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