'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