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