'The Long Run'

As Wen revs up for his post-National People’s Congress press briefing on Monday, he could do worse than go see California’s inimitable soft rockers ‘The Eagles’ who this week performed in China for the first time. “I used to hurry a lot, I used to worry a lot......... I just couldn’t carry on that way”. He would, of course, have to shell out up to Yuan 1080 ($164) for the privilege. But “we can handle some resistance” and “when it all comes down, we will still come through in the long run”.

The Premier will need such pragmatism, too, as he digests the week’s economic data. For example, today, annualised inflation for February came in at 4.9% which was disappointingly higher than January, despite the fact that food rose by 11% and non-food by only 2.3%. Similarly, producer prices leapt by 7.2%. Okay, commentators say that data for the first two months of the year in China are perennially distorted by the incidence of the Lunar New Year holiday. But Merrill Lynch, for one, thinks March’s CPI could be 5.5% and PBOC Governor Zhou is on record this week, at the NPC, saying that interest rates will be used to contain inflation.

Earlier in the week, China reported a surprise trade deficit of $7.3 billion for February, the largest in seven years; and within this tally exports rose 2.4% while imports climbed 19.4%. Merrill Lynch also says that for every $1 on the price of a barrel of oil, China’s annual trade surplus dips by $1.9 billion. The smart money says that February’s trade deficit will take pressure off the Yuan and calls for its appreciation. It also supports claims that the Government is shifting towards rebalancing the economy; albeit inflation remains the unwelcome guest here. More popular are industrial output (+15% in February) fixed asset investment up 25% in January and February combined, with retail sales (on the same basis) ahead by 16%. Elsewhere, the rate of sales of new cars slowed to 2.6% in February (the least in 16 months) but this was impacted by the Government ending some incentives and, again, by the holidays. What's more, the China Association of Automobile Manufacturers (CAAM) expects 10 to 15% growth this year (after 2010’s +32%); and as Ford said, 10% growth means 18 million new vehicles which is six assembly plants.

In terms of the money markets, there have also been conflicting signals, with the seven day repurchase or repo rate falling 16 basis points in the week to 2.06% and one year interest rate swaps shaping up for their largest weekly drop in two years: down 29 basis points to 3.46%. Elsewhere, Yuan Forwards eased and are now pointing to just a 2% appreciation over 12 months. This seems at odds with the fear/expectation that interest rates will rise. Only the glass-half-full man would bet against it. And, the story of the week here is a Columbia University study which claims that an increasing number of bachelors in China is limiting the Yuan’s appreciation. Apparently, they are saving money so as to better compete in the marriage stakes with a disproportionately low number of Chinese females.

In real estate, the push/pull is also evident with the Land Ministry ordering local government to keep the lid on land prices, what is deemed “unreasonable” demand from speculators (Qi Ji, Vice Minister of Housing and Urban-Rural Developments) and PBOC advisor Li Daokui saying that home prices will follow the current fall in volumes later this year. However, China Vanke, the Nation’s number one developer, says that demand for its homes will withstand Government efforts to cool speculation this year. It is also the first real estate company in China to generate more than Yuan 100 billion ($15 billion) in sales (in 2010) on which it generated net income of Yuan 7.3 billion (+37%).

On Wednesday, the Shanghai Composite cleared 3000 and was at its best level for four months (i.e. 15 November). Since then it has lost 2.2% (albeit still almost 5% up year-to-date) but many other global markets have done worse as events in Libya, in particular, appear to be set for a more protracted duration. Today’s 8.9 magnitude earthquake in Japan, and a possible ocean of tsunamis in the Pacific are not only desperately tragic on a personal level, but they will also compound geopolitical worries.

“Well, we’re scared, but we ain’t shaking. Kinda bent, but we ain’t breaking” - Don Henley and Glenn Frey

Shanghai Composite:
Today: -0.79% to 2,933.80 at close
This week: -0.33%
Since 5 July: +24.1%
Since 8 Nov: -7.1%
YTD: +4.9%

Hang Seng:
Today: -1.55% to 23,249.78 at close
This week: 0.7%
Since 25 May: +22.5%
Since 8 Nov: -6.9%
YTD: +0.9%

Oil futures: $101.80
Gold futures: $1416.30
(new ‘immediate delivery’ high of $1444.95 on 7 March 2011)
Euro/$ spot: 1.3816

