Tick, tock

“You Americans, you always look at your watches. We look at our calendar” said, a Chinese education minister to the Carnegie Corporation of New York. I am of neither nationality, but I side with the education minister, especially when both the Shanghai and Hong Kong stock exchanges fell by more than 2% today; and in HK it seems worse given that the points fall was almost 500. Both domestic indicies are now negative in 2011, too.

No prizes for guessing why – as all eyes are on Europe’s sovereign debt issues. Similarly, S&P has said Italy’s credit rating is at risk (the outlook has slipped from stable to negative), while Fitch has cut Greece’s to B+, four steps below investment grade (down from BB+).

“The biggest concern about Europe is the risk of contagion and of credit markets drying up globally” said Platypus Asset Management. “The memory of the global financial crisis is fresh in everyone’s mind, and everybody’s preference is that we don’t go there again. Greece has a disproportionately large ability to cause a lot of collateral damage. Credit is a very important mechanism for quickly transmitting malaise around the world. If Europe’s problems affect credit markets generally it has the ability to derail the global economic recovery”.

Meantime, in China activity is moderating but there will be no hard landing. So says HSBC/Markit as its ‘flash’ PMI for manufacturing eased from 51.8 to 51.1 (the actual one is out on eight days time). Overall, too, the Index suggests that factory output is growing at 13% per annum and GDP at 9%; which is all very nice to be getting on with. The World Bank concurs with its higher forecast for China’s GDP of 9.3% this year (up from 9.0% in March and 8.7% last November); albeit this compares with 10.3% last year. The Bank describes this as “healthy” but it is worried about inflation and urges the Chinese authorities not to ease tightening just yet. The money markets agree and the seven day repo rate has risen for the third day (+62 basis points) to 4.7%. This is despite the general view, that while inflation will continue to rise this quarter (perhaps to as high as 6%), it will moderate in the second half of the year.

Meantime, the Yuan has been perky but lacks international maturity (and will continue to) i.e. after hitting a new high of 6.4948 to the US dollar on 11 May, it dipped 15 basis points this morning to 6.4998.

I don’t think that China wants to raise interest rates again or see a dramatic rise in the value of its currencies. Of course, it will increase rates if needs must, even temporarily; but the currency is a different story. Note, too, that the World Bank has underlined the fact that exports as a share of GDP fell to 29% last year, which compares with 39% in 2006. The economy is changing. In the same vein, Nomura says Chinese stocks will trade in a “range” until the middle of the year amid concerns over inflation and slowing economic growth. But it remains “optimistic” on the market for the full year, saying the economy will likely enter a “soft landing”.

“Oh! Do not attack me with your watch. A watch is always too fast or too slow. I cannot be dictated to by a watch” - Jane Austen

SHANGHAI COMPOSITE
Today: -2.93% to 2,774.57 at close
Last week: -0.44%
March: -0.8%
April: -0.6%
May (to date): -4.7%
YTD: -1.2%
Since 05/07/10: +17.4%
Since 08/11/10: -12.2%

HANG SENG:
Today: -2.11% to 22,711.02 at close
Last week: -0.33%
March: +0.8%
April: +0.8%
May (to date): -4.2%
YTD: -1.4%
Since 25/05/10 +19.6%
Since 08/11/10: -9.0%

OIL FUTURES: $97.26
GOLD FUTURES: $1509.11
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3996

ECONOMY
• China’s growth in manufacturing hits 10 month – but there will be no “hard landing”, according to ‘flash’ PMI from HSBC/Markit
• World Bank raises China’s 2011 GDP forecast from 9.0 to 9.3% and urges more tightening
• Global economy to expand just over 4% this year, says Barclays and Morgan Stanley; down from 4.9% in 2010
• China is unlikely to allow a “jump” in the Yuan’s value, says NERI’s Fan Gang; and inflation will ease in H2

CASH
• Money market rate rises for third day as Companies conserve cash
• Yuan dips after record 6.4948 on 11 May
• China wants its banks to maintain leverage ratio of at least 4%
• Offshore Yuan trading tops $1 billion a day for the first time
• PBOC injects a net Yuan 67 billion into banks via money market

REAL ESTATE
• Stale bear Andy Xie claims that Chinese real estate prices will drop by 50% in three years

ELECTRICITY
• China’s power capacity to rise 77% by 2020, says State Grid

COMPANIES
• Anhui Conch is raising cash at just over 5%
• A majority of Chinese flooring companies face preliminary US duties of as much as 83%

PEOPLE
• Artist Ai Weiwei has evaded “a huge amount” of taxes, says Chinese police

HONG KONG
• HKMA may seek to slow down the growth in Yuan deposits, which is at a record
• City’s banks may moderate credit growth

COMMODITIES
• China is now largest market for gold bar and coins; although India remains largest consumer overall
• Iron ore prices steady as buyers wait
• Iron ore prices may fall on Chinese power shortages, says Deutsche
• China’s daily crude steel output up 0.29% in first 10 days of May
• Glencore is unperturbed about the slide in commodity prices
• Glencore buys iron ore in Brazil
• Chinese shipbuilder examines plans to build the World’s largest commodity carrier
• Quality issues raised with Indian iron ore
• Iron ore “bubble” looms, says Baosteel