcelorMittal said its bid “remains superior to Nunavut’s coercive partial bid” and the Nunavut offer “carries significant uncertainty for Baffinland shareholders”. Similarly, Baffinland, itself, said shareholders should accept ArcelorMittal’s offer. The Nunavut group already owns about 10.5% of Baffinland’s shares. However, the latter’s largest shareholder, Resource Capital Funds, based in the US and Australia, has agreed to tender its 23% stake to ArcelorMittal. Directors and managers have also tendered another 2.4%.

Mary River, which lies in the Arctic Circle, could initially produce 18 million metric tons of iron ore annually - starting in from 2013, according to Baffinland in November. The cost has been put at C$4 billion for an estimated 365 million tons of reserves.

The competition to win control of Baffinland underlines the popularity of iron ore assets worldwide at this time.


Riversdale agrees increased $3.9 billion Rio bid

Rio Tinto has offered $3.9 billion (£2.5 billion)to buy African coal miner, Riversdale, in an agreed deal which is likely to be challenged by rivals seeking to secure coking coal reserves. Rio’s first big proposed acquisition since its unsuccessful bid to buy Alcan in 2007 is a plan to benefit from rampant Asian demand for the key steel making ingredient. But it needs the backing of at least one of Riversdale’s three large shareholders, including India's Tata Steel and Brazilian steel group CSN.


Brazil iron ore exports in December jump to highest in almost three years

Brazil’s iron ore exports in December jumped 33% to the highest volume in almost three years, according to the Country’s Trade Ministry. Shipments totalled 32.2 million metric tons, the most since May 2008, when exports were 35.1 million tons.