INFLATION
• February CPI rises to an annualised 4.9%; but no change on month
• Food costs rose 11% from a year earlier, while non-food prices rose by just 2.3%.
• Producer prices jumped 7.2% last month (most since 09/2008)
• Fixed asset investment grew 25% in the first two months of 2011 from a year earlier
• Retail sales rose by a less-than-forecast 16% in January and February combined
• Industrial output rose 15% in February from a year earlier
• Incidence of Lunar New Year holiday distorts data
• Merrill Lynch forecasts March inflation of 5.5%.
• PBOC Governor Zhou says interest rates will be used to contain inflation, and played down the role of currency gains
• Zhou also said that liquidity will be tighter this year

ECONOMY
• China post unexpected $7.3 billion trade deficit as exports slow (+2.4%) and imports surged (+19.4%)
• Car sales growth rises at slowest pace in more than two years
• Foreign carmakers warn of China slowdown

EQUITIES
• Stocks may rise 21% on valuations, says Daiwa
• Bullish China call options beat the puts and the bears for the first time since 2009
• Li's Hutchison Port seeks to raise $5.4 billion in Singapore IPO

MONEY
• One year interest rate swaps look set for largest weekly drop since November 2008
• Li and Chen opine on the Yuan
• China raises yield on three month bill and swap rates rise
• PBOC holds yield on one year bills
• China faces 60% risk of a bank crisis by 2013, says Fitch
• Yuan-linked bonds reduce costs for Powerlong Real Estate
• Bachelors limit Yuan gains more than China’s policies, says Columbia University

REAL ESTATE
• ‘Great Wall of Money’: Asia-Pacific real estate attracts 45% rise in property investment, says DTZ
• Land Ministry orders local government to keep the lid on land prices
• Property demand is driven, in part, by “unreasonable” speculation, says Housing Minister
• Home prices to fall, says PBOC advisor Daokui
• China Vanke says demand will withstand Government efforts to prevent a bubble

INTERNATIONAL
• China Guangdong Nuclear Power plans $1.2 billion bid for uranium unit Kalahari Minerals
• China’s Vice Premier to visit Kenya, Zimbabwe and Angola this month

DOMESTIC
• China reports a 68% jump in hacking attacks on Government websites in 2010
• Power regulator says China must consider take inflation into account in electricity pricing

IRON & STEEL
• February’s iron ore imports fall 29% on month: 1.5% annual
• February steel output gains 9.7%, year-on-year, as prices fall
• Wuhan, Angang and others turn to niche steel and exports amid domestic difficulties
• Rio raises Riversdale bid by 3% to $3.9 billion
• Essar to spend $750 million to revive Zimbabwe Iron & Steel

Green Monday

‘Green Monday’ is a first novel by ex-investment banker Michael M Thomas about manipulation of global oil prices and their impact on the stock market. It was first published in 1980 (i.e. there really is nothing new). The title refers to the potential uplift at the beginning of a trading week on the back of weekend news. Premier Wen Jiabao is no doubt familiar with the term and did his best at the weekend’s National People’s Congress (NPC) to deliver one; and today the Shanghai Composite rose nearly 2% which takes it 6.7% to the good in 2011 so far.

The NPC is an annual gathering but more special this time because it unveils the Government’s new five year plan (the modern Nation’s 12th in 61 years). Wen said that his number one priority is to fight inflation and to ease the social unrest which higher prices has exacerbated. He also intends to reverse the widening income gap “as soon as possible” through fiscal measures and stoke domestic consumption. China’s annual economic growth target, as previously promulgated, will be 7% (maybe 8% in reality) with inflation pegged at 4%; and the strap-line being bandied about (and attributed to President Hu Jintao) is “inclusive growth”.

More specifically, fiscal spending will rise 11.9% this year to Yuan 10 trillion, although the budget deficit will be held at 2% of GDP (2010 = 2.5%). Similarly, cash for housing will rise 9.6% to Yuan 258 billion (although this disguises a 35% increase for low income housing). Hand in hand, too, will come an “adjust and improve” on real estate tax policies to control “exorbitant” house prices.

Turning to currency, the NPC also opined that the Yuan could happily rise 3 to 5% per annum. The PBOC’s Deputy Governor also said the currency was as close to equilibrium as it had ever been. The money market agreed, too, as the seven day repurchase or 'repo' rate galvanised its three month low (at 2.18%).

