Sharp-eyed readers will note that this missive was penned over t’weekend. I am speaking at the Intercem Conference in Barcelona early next week and will be off-blog point until Thursday. Good luck. www.intercem.com
It was St Ambrose in the year AD 390 who coined the much plagiarised precept: “when in Rome, do as the Romans do”. In practice, it advises that it is both polite, and advantageous, to abide by the customs of a society when one is a visitor.
China’s Premier Wen Jiabao is a pretty astute fellow and the first thing he did on his current Europe tour (24 through 28 June) was to pen an exclusive opinion piece for the Financial Times. Herein, he said that China’s efforts to reduce inflation have worked and that the pace of consumer price rises will slow. “There is concern as to whether China can rein in inflation and sustain its rapid development - my answer is an emphatic yes. China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily”.
Wen also pointed to evidence of a moderation in lending and money supply, an “oversupply of main industrial products” and “abundant” grain. For example, new loans ($549 billion) for the first five months of 2011 are an annualised 12% lower, while M2 in May rose the least (15%) since November 2008.
Straight away China’s money market rate declined, ending seven days of advances, on speculation that the PBOC will cease raising interest rates i.e. the seven day repo rate fell 56 basis points to 8.48% on Friday morning, having touched 9.20% earlier, the highest level since October 2007.
Similarly, the Shanghai Composite hauled itself off the floor and ended the day 2.2% to the good and 3.9% on the week. Okay, it is still 10.2% off its 2011 high (18 April) but at one stage was 14.3% down on this basis (at 2621.25 on Monday). The Hang Seng did pretty much the same thing (although it is a net 8.1% off its April peak, having been down 10.5%).
Even the Yuan joined in and, after bouncing off another spot record of 6.4643 (on Wednesday), it closed the week at 6.4715. Furthermore, Twelve Month Non-deliverable Forwards decreased 0.3% last week to 6.3927 per US dollar on Friday morning. The contract was at a 1.2% premium to the spot rate in Shanghai.
And, finally, Ai Weiwei was released on bail after more than two months in jail; and another prominent dissident Hu Jia, who has just completed a three-and-a-half-year jail term, was also released.
Back on tour, at his first port of call in Budapest, Wen pledged support for Europe at this time of crisis and added that China will remain an investor in European markets, including sovereign debt. “In recent years, we have increased by quite a big margin our holdings of government bonds. We will consistently continue to support Europe and the Euro”.
China will also buy a “certain amount” of Hungarian government bonds, he added. In fact China is targeting an increase in trade with Hungary from $8.7 billion last year to $20 billion by 2015. It is also extending a Euro 1 billion loan via its State Development Bank to finance projects in Hungary. In addition, China plans to set up a European transportation logistics base as part of 12 agreements which the two nations signed on the visit; plus make a $1 billion investment in the Hungarian chemical industry.
At the time of writing, on Sunday (CET), Wen was in the UK, where he will most probably be hobnobbing with PM David Cameron at his country residence - ahead of further meetings in London. Then its Angela Merkel’s turn in Berlin.
In other news, China’s manufacturing industry may well have expanded at its slowest pace in 11 months in June, according to a preliminary or ‘flash’ PMI. The 50.1 level reported from HSBC and Markit compares with a final reading of 51.6 in May. A number above 50 indicates expansion. “Demand is cooling thanks to the effect of tightening measures and the slackness in external markets” said HSBC. “But hard landing worries are unwarranted as inflation pressures are easing and industrial production can maintain momentum”. HSBC/Markit’s early PPI is based on 85 to 90% of the total responses to its monthly survey of more than 400 companies. The final reading will be published on 1 July.
Even more startling, is RBS’s view on Chinese equities. It says that the MSCI-China Index could see 40 to 80% of upside through 2012. Okay it is not alone (Citic is newly positive and HSBC is plumping for a 20% rise) but it is the most bullish. RBS points to easy US monetary policy and China’s macro approach which will help the MSCI China Index reach a PER of 18.2x next year; this compares with the current year’s 11.4x. It also believes that rising participation of the private sector in social housing will help support fixed asset investments and provide further impetus. RBS noted, too, that although the private sector housing market appears to be under some pressure, property developers have quietly hopped on the Government’s social housing bandwagon.
