Back on line

The Chinese say that “it is better to do a good deed near home than to go far away and burn incense”; and I have been far away – some 20,000 kilometres from London in fact. Thank you, too, for all those cards and letters (as the late, great Dean Martin used to say).

During my blog-interregnum, I was first in China and then marketing in Australia – before some ‘down time’ in the nation of my birth New Zealand (aka Godzone); not to mention, brief sojourns in two City states (Hong Kong and Singapore). For the record, the number one issue in all locations was the cost of living. Concern about the housing market is also omnipresent and the prevailing political climes continue to morph to centre/right.

What I love about China, though, is the energy and industriousness of its people and there is a palpable vitality on the street. Nor does it take long to appreciate that there is a wonderful education system at work. It is, too, a truly vast country and increasingly the big boy on the global block. Okay, there is some local difficulty with inflation right now (in April it was 5.4%) and the stock market has fallen 200 points or so since mid-April. (Ai Weiwei and 99 other liberals also remain under spurious arrest).

But the very wise Jim O’Neil, Chairman of Goldman Sachs Asset Management says that his strongest hunch is that China’s inflation may be close to easing, meaning the Chinese stock market may go crazy in the second half. Similarly, the Government will stop tightening policies as price gains moderate. “China’s economy is probably slowing down more than people realise” said O’Neill, who coined the acronym BRIC for the economies of Brazil, Russia, India and China. This means that GDP may slow to about 8% annualised in June through December after 9.7% in Q1. The PBOC has raised interest rates four times since mid-October and, in 2011, has increased bank reserve requirements five times to rein in credit growth. The latest of these (+0.5%) kicks in on Wednesday at which point the large banks will be on 21% and this alone extracts Yuan 370 billion ($57 billion) of lending capacity.

Elsewhere the New York based Conference Board Leading Economic Index for China increased 1.0% in March to 157.0 (2004 = 100), following a 0.3% increase in both February and January. Four of the six components contributed positively to the index in March. “After two months of small increases, the large increase for China in March points to continued economic expansion in 2011. Combined with an up-tick in the coincident economic index (+1.6% to 199.6), the leading indicators suggest that risks of a hard landing for China’s economy in 2011 may be easing. However, growth will likely remain slower than during the second half of 2010. In March, improving consumer expectations and construction activity offset slack in the manufacturing supply chain and declining export orders”.

Real estate
Turning to real estate, it is hard to believe when travelling in China - outside of Beijing and Shanghai - that there is a property bubble. Furthermore, property development investment rose 34.3% in the four months January through April to Yuan 1.33 trillion. Similarly, by volume, China’s newly started property rose 24.4% to 249 million square metres in the first four months of the year. Okay, the value of home sales in the month of April declined 21% as Government measures impacted, but it was still 11% ahead in the first four months of the year: January through April. Similarly, house prices rose 0.4% in April for the eighth consecutive month. Finally, new home construction climbed 21% in the first four months to 440.1 million square metres (although in Beijing sales volume fell 32% to 2.6 million square metres).

More broadly, however, there are concerns that the Chinese Government’s plan to massively increase the supply of social housing will negatively impact developers’ margins. It is committed to building 36 million new homes in the social housing sector over the next five years; and about 10 million of those homes are planned for this year and next, almost twice the 5.8 million target for 2010. However, in my view, the public and private sectors should be able to work together here. For example, the Government can not physically do all the work on its own; and 36 million houses will only house 80 million people from a population of 1.3 billion.

Commodities
Turning to the vexed issue of natural resources, there has been a serious wobble in both price and expectation. The former, of course, can benefit China although in April imports of iron ore fell 11% - from March - to 52.9 million metric tons; they were also 4.4% lower year-on-year. However, import prices at Tianjin Port rose 5.3% in April. Similarly, in the week to 3 May, the price of iron ore with 62% iron content delivered to the Tianjin rose 2.1% to $182.60 per metric ton, the highest level since 14 April.

In terms of the domestic steel industry there are a number of issues, not least profitability in the face of soaring iron ore prices and coal. For example, the price of imported iron ore to China rose 54.4% in Q1. Electricity shortages are also now prevalent once more and the Government aims to cut some 26 million tons of outdated steel production capacity this year.

