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”