Even Henry Kissinger (now 88) is positive, saying - at the Second Global Think Tank Summit held in Beijing - that China, with its growing financial assets and expanding global economic reach, has gained a new confidence; particularly during the fight against the global financial crisis. He also said that China’s growth was one of the essential factors which had prevented a far worse global downturn in 2008; and reminded his audience of the IMF calculations which show that an additional 1% of real growth in China, sustained for five years, adds 0.4% to global growth.
Morgan Stanley’s Chairman Stephen Roach is another high profile bull and likes, in particular, China’s dynamic refocusing towards its consumers. He expects China’s private consumption as a share of GDP will rise as much as five percentage points between now and 2015. In 2008, he says consumption accounted for just 35% of GDP. “I think it’s a great start in the direction of getting the Chinese consumer going and I encourage all of you to take a look at what they’re proposing in terms of job growth, boosting wages and building up the safety net. Over the next five years you’re going to see a powerful impetus from the Chinese consumer, allowing export-led China to wean itself from the zombie American consumer”.
Elsewhere, ING’s Tim Congdon has gone as far as saying that there will be no further interest rates this year (okay he’ s bit lonely right now). “We think the balance of risks for the State Council has shifted to growth from inflation” and “we view Wednesday’s comment by an NDRC official that inflation could accelerate (to 6%) in June as preparing public opinion for higher inflation”.
The PBOC has raised interest rates twice this year (to 6.31%) and the banks’ reserve ratios requirements six times (to 21.5% for the big boys). In my view RRRs are a rapier to interest rate's hatchet; and if ‘Roman’ Wen is right the medicine is working.
“Veni, vidi, vici” (I came, I saw, I conquered”)
- Julius Caesar 100 to 44 BC
SHANGHAI COMPOSITE
Friday: +2.16% to 2,746.21 at close
Last week: +3.91%
May: -5.8%
June (to date) +0.1%
YTD: -2.2%
Since 05/07/10: +16.2%
Since 08/11/10: -13.1%
HANG SENG:
Friday: -1.90% to 22,171.95 at close
Last week: +2.20%
May: -0.2%
June (to date) -6.4%
YTD: -5.5%
Since 25/05/10 +16.8%
Since 08/11/10: -11.2%
OIL FUTURES: $91.16
GOLD FUTURES: $1500.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4188
HEADLINES
WEN’S EUROPEAN TOUR 24 to 28 JUNE
• Chinese inflation is firmly under control says Wen in an FT article at start of Europe visit
• Wen says China will continue to buy European government debt and supports the Euro
• China will buy a “certain amount” of Hungarian Government bonds; and agrees to extend a Euro 1 billion loan
• China plans a transport logistics base in Hungary; and will invest $1 billion in its chemical industry
• HK Chairman of China’s sovereign fund (CIC), Laurence Lau says China is positive about Euro and a solution in Greece
ECONOMY
• HSBC/Markit ‘Flash’ PMI says China manufacturing in June looks set to slow – due to policy tightening
• Kissinger says China gains new confidence during GFC
• Vice Premier Li Keqiang jumps on ‘top priority is to tackle inflation’ bandwagon
• Inflation rate to slow, says State Information Center; although NDRC says it may hit 6% in June (highest since July 2008)
• China should raise rates soon to curb inflation, says China Securities Journal
• Asian consumers are needed to fight “American zombies” says Morgan Stanley’s Stephen Roach
• China food prices spike as floods ruin farmland
• China to give priority to hydro-electric development to 284 gigawatts by 2015
EQUITIES
• Chinese stocks could rise by 40 to 80% next year, says RBS
• Buffet-backed BYD online Shenzhen offering is 21 times oversubscribed; although at a projected $219 million, the IPO will raise less than expected for ‘Build Your Dreams’
• Anthony Bolton's Fidelity Special Situations Fund disappoints
• Macquarie and China Everbright have raised a $729 million China infrastructure fund
CASH
• Money market rate falls after Wen speaks on inflation
• Yuan Forwards declined last week (6.3927); Wen again
• Bank reserve ratio requirement hikes have created cash "pools" for future easing
• Chinese banks falter on monetary tightening
• PBOC tightens controls on offshore Yuan deals
• Credit squeeze has seen smaller companies paying five times base interest rates for debt
• US companies urge US Government to avoid legislation against value of Yuan
• Bigger international role for the Yuan only works with a more open capital account, says Ex-PBOC Advisor Fan Gang
• China should halt gains in Yuan, say two leading economists
• Greenspan says China is mistakenly using currency manipulation to increase employment; US not perfect either
• Hong Kong to provide daily Yuan benchmark from 27 June