CICC says that the average gain for the stock market in the four weeks following the NPC (since 2006) is 13%; and 2011 will be similar. It likes the Government for what it calls “maintaining stability”. Similarly, Robeco speaks of a “window of opportunity”. I was also encouraged by the stoicism of China Overseas Land & Investment. It is the Hong Kong listed developer controlled by the Nation’s Ministry of Construction. It plans to set up a real estate fund of $300 to 500 million to invest in commercial and residential property in China where it believes that the demand will prove resilient to Government measures to control it.

Okay, a lot has to go right from here and inflation and inequality are not beaten yet. Nonetheless, investors have their pocket books out once again.

“Monday is the key day of the week” - Gaelic proverb

Shanghai Composite:
Today: +1.83% to 2,996.21 at close
Last week: +1.3%
Since 5 July: +26.8%
Since 8 Nov: -5.2%
YTD: +6.7%

Hang Seng:
Today: -0.41% to 23,313.19 at close
Last week: +1.7%
Since 25 May: +22.8%
Since 8 Nov: -6.6%
YTD: +1.2%

Oil futures: $106.00
Gold futures: $1438.20
(new ‘immediate delivery’ high of $1441.00 on 2 March 2011)
Euro/$ spot: 1.3997

NATIONAL PEOPLE’S CONGRESS
• Wen targets inflation as priority so as to ease social unrest
• Inflation is putting China’s “dream” at risk, says Wen
• +3 to 5% for the Yuan per annum
• Fiscal spending rose 11.9% this year to Yuan 10 trillion
• Housing spend to rise 9.6% to Yuan 258 billion
• China’s spending on internal police force in 2010 was larger than on national defence; and plans to do the same this year
• The 2011 Budget at a glance

EQUITIES
• Shares rise to three month high on economic plan
• Economic plan opens “a window of opportunity” for a stock market rebound, says Robeco

MONEY
• Money market rate declines and sustains three month low
• The Yuan is as close to equilibrium as it has ever been, says PBOC’s Yi

REAL ESTATE
• Property tax will be more effective if applied national, says Mayor of Chongquing
• China Overseas Land plans a $500 million real estate fund, as it bets the Government will not overly constrain property demand

DOMESTIC
• Drought impact on crops is “limited” says Government

INTERNATIONAL
• Relations between China and the US enjoy a “good atmosphere”

HONG KONG
• Hong Kong’s inclusion in China’s five year plan underlines its importance to the PRC
• HK house prices rise 0.9% in last week of February

IRON & STEEL
• Wuhan Steel aims to by more international iron ore resources in push to self-sufficiency; as foreign suppliers plan a dock side spot-selling unit
• Guinea plans a review of all its mining licenses
• Baoshan wins drill pipe anti dumping case in US

Medicine: domestic and international

We have all heard of cases when the medicine was so strong that it killed the patient. In China, though, there is a healthy chance that the administered dose was the correct one. Herein, the first symptom is February’s bank lending which is reported, by the China Securities Journal, to be less than Yuan 600 billion (or $91 billion). We will have to wait until around 11 March to know the official number, but the smart doctor knows that it is most likely true; and that it compares with Yuan 1.04 billion in January and Yuan 700 billion a year ago. Secondly, the seven day repurchase or ‘repo’ rate has fallen to its lowest level (2.22%) since 7 December.

Numbers three, four and five are a hat trick of Purchasing Manager’s Indices (PMIs) which showed that manufacturing expanded at its slowest pace in six and seven months in February (Logistics Federation and HSBC/Markit respectively); and the same for Non-manufacturing (National Bureau of Statistics/LF). Okay, the holidays impacted the later (but it would have still been lower) and input prices remain a concern; but at the same time, a measure of business prospects inched up.

Then, under the heading of rehabilitation it is also rumoured that the Government will reduce tax rates for individuals and ease the tax burden for low income earners. This comes ahead of the National People’s Congress which kicks off tomorrow and which will showcase the Nation’s new five year plan. Lower tax would of course assist the growth of domestic consumption which is a stated policy objective. On this tack, it is also interesting to note that China’s richest man, Zong Qinghou (worth $12 billion says Hurun), who is also Chairman of soft drink maker Wahaha, is planning to open 100 department stores.

Turning, to real estate it is wise to seek a second opinion. On the one hand, new home sales in Shanghai (-83%) and Beijing (-70%) in February were truly awful. This was most likely driven by Government policy but could also be something of a knee-jerk reaction. More sanguine is the fact that SouFun said, nationally, prices in February (+0.5%) rose at their slowest pace in six months. More broadly, Soho China, Beijing’s largest CBD developer, while ultra cautious on housing, expects a “significant increase” in commercial property prices this year. Plus, in the fit and healthy camp, China Vanke said that its sales in February rose 142% by value (Yuan 6.1 billion) and 160% by volume (to 549,000 square metres).

