Interesting vacation

“Holidays have no pity”, according to Italian poet Eugenio Montale (1986-1981) and so it was with the Chinese New Year vacation as, effective today, the PBOC has raised interest rates (for the third time since mid-October). This means that the benchmark one year lending rate will increase 25 basis points from 5.81 to 6.06%; and so will the core deposit rate - by the same amount - to 3.0% (with five year deposits attracting 45 basis points extra).

Inflation, of course, is the party pooper with the hawks looking for as much as even 6.0% in January when the figures are promulgated next week (the consensus forecast is 5.3%). This also means that ‘the birds of prey’ expect as many as three or four further hikes in interest rates this year. But was the increase in rates a surprise? No, but human nature being what it is, expectation and actuality are two different things.

That said, at least one eagle-eye was pragmatic. For example, Gavin Parry, MD of the eponymous Hong Kong-based Parry International Trading said “a rate rise was expected, but given they delayed to the end of Chinese New Year, it created anxiety over the potential severity. Now that uncertainty is removed, the markets can focus on the January trade, and the producer prices and consumer price data next week. At least there’s a bit more stability on a sentiment basis. I think it’s going to wash through and we can carry on”.

Unsurprising, too, is the rise in the Yuan towards a 17 year high. This morning it was up 0.2% at 6.5824 to the US dollar (in the first day of trading since 1 February). Meantime, Twelve-month Non-deliverable Forwards strengthened to 6.4230, reflecting bets the currency will rise 2.5%. However, the consensus view is for +4.5% to circa 6.3; with the most extreme view (Clariden Leu) at 6.0. Similarly, the one year interest rate swap rate rose the most in more than two years i.e. 22 basis points to 3.87% at lunchtime today. Note, too, that the US Treasury stopped short of calling China a currency manipulator in its latest report.

In other news during the holidays, veteran investor icon, Barton Biggs, reiterated his positive views on China at a conference in New York. “I think China is going to be one of the two or three, maybe the best major markets in the World. Basically the Chinese have done a really superb job of engineering a soft landing. They did what we should have done going into the crisis. They applied massive stimulus very quickly. They came booming out of their slowdown. They may have overdone it a little bit”. Biggs also had advice for arch-China bear, Jim Chanos: “I suggest he go to China before he gets too negative on it”.

In real estate, developer shares predictably fell today and their sub-Index within the Shanghai Composite was the worst industry group (from five) performer at -2.1%. Citigroup, however, said that Chinese interest rates are not powerful enough to halt home buying. And, while policy tightening has become more meaningful, homebuyers have already factored in reasonable increases in borrowing costs. Nonetheless, Premier Wen Jiabao, in a New Year speech, pledged to restrain property speculation and add more affordable housing.

Elsewhere, droughts in China may threaten grain harvest (but ironically heavy snow falls may ease the former). As a Nation, too, it continues to invest in Africa, with the latest targets Zimbabwe, Congo and Kenya.

As is well documented, we are now in the Year of the Rabbit which is the fourth animal in the 12 year cycle of the Chinese Zodiac. It is, reputedly, one of energy and optimism and the perfect time to try something new. Similarly, if you are bold and confident the year should bring great rewards. It is also, apparently, a good one for metals.

“A clever rabbit will have three openings to its den” - Chinese proverb

Shanghai Composite:
Today: -0.89% to 2,774.07 at close
Last week: +0.3%
Since 5 July: +17.4%
Since 8 Nov: -12.2%
January: -0.6%
YTD: -1.2%

Hang Seng:
Today: -1.36% to 23,164.03 at close
Last week: +2.0%
This week: -3.1%
Since 25 May: +22.0%
Since 8 Nov: -7.1%
January: +1.8%
YTD: +0.6%

Oil futures: $87.52
Gold futures: $1365.40
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3650

INTEREST RATES
• China raises interest rates to slow inflation – for third time since October last year
• More rate increases to come…….
• Rate decision should be “well received”, says Daiwa
• Julius Baer looks to the Yuan at 6.2 to 6.4 to the US dollar
• The delay in the interest rate increases caused “anxiety”, says Parry International

MONEY
• Yuan forges towards 17 year high on interest rate rise
• Interest rate swaps rise the most in more than two years

ECONOMY
• Barton Biggs says Asian stocks will beat the S&P in next year; and is “big bull” of China
• Nassim Taleb is “comforted” by Russia but nervous about the US and China
• Roubini says China and other of the World's emerging markets face a risk of "hard landing"
• Morgan Stanley’s Roach says the US faces a decline in the dollar as China relies less on its exports

REAL ESTATE
• Developers shares fall on rate rise
• Wen pledges to control property speculation in New Year speech

INTERNATIONAL
• US Treasury says China needs to do more on the Yuan but refrains from calling the Nation a currency manipulator
• North Korea meets South for first time since artillery attack
• China sells Japanese debt
• Asia need to raise interest rate to avoid over-heating and a “hard landing”, says IMF
• China seeks access to diamonds and platinum in Zimbabwe
• China Loans $368 million to Congo for Hydroelectric Plant
• China may take over $826 million Kenyan road project
• Chinese steel drill pipe exporters to face US dumping duties

DOMESTIC
• Droughts affect wheat and other grain crops
• Snow in northern China may relieve drought
• China’s largest energy users raise efficiency 20%
• Private business exports reach $481.3 billion – up 223% since 2005
• Private -business tax hits Yuan 1.1 trillion – up 172% since 2005

HONG KONG
• Home sales in January fall 16.5% on December

IRON & STEEL
• Iron ore import prices to China may rise after the New Year holidays, says Deutsche Bank
• Iron ore price to rise 21% this year, says Credit Suisse (NB this is a reiteration from January)
• Asia’s number three iron ore miner, NMDC, sees Q3 net profit rise four fold on iron ore prices
• BHP Vale and Rio are set for record profits (totalling $52 billion) on iron ore pricing; as steel makers go the other way
• Vale may build an iron ore shipping port in northern Brazil in 2015
• Nippon Steel and Sumitomo Metal to merger and create World number two…..and Kobe Steel may also be asked to join merger
• Kobe Steel’s Q3 profit doubles on Asian demand
• CSN increases it stake in Usiminas (part owned by Nippon Steel)
• CSN raises its stake in Riversdale, which is subject to $4 billion Rio Tinto takeover bid
• ArcelorMittal’s share price advances to a nine month high on its 2010 performance – which was the best 12 months for industry volumes (+15%) for more than 50 years; and it continues to seek further direct ownership of iron ore