REAL ESTATE
• Developers embrace projects for tourists in significant new trend
• Former Premier Zhu Rongji criticises policy of allowing local governments to retain land sale proceeds; but likes the affordable housing programme
COMPANIES
• TCC to spend $3 billion over the next five years expanding its cement operations in China
• Holcim says it is monitoring consolidation in Chinese cement
• Caterpillar remains bullish on China, despite Q2 sales decline
• Porsche Cayenne sales soar in China; as do other SUVs
• ICBC to buy Standard Bank Argentine unit for $700 to 800 million
INTERNATIONAL
• China and India to resume military ties after a year’s hiatus
• Russia and China are the best of the BRICs, says Jim O’Neill of Goldman Sachs
DOMESTIC
• Ai Weiwei released on bail in Beijing
• Prominent Chinese disident Hu Jia is released from jail
• Rains continue as floods kill dozens and force major evacuations
• Strong winds, heavy rains predicted along East China coast as tropical storm Meari approaches
• China offers riot informers cash and other awards
• Government blocks website (www.ibribery.com) which allowed citizens to report payoffs and bribes made to officials
Sunday 26 June 2011
Friday 24 June 2011
Rock or sand: a Chinese real estate special
The - freely adapted - Christian Bible (Matthew 7:24) says if you want your house to stand up in a rain storm/flood then build it on rock. This is what the wise man did. The foolish man, however, built his house upon the sand. “The rains came down and the floods came up and the foolish man’s house went splat”.
Equally divergent are the opinions in China as to how solid the housing market is, given the deluge of Government controls and wave of inflation. In the latest price data, however, there was succour for both. In May, for example, the price of new homes rose by an annualised 4.2%, which was down from April’s 4.5%. Similarly, month on month, May’s rise was 0.2% versus 0.3% in April. In terms of existing homes, May was pretty much flat at 3.2%, year on year, with no real change in the month.
The (beach) bears says that this is the beginning of the end while the (boulder) bulls welcomed the news, which they said underlined both the success of Government policies and the substance of demand. In terms of the latter, new prices rose in 67 of the 70 cities monitored by the Government (66 for existing). Similarly, in a number of less mainstream locations new prices rose by 7% or more and in existing ones by double digits.
The very wise man, Stephen Roach, Chairman of Morgan Stanley believes that the bears are wrong and that bubble fears are overblown as incomes rise and the largest urbanisation in history continues. “I can’t say a bubble will never happen”. But “the important signal Chinese authorities have sent is that unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem”.
Similarly, “the dynamics of prices this year will be much less aggressive than in the past” said Natixis. “If you look at the transaction volumes, the policies are working”. The investment bank also said it is significant that the Chinese government did not did not impose a nationwide flat property tax (to date it has been levied only in Shanghai and Chongqing).
“Underlying demand from the end users is still very much here” said JLL. “There’s no bubble from that perspective”. Nor are Chinese families saddled with big mortgages as domestic buyers have to pay at least a 30% down payment for the first home they buy and 60% for second homes, compared with as low as a zero down payment in the US and UK ahead of its financial crisis. “The western concept of bubble with tremendous level of leverage on home buyers clearly is not the case in China”.
Stephen Roach again. Too much is being made of the so-called Chinese property bubble as China’s urbanisation fuels demand for housing, he said. “China often puts new office and residential supply online before demand. Over the next 20 years, some 360 million people will move from the countryside to cities in China and that provides a powerful source of demand to absorb the supply that’s now being put in place”. Some 170 million people moved to cities in the last 10 years, the biggest urbanisation in history, according to the Chinese Academy of Social Sciences. What is more, the Chinese Government aims to increase the proportion of those living in cities from 47.5 to 51.5% by 2015, according to its latest five year plan; and this would be the first time that those living in the city outnumbered rural dwellers.
But, the process needs to be handled with care. Property accounts for some 10% of GDP and it is a key pillar of the economy. “The Chinese government is facing a dilemma on the one hand to control inflation while on the other hand not wanting the property market to crash” said Patrick Chovanec of Tsinghua University.