Taking all this on board, the China Iron & Steel Association says growth in Chinese demand for steel may ease to a rate of between 2.6 and 4.6% annually through 2015 as the economy slows. That is GDP will grow at an average 7% a year through 2015 from 11.2% in the past five years. Growth in apparent steel consumption, which includes stockpiles, averaged 17% a year from 2006 to 2010.

My final point here would be to say that I am not a bear on natural resources. Okay, there had to be a correction on price (and there has been) but demand remains inexorable even with the US and Japan out to lunch. Similarly, the appetite to secure supply (especially of iron ore) remains huge, with Severstal and ArcelorMittall (to name but two) continuing to invest here. Look out, too, for the imminent - and staggering successful - $11 billion IPO for Glencore, one of the World’s largest commodity traders. In addition, there could well be a bonus on dry cargo shipping rates, too, as fleet capacity rises 16% this year while annual volumes of water-borne iron ore rise 7%.

“Travel is fatal to prejudice, bigotry, and narrow-mindedness” - Mark Twain

SHANGHAI COMPOSITE:
Today: -0.77% to 2,849.07 at close
Last week: +0.25%
March: -0.8%
April: -0.6%
May (to date): -2.1%
YTD: +1.5%
Since 5 July 2010: +20.5%
Since 8 Nov. 2010: -9.8%


HANG SENG:
Today: -1.36% to 22,960.63 at close
Last week: +0.51%
March: +0.8%
April: +0.8%
May (to date): -3.2%
YTD: -0.3%
Since 25 May 2010: +20.9%
Since 8 Nov. 2010: -8.0%


OIL FUTURES: $98.10
GOLD FUTURES: $1496.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4123


FORECASTS
• Goldman Sach’s O’Neill says China inflation won’t be a problem as growth cools
• Deutsche Bank’s Jun Ma says China is more cautious on raising interest rates
• China moves on reserve ratios again but interest rate rises may be more limited
• Conference Board indices point to continued economic expansion in China and no hard landing

REAL ESTATE
• Property development investment rises 34.3% in January through April to Yuan 1.33 trillion
• The volume of newly started property in the four months January through April rises by 24.4%
• The value of home sales in China in April declined 21% on Government measures, but it was still 11% ahead for first four months; house prices also rose 0.4% in April for the eighth consecutive month
• Beijing housing sales in January to April drops 32%
• China’s plan to build record numbers of cheap housing may squeeze developers’ profits, says RBS and others

MONEY
• China orders banks to set aside more cash

ECONOMY
• China inflation spreading beyond food suggests that Wen will persist with tightening
• China inflation of 5.3% in April
• Wang calls for China growth model shift amid trade surplus
• China has bigger than forecast surplus on record exports

INVESTMENT
• Poll says China Yuan to be convertible by 2016
• Investors are less optimistic about China; but it still ranks number three Worldwide
• Investors shifting to cash from commodities

BONDS
• Yuan-denominated bonds continue to be popular in HK
• China buys most Japanese bonds since 2005

INDUSTRY
• Nation may face and electricity shortage
• Car sales slow

HONG KONG
• Hong Kong economy expands a faster-than-forecast 7.2% in Q1
• Hong Kong land sales beats estimates

IRON & STEEL

(i) domestic
• Imports of iron ore fall 11% by volume in April from previous month and 4.4% from a year earlier; but prices rise 5.3%
• Iron ore prices at $182.60 per ton on 3 May and expected to hold
• Chinese power cuts may curb steel production
• China steel demand growth may ease to 4.6% as economy slows; as Q1 imported iron ore prices rise 54%

(ii) international
• Iron ore ship rentals fall the most in months due to oversupply of vessels – and are 86% lower than a year ago
• Sundance seeks additional Chinese partner for $4.7 billion African iron ore project
• Severstal agrees to buy access to Brazil’s iron ore licenses
• ArcelorMittal Q1 profit beats estimates; but it sees a seasonal slowdown
• ArcelorMittal South Africa plans to work its own mine
• Quebec plans $83 billion investment in north of province
• Vale posts record quarterly profit - and more than four fold increase - on higher iron ore production and prices
• CSN says profit rises 38% as mining sales offset steel drop
• Vale’s ‘sea monster’ sends shipping returns plummeting