The St Valentine's Day Rejuvenation

China’s mail bag, today, was overflowing with gifts – as affection for the Nation rebounded. Japan was first in line as it admitted, officially (what we had all known for some time), that China is the World’s number two economy: $5.88 trillion of GDP in 2010 against Japan’s $5.47 trillion.

Second was a present from multiple givers, as China reported a smaller than forecast trade surplus of $6.5 billion in January as import growth (+51%) outpaced export gains (+38%) for a fourth month. Okay, its relevance is coloured by the timing of the Chinese New Year, but it nonetheless supports the ‘consumption-in China-becoming-a dominant-force’ theory.

Thirdly, Fidelity’s star investor, Anthony Bolton, underlined a continuing conviction about the case for investing in China (where he has been living for almost a year). It is not just any emerging market, he said in the FT, but the dominant economy in Asia and one of the two most important in the World. Yes, there are concerns but all emerging markets, China included, will have to get used to structurally higher inflation. But rising prices are currently being driven by food inflation, which accounts for around 70% of the increase in China’s consumer price index. “It is important to realise that Chinese consumers are not affected by rising interest rates in the same way as they are in the west. Consumer borrowing is very underdeveloped in China, although it is growing. With high levels of cash savings, Chinese consumers might even benefit from rising rates”. Finally, “for a stock-picker such as me, China is a treasure trove of investment opportunity”.

Fourth, is the expectation that January’s CPI (out tomorrow) will be less than expected i.e. Central China Securities says consumer prices may have climbed by 4.9% in January, compared with a consensus estimate of 5.4% (which would be a 30 year high). In advance of this, too, the Shanghai Composite jumped 2.5% to its best level since 21 December. Similarly, the property developer sub-Index within the Composite also rose 2% today. What's more this comes after a note of caution from the Nation's number one real estate operator, China Vanke, and its forecast of a "sharp" fall in sales in February. However, Vanke and its competitors also said that it/they are spreading their wings away from Shanghai and Beijing to smaller regional cities. For example, Evergrande, based in Guangzhou (which sells the second most properties after Vanke) generated more than 90% of its sales in central and western cities including Changsha, Chongqing, Chengdu and Wuhan - the new transportation hub for China’s high speed trains. In addition, land sales in Wuhan rose 163% last year to Yuan 78.2 billion.

By way of background noise, some relief from the drought has come from fresh snow falls and the World’s rice crop appears to be recovering. Elsewhere, PetroChina is intending to spend $5.4 billion on a gas project in Canada, which takes total energy acquisitions this year by Chinese companies to $46 billion. National largesse also continues in Zimbabwe and Guinea. Closer to home, the Government intends to spend an extra $4.6 billion on rural roads and cement consumption is forecast to rise 12% by the China Cement Association.

Happy Valentine’s

“Grow old with me, the best is yet to be” - Robert Browning

Shanghai Composite:
Today: +2.54% to 2,899.13 at close
Last week: +1.0%
Since 5 July: +22.6%
Since 8 Nov: -8.2%
January: -0.6%
YTD: +3.2%

Hang Seng:
Today: +1.28% to 23,121.06 at close
Last week: -4.5%
Since 25 May: +21.8%
Since 8 Nov: -7.4%
January: +1.8%
YTD: +0.4%

Oil futures: $85.50
Gold futures: $1358.10
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3457

ECONOMY
• China reports smaller than expected trade surplus to $6.5 billion: exports rose 37.7% to $150.7 billion; while imports rose 51% to $144.3 billion
• Rural roads to receive $4.6 billion of spending in 2011
• Fighting the drought remains tough despite fresh snow
• State Grid power consumption rises 9.4%

MONEY
• Yuan stable ahead of G20 finance chiefs’ meeting in Paris later on this week
• China acts to adjust the reserve ratios for some small banks, says the Securities Journal
• Domestic takeovers by foreign companies to be reviewed
• UBS to double workforce in China over five years to 1200
• IMF urges a strengthening of global monetary system and adding Yuan to SDRs
• Fidelity’s Anthony Bolton: “Rabbit that will shape China’s future”

CEMENT
• Cement demand to 12% in 2011 to some 2.1 billion tones

REAL ESTATE
• China Vanke expects a “sharp” drop in sales
• Chinese developers spread their interests beyond Shanghai and Beijing to smaller regional cities

INTERNATIONAL
• World rice output receives Asia fillip
• China and Taiwan to hold economic co-op meeting on 22 February
• China seeks economic cooperation with Zimbabwe and calls for sanctions to be lifted
• China and Guinea agree to sign cooperation accords
• PetroChina proposes paying $5.4 billion for a stake in Encana Corporations’s gas project in Canada
• North Korea discontinues talks with the South

HONG KONG
• Home prices rise

IRON & STEEL
• Kumba confirms that 2010’s net income more than doubles as Indian and China demand drives up prices; and forecasts Chinese demand to rise 5 to 10% this year
• Kumba says Thabazimbi mine expansion project is not open to ArcelorMittal in the RSA
• Rio Tinto’s 2010 pretax profit rise 161% to $20.6 billion on iron ore prices in China; and launches $5 billion share buy-back
• Rio Tinto extends Riversdale offer as CSN lifts stake
• Dry bulk shipping rates may rise over the next six months says Deutsche Bank; but they are still down 34% year-to-date
• India allows accumulated stocks of iron ore to be shipped from Karnataka; in temporary lift of export ban