100 not out

The Americans are sceptical about the game of cricket. “How can you play for five days and have a tie?”, they ask. In any event, to the aficionado, it is a game of sublime skill and tactics. At its most simple, too, there are a number of key benchmarks of success (or otherwise), with perhaps the most renowned being scoring an unbeaten century i.e. 100 runs not out – which is like scoring 100 points. With this in mind, I am delighted to tell you that today marks my century in official blogs on China – having been launched, on to an unsuspecting public, in May last year.

The subject of my musings, however, is not so fortunate. And, at this time, I liken China to a batter in a cricket match who wants (like all players) to score 100, but who is stuck on about 60. This is a respectable score but not enough to win. Something has to give or, at least, go very right; and, for a start, a few slower balls coming towards him would be a start.

The first of these would be inflation which is expected to have continued at a fast pace in January to more than 5%. Its trajectory, too, was underlined by at least one of today’s brace of PMI surveys. On the one hand, the Logistics Federation said it’s PMI for manufacturing dipped in January from 53.9 to a lower-than-expected 52.9 (albeit anything above 50 indicates continued expansion). But, on the other, input prices rose from 66.7 to 69.3. Similarly, the State Council said, that while a slowdown in industrial output may be “bottoming out”, inflationary pressure appears to be rebounding. It also added that slower output growth in real estate related industries such as furniture, textiles, glass and cement needs attention. Elsewhere, the HSBC/Markit PMI for January inched up from 55.4 to 54.5.

Interestingly, the Shanghai Composite rose for a fifth consecutive trading day (as did stock futures) and the gain since 24 January is now 4.5%. Maybe the bulls are winning? With two of these being Prudential Financial and USAA Investment Management who point out that Chinese stock valuations are at a record low versus Hong Kong: 11.7x estimated 2011 earnings versus 17.5x based on the MSCI China Index (on Monday). For its part, too, USAA said “the valuation disparity will probably return to normal. Chinese regulators are trying to engineer a soft landing-type of situation and they will probably be able to manage that. That would make for a decent buying opportunity”.

This toing and froing is also evident in the money markets. For example, the PBOC has set an M2 growth target this year of +16% to help slow credit growth and inflation (in 2010, M2 grew at 19.7%). However, the China Securities Journal says that January’s loans were probably around Yuan 1.1 trillion and that Q1 could soar to Yuan 3 trillion which is 35 to 40% of the full year target. Despite this, a time-out has come from the seven day repurchase rate (which measures available funding) as it fell by the most since October 2007 i.e. down 4.88 to 3.30%.

The same goes in the real estate test match, where SouFun says that January saw the largest month-on-month rise (1%) in house prices in six months. Similarly, Citibank says that the residential market is headed for a bubble because investment here is equivalent to 6.1% of nominal GDP (the same as in the US in 2005). Nonetheless, SouFun also said that sales volumes slumped in 23 of the 30 cities it monitors closely, with 15 of them declining by more than 20% in January from December. Similarly, CICC says transaction volumes are now expected to drop 10% this year to 940 million square metres (it was earlier looking for a 5% rise). Lending to developers and mortgage loans may also both fall by 30% this year, it added. Elsewhere, ICBC has reportedly abandoned its 15% mortgage rate discount for first time buyers and CCTV claims that Shanghai may extend is property tax trial from new homes to existing ones.

As Hu and his team-mates pack their kit for the Chinese New Year tour, they will also realise that ‘sublime skill and tactics’ will be needed to win this particular game.

“Cricket is a most precarious profession; it is called a team game but, in fact, no one is so lonely as a batsman facing a bowler supported by ten fieldsmen and observed by two umpires to ensure that his error does not go unpunished” - John Arlott

Shanghai Composite:
Today: +0.30% to 2,798.96 at close
This week: +0.3%
Since 5 July: +18.4%
Since 8 Nov: -11.4%
January: -0.6%
YTD: -0.3%

Hang Seng:
Today: +0.15% to 23,482.95 at close
This week: +0.2%
Since 25 May: +23.7%
Since 8 Nov: -5.9%
January: +1.8%
YTD: +1.9%

Oil futures: $91.80
Gold futures: $1339.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3723

ECONOMY

• Manufacturing growth slows but causes divergent views
• China may face increasing difficulty in meeting the future demand for food
• Former PBOC advisor says Chinese growth rate may be lower than 8% in next five years

REAL ESTATE

• Home prices in January rise by the most (1%) in six months, says SouFun
• China's housing market is heading for a bubble based on international empiricism, says Citigroup i.e. it already accounts for 6.1% of GDP

MONEY

• Interest rate swaps fall by the most in more than eight weeks; as the money market rate falls the most since October 2007
• China sets M2 target growth at 16% this year and underlines risk of inflation
• Yuan rises for first day in four to 6.5924
• Q1 loans may be as much as Yuan 3 trillion ($45.7 billion), says China Securities Journal
• Shanghai’s SAFE warns about “hot money” entering property and equity markets
• China is reported to be planning to raise the capital ratios for its major banks
• Lending rates rise faster than the PBOC benchmark
• China’s 10 year bonds fall due to a shortage of bank cash; as yields nudge highest level since 2008
• Dim Sum bond yields may rise as funds are allowed to go ‘onshore’

EQUITIES

• Shares in China show record discount to Hong Kong – which means “buy”, says Prudential Financial and USAA

HONG KONG

• Hong Kong weekend sales of existing home falls 34%, says the Centaline agency
• Yuan deposits rise 13% in Hong Kong to a new record level of Yuan 314.9 billion