Also pragmatic is Citicorp which says that China’s investment in residential property accounted for 6.1% of GDP last year, the same as the record level in the US in 2005 preceding the sub-prime crisis. it also says that The Government is prepared to sacrifice 1.0 to 1.5 percentage points of GDP growth to restrain the property market. “China’s quest to curb property prices is one of the important parts to its fight against inflation. If home transactions slow, property-related consumption and investment might also slow, and take the overall economy with it”.
Nonetheless, Citigroup also adds that the dramatic rise in home prices should be “no surprise” given China’s 30 years of averaging 10% economic growth. “China’s rising home prices are strongly linked with the Country’s economy, which is a process of wealth accumulation”. Similarly, urban household income per capita rose 13.7% in 2010 from 2009; and there is great desire in China to be an owner occupier.
Foreign capital also continues to flow into the Chinese property market despite divergent opinions of which direction it is going. And, in the first five months of the year it surged by an annualised 57.3% to Yuan 26.6 billion. In addition, Singapore’s CapitaLand - which is also South East Asia’s largest developer - says it is aiming to double it portfolio in China over the next five years; and already has $8.1 billion invested.
My final layer comes from the Shanghai stock market where the sub-index of property developers with the Composite is now 7.5% up year-to-date in a stock market off by some 2.3%.
“The loftier the building, the deeper must the foundation be laid” - Thomas Kempis
HEADLINES
• Foreign capital continues to flow into Chinese property
• Chinese banks told to cut loans to property developers, according to Chinese press reports
• Local governments will be allowed to issue bonds to finance construction of affordable housing
• China new home prices rise by an annual average 4.2% in May, with gains in 67 out of 70 cities; existing homes rise by 3.2% (and all but four were higher)
• Government controls on housing market are beginning to have the desired effect; but, happily, in a pretty measured reality; and
• Down payments on houses may rise; for first homes from 30 to 40%
• PBOC poll shows that three-quarters of respondents think house prices are unacceptably high
• Singapore-based CapitaLand aims to double its China portfolio over five years on economic expansion
• Shanghai bar district is to be replicated in Shui On
• Beijing to re-offer nine lots in CBD on 6 July; in a year in which land sales have fallen in value by 75%
• Hong Kong home prices to fall by as much as 15% be year-end, says Walter Kwok
• Cheung Kong’s Chiu says he is “not that bullish” on Asia’s housing market: with Government measures making an impact in China; and in Hong Kong, a flatter outlook
Equally divergent are the opinions in China as to how solid the housing market is, given the deluge of Government controls and wave of inflation. In the latest price data, however, there was succour for both. In May, for example, the price of new homes rose by an annualised 4.2%, which was down from April’s 4.5%. Similarly, month on month, May’s rise was 0.2% versus 0.3% in April. In terms of existing homes, May was pretty much flat at 3.2%, year on year, with no real change in the month.
The (beach) bears says that this is the beginning of the end while the (boulder) bulls welcomed the news, which they said underlined both the success of Government policies and the substance of demand. In terms of the latter, new prices rose in 67 of the 70 cities monitored by the Government (66 for existing). Similarly, in a number of less mainstream locations new prices rose by 7% or more and in existing ones by double digits.
The very wise man, Stephen Roach, Chairman of Morgan Stanley believes that the bears are wrong and that bubble fears are overblown as incomes rise and the largest urbanisation in history continues. “I can’t say a bubble will never happen”. But “the important signal Chinese authorities have sent is that unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem”.
Similarly, “the dynamics of prices this year will be much less aggressive than in the past” said Natixis. “If you look at the transaction volumes, the policies are working”. The investment bank also said it is significant that the Chinese government did not did not impose a nationwide flat property tax (to date it has been levied only in Shanghai and Chongqing).
“Underlying demand from the end users is still very much here” said JLL. “There’s no bubble from that perspective”. Nor are Chinese families saddled with big mortgages as domestic buyers have to pay at least a 30% down payment for the first home they buy and 60% for second homes, compared with as low as a zero down payment in the US and UK ahead of its financial crisis. “The western concept of bubble with tremendous level of leverage on home buyers clearly is not the case in China”.
