68-out-of-70 looks like a great score

Pity the poor residents of Quanzhou and Nanchong in south east and west China, respectively, where new home prices failed to rise in January; and they were the only two cities out of 70 monitored by the Government. Pick of the bunch, was Haikou with a 21.6% gain, while 10 other cities were at 10% or more. In Beijing the rise was a more sedate 6.8% while Shanghai struggled by on +1.5%. These numbers are also the first from the Government’s new method of calculation. Volume gains, however, were more modest with Beijing and Shanghai on 0.8% and 0.9% respectively, although only one city was negative: Chongqing (-0.1%).

Views are divergent about what this means, with the likes of Standard Chartered saying that the Government needs to tighten liquidity and raise interest rates. Others such as Credit Suisse and Mizuho said that there may have been a surge in demand ahead of further Government constraints being introduced. These includes new measures in Beijing which has banned residents from owning more than two houses; and non-locals will only be able to buy one - and, then, only after producing five years of tax documentation.

Meantime, BNP Paribas added that “although property is being targeted with tightening measures, overall credit growth in the economy remains expansionary. The memories of the 2008 downturn in exports and housing prices are still too fresh at central and local government level to create another downturn”.

Similarly, Fitch Ratings said “demand will be restrained in the beginning of the year after the Government measures” and it has a “neutral” view on the sector. Nonetheless, it also said that China’s home prices will rise about 5 to 10 % this year because property remains a hedge against inflation.

The stock market couldn’t make its mind up either and the sub-Index of property developers within the Shanghai Composite rose and fell before settling 0.2% lower at 3318.04, albeit this is still 5.1% up in the year to date (after an awful 2010).

However, Ronnie Chan, Chairman of Hang Lung Properties (which means “eternal prosperity”) is betting $5.1 million on Chinese consumers. He plans to build some 1.5 million square feet of malls and offices in five Chinese cities outside Shanghai over the next five years. And, this will follow the opening of a fourth mall in Jinan in August (after which the Company’s rent roll in China will be greater than in Hong Kong: HK 2.61 billion in the year to June 2010).

More broadly, Macquarie says that China, over the next five years, will spends some Yuan 3.5 trillion on railway construction plus the same amount on highways; and a few billion here and there on airports and docks. And this follows rampant spending on the same over the last two years in a progamme, which RBC says was the same size as the entire Swiss economy. This will also serve to open up regional China in unprecedented fashion and bring with it gargantuan development opportunities.

In the more general, contemporary economy, however, it was disappointing that The Conference Board’s leading economic index for China fell in December for the first time since 2008 – by 0.5% to 154.3 from November. It did say that it was “too early to tell” if the World’s second largest economy will have an economic slowdown; although it added construction and consumer sectors were weakening, as growth in the industrial sector remains strong. I would also add that this index is often subject to revision.

Another double edged note was sounded with FDI, which rose 23.4% in January to $10 billion, with investment in the service sector and western China particularly strong. Yes, this is good news, of course, although it may also stoke liquidity and inflation – which could lead to further tightening; and to further calls for the Yuan to rise. The latter has already been raised at today's (and tomorrow’s) G20 policy makers meeting in Paris.

Finally, the Shanghai Composite dipped (0.9%) for the first time in seven sessions albeit that it is ahead 3.3% in the year to date. Neither figure is particularly exciting and ‘torpor’ is a word that springs to mind. In turn, this puts more pressure on next month’s National People’s Congress and where there are expected to judicious commentaries, encouragement and a raft of new pro-growth policies. All are needed.

“Whatsoever, after due examination and analysis, you find to be kind, conducive to the good, the benefit, the welfare of all beings that doctrine believe and cling to, and take it as your guide” - Hindu Prince Gautama Siddharta

Shanghai Composite:
Today: -0.93% to 2,899.79 at close
This week: +2.6%
Since 5 July: +22.7%
Since 8 Nov: -8.2%
January: -0.6%
YTD: +3.3%

Hang Seng:
Today: +1.26% to 23,955.34 at close
This week: +3.4%
Since 25 May: +24.3%
Since 8 Nov: -5.5%
January: +1.8%
YTD: +2.4%

Oil futures: $86.14
Gold futures: $1387.10
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3573

ECONOMY
• China leading index falls for first time since 2008
• FDI rises 23.4% in January
• Inflation in wider economy is up faster than the CPI, says Nomura
• Inflation is likely to remain “relatively high” in Q1 before easing in Q4, says Statistics Bureau
• Inflation may rise to 5.2% in February, says State Info Center
• China's car sales growth slows to 16% after tax incentives end
• Vehicle exports rise 40% (but imports of same double)

MONEY
• Money market rates are set for weekly gain
• China’s regulator tells banks to reduce the use of external ratings
• “Hot money” inflows were at $35.5 billion last year, says SAFE; which Credit Agricole says “is not a major problem” – nor will it restrain PBOC rate hikes
• PBOC pumps Yuan 55 billion into the system this week; less than the previous one
• PBOC sells Yuan 10 billion of 3 month bills at unchanged 2.6243%
• Ministry of Finance sells Yuan 30 billion 5 year bonds at 3.60%
• China may loosen deposit rate controls, says Deutsche and Mizuho
• Capital ratios to rise again?

REAL ESTATE
• Home prices rise in 68 out of 70 cities
• Government releases new housing price index
• Beijing City limits home purchases
• CBRC warns on property loans
• Property bonds tank
• Hang Lung Properties makes $5 billion bet in China

TRANPORT LINK EXPANSION
• China plans to spent “trillions” of Yuan on rail and transport links over the next five years; which will open up inland regions and cities

DOMESTIC
• Wheat price rebounds as China's drought may restrict domestic output and lead to imports

INTERNATIONAL
• G20 tensions continue on the Yuan
• EU imposes duties as high as 62.9% on Chinese glass fibres
• Ghana expects to commence building a $6 billion rail network in April, with Chinese contractors and Chinese cash
• Ghana will also receive $167 Million from China for the Bui hydroelectric project

HONG KONG
• Hong Kong retail sales rose 18.5% in December as unemployment fell and visitor levels increased (including a 26% rise for visitors from mainland Chinese)

IRON & STEEL
• Iron ore imports to China may dip by up to 3% in 2011 (for the second year running), says Mysteel and Ministry of Industry; as domestic production rises
• Steel prices rise again for Wuhan and Baoshan
• Capesize bookings for deliveries to China increased 20% last month, says Clarkson
• Wuhan Steel and Canada’s Century Iron Mines agree to develop mining projects; which comes two days after Wuhan’s deal with Adriana to develop Lac Otelnuk
• BHP Billiton may spend $25 billion on iron ore, says Citigroup
• Novolipetsk and Metalloinvest sign a four year iron ore supply contract; and local bank forecasts 38% increase in prices this year
• Cliffs Natural Resources best analysts' estimates as net profits triple and margins double to 28.7%