Exploding watermelons

An agrarian minefield has been discovered in Jiangsu Province in eastern China where nearly all the watermelons on a 700 mu site (around 115 acres) have burst open. This was caused, apparently, by a chemical known as forchlorfenuron which is designed to prompt plant growth, but clearly over-did it.

The Chinese authorities have been doing the opposite in the housing market where they have used legislative weed-killer to constrain growth in prices. And, depending upon which commentator you talk to, the crop protection is either working or it isn’t. This is compounded by the fact that the Government has re-cast the calculation of data and where efficacy is questioned.

My view is that the Government has been successful in slowing down the rate of house price inflation, which was its intention i.e. it never wanted germination to cease. But it is a correction not a collapse, given underlying demand and wealth

For example, in April, new homes in nine cities out of 70 recorded a dip in price, while five were flat compared to March. All increases in price, too, were smaller than 1% on a month-on-month basis and 26 cities had smaller rises than March. Year-on-year, three cities had a decline in prices (versus two in March), while 52 witnessed a slowing rate of gain. For the second-hand market, 16 cities recorded an easing in prices, with 13 flat compared to March. Three more cities showed month-on-month declines. On a year-on-year basis, eight cities saw a drop (versus three in March), while 45 slowed. Similarly, sales by floor space in April fell 9.9% from a year earlier, the first drop since September. Overall, too, house prices increased at a faster pace in smaller cities and slowed in major ones, with the exception of southern manufacturing hubs. Month on month for example, new home prices in Beijing rose by just 0.1% while in Guangzhou the rise was +0.7% for the month.

In the money markets there has been a similar result for the central authorities. After the fifth increase in banks’ reserve ratio requirement or RRRs, the seven day repurchase rate declined the most in almost three months this morning (by 138 basis points to 3.21%) on speculation a cash squeeze will ease as banks comply.

Foreign direct investment or FDI in China is also alive and well and in April it rose 15% to $8.5 billion, after a 33% gain in March; and, for the first four months, the total was $38.8 billion, a gain of 26%. Foreign companies are targeting consumers in China as earnings rise and families move to cities from rural areas. China is aiming to increase urban and rural per capita net income by more than 7% a year in real terms over the next five years, according to the National Development and Reform Commission (March 2011). Similarly, Premier Wen aims to shift economic growth to a model which is driven by consumption and is less reliant on exports. “Global investors are still attracted by China’s growth story” said Societe Generale. “The question is what the Chinese Government is going to do about the capital inflows which are putting pressure on the Yuan”. Note, too, that last month, work began on the $4.4 billion Shanghai Disney Resort.

In fact investment spending in emerging markets - overall - is set to outpace expenditure in developed economies for the first time ever in 2011 as a surge in infrastructure supports global growth, according to Citigroup. In turn, this forms part of global fixed investment which will reach $23.2 trillion by 2016, an increase of 61% from last year. Herein, urbanisation in particular is prompting developing countries, including China and India, to spend on roads, power stations and water systems; and putting this in context, McKinsey brilliantly quantifies that China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth. The Nation will also lengthen its rail network to 120,000 kilometres (75,000 miles) from 86,000 by 2015; and its roads will surpass those in the US within five years, from 70% of the size today. Similarly, the Country’s urbanisation ratio is rising towards the level of developed nations, to 63% longer term from 47% now. Going the other way, too, China will also invest more than $1 trillion abroad by 2020, according to the Asia Society and Woodrow Wilson Center for International Scholars.

As a result of this investment, demand for copper, steel and other commodities may very well “provide a floor” beneath raw material prices, according to Principal Global Investors. In addition - and based on one of my favourite adages: ‘it is a thin wind that dries nobody’s washing’ - estimates for spending in Japan in the wake of March’s tragic earthquake and tsunami are of the order of $300 billion, of which some 10% will be spent on steel products, says ANZ. As it rebuilds, Japan’s consumption of steel may climb 8% annually in the next three to five years – and at least half would be imported. “Benchmark that against virtually flat growth in the last 10 years in Japanese steel production and we are talking an additional 10 million tons of steel each year” continues ANZ. In the same vein, Government forecasts say China’s crude steel output may rise 12% this year to 700 million metric tons – up from an earlier estimate of 660 million tons. What is more global seaborne supply of iron ore will fall about 15 million tons short of demand this year, compared with an 11 million ton surplus in 2010, according to Macquarie. It, thus, predicts that Chinese spot prices will probably jump by more than 15% this year. So much for a commodities bust.

“China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth” – McKinsey


SHANGHAI COMPOSITE:
Today: +0.70% to 2,872.77 at close
This week: +0.06%
March: -0.8%
April: -0.6%
May (to date): -1.3%
YTD: +2.3%
Since 5 July 2010: +21.5%
Since 8 Nov. 2010: -9.1%


HANG SENG:
Today: +0.48% to 23,011.14 at close
this week: +0.14%
March: +0.8%
April: +0.8%
May (to date): -3.0%
YTD: -0.3%
Since 25 May 2010: +21.2%
Since 8 Nov. 2010: -7.8%


OIL FUTURES: $98.09
GOLD FUTURES: $1491.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4251


ECONOMY
• Foreign Direct Investment in China climbs 15%
• Limits on electricity usage may reduce Q2 GDP growth by 0.5%, says Shanghai Securities News
• Chinese tourists set new daily record in Hong Kong at 122,893 on the 30th of April

REAL ESTATE
• House prices rise in April as commentators debate their strength
• Value of home sales fell 21% in April, while volume eased 9.9%
• The calculation of house price data has changed (so be careful)
• Reuters bullish on house prices; estimates 4.3% annual gain in April
• Soufun says house prices in April rose 0.4%
• Land sales fall at four major cities
• Insurance companies to be allowed to invest in affordable housing
• China stops developers financing through real estate trusts
• Evergrande Real Estate shares climb in Hong Kong trading on annoucement of Grandday Stake sale
• MGM plans 30 hotels in China to tap growing luxury travel demand

MONEY
• China money market rate drops on new reserve ratio requirement
• China cuts US Treasury holdings as Democrats and Republicans argue on national debt limits

MARKETS
• Investment in emerging markets is set to exceed that in the developed world for the first time

IRON & STEEL
• Tragic Japanese boost for iron ore and Chinese steel exports
• 15 million ton of global iron supply this year
• China steel output to rise by better than expected 12% this year
• Cheaper dry cargo shipping by 67%