Construction (China is now the global leader in scale), cement (new investors/investment) and railroad building are in peak condition too, although there are some concerns on the latter’s funding. Plus, there has even been some soothing rain in drought affect areas.

Turning to the international medical profession, it is worth pointing out the Shanghai Composite has risen 10% since the first shoe was thrown in Egypt on 25 January. This is also despite an incipient Jasmine consciousness in China and, although the police have been strong arming any flag wavers, Wen has taken notice of what has been said and has hinted at policy change. Dr China has also increased its holdings of US Treasuries to over $1 trillion and comfortably retains its number one spot on the US creditors list. Being America’s banker (as former Aussie PM Kevin Rudd said) has a lot of health benefits.

And the final word goes to Michael Holland (who may or not be a doctor) Chairman of boutique investor Holland & Company: “the market had been very, very adverse to accepting the good news out of China, always looking for the last several quarters at what could go wrong. In the case of China, it’s only a matter of time, along with Taiwan, before investors come back to realise that this thing has been working and will continue to work”.

Shanghai Composite:
Today: +1.35% to 2,942.31 at close
This week: +1.3%
February: +4.1%
Since 5 July: +24.5%
Since 8 Nov: -6.7%
YTD: +4.8%

Hang Seng:
Today: +1.24% to 23,408.86 at close
This week: +1.7%
February: -0.5%
Since 25 May: +23.3%
Since 8 Nov: -6.2%
YTD: +1.6%

Oil futures: $102.75
Gold futures: $1416.90
(new ‘immediate delivery’ high of $1441.00 in March 2011)
Euro/$ spot: 1.3956

EQUITIES
• China’s ETF assets to out perform ROW, says BlackRock
• China's stock exchanges plan to double ETFs

ECONOMY
• Manufacturing PMIs fall (to 52.2 and 51.7) as monetary policy begins to take effect
• Non-Manufacturing PMI falls sharply (to 44.1) in February on seasonal factors
• Personal tax thresholds and rates to fall
• China's richest man plans to expand into department stores
• China’s energy use to rise 4.24% per annum through 2015 when it will cap energy use at the equivalent of 4 billion tons of coal

MONEY
• February’s new loans decline to less than Yuan 600 billion, claims China Securities Journal
• Money market rate falls to lowest (2.22%) this year
• CBRC’s Liu sees only gains for the Yuan
• Yuan may strengthen faster on liberalisation, says Societe Generale
• NDRC is to ease limits on outward bound investment
• China’s holdings of US Treasuries rises to $1.16 trillion

REAL ESTATE
• Shanghai’s new home sales in February fall 83%, says Uwin
• Beijing new home sales in February fall 70%, says Xinhua
• Shanghai house price also fell 10%, says Uwin
• National house price growth was the slowest in six months in February, says SouFun
• Shanghai makes it is easier to qualify for low cost housing
• China Vanke says that February’s sales rose 142% to Yuan 6.1 billion, year-on-year
• Soho China reports 2010 net profit up 10% and expects commercial real estate prices to rise

CONSTRUCTION
• China builds way to top of global construction league

CEMENT
• Taiwan’s Far Eastern Group plans to buy more cement companies in the People's Republic of China
• West China Cement plans a Yuan 3 billion investment

RAIL
• Railroad yield gap is at a six month high as debt sales increase

DOMESTIC
• Wen welcomes billionaire members to the National People’s Congress - as the wealth gap widens
• China’s drought affected regions have had rain
• China’s defense budget to rise 12.7% to $91 billion this year

HONG KONG
• Hong Kong to give individuals $6,000
• Hong Kong says February home sales rose 37% versus January; and 10% year-on-year

IRON & STEEL
• Australia economics bureau, ABARES, is bullish on iron ore; but says prices will fall as supply rise
• Australia's iron ore exports to rise 5.5% in 2011, says ABARES
• Iron ore shipping rate end 10 day decrease
• Indian iron ore exports fall for seventh month in a row
• ENRC to spend $6.8 billion on iron ore in Kazakhstan and Brazil
• Fortescue in new billion ton iron ore discovery after its H2 2010 prices more than doubled to $138.50
• China International Fund to invest $100 million in Bellzone’s Guinea iron ore project; as Bellzone’s losses increase
• Rio Tinto and Baoshan sign three year coal deal