Stephen Roach again. Too much is being made of the so-called Chinese property bubble as China’s urbanisation fuels demand for housing, he said. “China often puts new office and residential supply online before demand. Over the next 20 years, some 360 million people will move from the countryside to cities in China and that provides a powerful source of demand to absorb the supply that’s now being put in place”. Some 170 million people moved to cities in the last 10 years, the biggest urbanisation in history, according to the Chinese Academy of Social Sciences. What is more, the Chinese Government aims to increase the proportion of those living in cities from 47.5 to 51.5% by 2015, according to its latest five year plan; and this would be the first time that those living in the city outnumbered rural dwellers.
But, the process needs to be handled with care. Property accounts for some 10% of GDP and it is a key pillar of the economy. “The Chinese government is facing a dilemma on the one hand to control inflation while on the other hand not wanting the property market to crash” said Patrick Chovanec of Tsinghua University.
Also pragmatic is Citicorp which says that China’s investment in residential property accounted for 6.1% of GDP last year, the same as the record level in the US in 2005 preceding the sub-prime crisis. it also says that The Government is prepared to sacrifice 1.0 to 1.5 percentage points of GDP growth to restrain the property market. “China’s quest to curb property prices is one of the important parts to its fight against inflation. If home transactions slow, property-related consumption and investment might also slow, and take the overall economy with it”.
Nonetheless, Citigroup also adds that the dramatic rise in home prices should be “no surprise” given China’s 30 years of averaging 10% economic growth. “China’s rising home prices are strongly linked with the Country’s economy, which is a process of wealth accumulation”. Similarly, urban household income per capita rose 13.7% in 2010 from 2009; and there is great desire in China to be an owner occupier.
Foreign capital also continues to flow into the Chinese property market despite divergent opinions of which direction it is going. And, in the first five months of the year it surged by an annualised 57.3% to Yuan 26.6 billion. In addition, Singapore’s CapitaLand - which is also South East Asia’s largest developer - says it is aiming to double it portfolio in China over the next five years; and already has $8.1 billion invested.
My final layer comes from the Shanghai stock market where the sub-index of property developers with the Composite is now 7.5% up year-to-date in a stock market off by some 2.3%.
“The loftier the building, the deeper must the foundation be laid” - Thomas Kempis
HEADLINES
• Foreign capital continues to flow into Chinese property
• Chinese banks told to cut loans to property developers, according to Chinese press reports
• Local governments will be allowed to issue bonds to finance construction of affordable housing
• China new home prices rise by an annual average 4.2% in May, with gains in 67 out of 70 cities; existing homes rise by 3.2% (and all but four were higher)
• Government controls on housing market are beginning to have the desired effect; but, happily, in a pretty measured reality; and
• Down payments on houses may rise; for first homes from 30 to 40%
• PBOC poll shows that three-quarters of respondents think house prices are unacceptably high
• Singapore-based CapitaLand aims to double its China portfolio over five years on economic expansion
• Shanghai bar district is to be replicated in Shui On
• Beijing to re-offer nine lots in CBD on 6 July; in a year in which land sales have fallen in value by 75%
• Hong Kong home prices to fall by as much as 15% be year-end, says Walter Kwok
• Cheung Kong’s Chiu says he is “not that bullish” on Asia’s housing market: with Government measures making an impact in China; and in Hong Kong, a flatter outlook
Friday 17 June 2011
"The Late Show"
“TLS” is a song title from the wonderful Jackson Browne and the refrain includes: “now to see things clear it’s hard enough I know, while you’re waiting for reality to show”. (http://www.youtube.com/watch?v=lF7pMqCZWio)
This is what I think the Chinese Government and the PBOC are doing, despite the ‘reality’ of this week’s higher inflation, soaring money market rates, a record high for the Yuan and a tanking stock market; plus the odd bit of civil unrest. Okay, I have had my head in the (too-busy-in-London) sand this week, too, which is why you haven’t heard from me until now; hence, the raft of headlines below.
Taking these in turn, consumer price inflation in May (5.5%) was at its highest level for 34 months; and included an 11.7% shift in food prices (in August 2010 food price inflation was 7.5%). In response, the PBOC raised the RRR for the largest banks by 50 basis points to 21.5%; the sixth such move this year. This is designed to squeeze liquidity but higher interest rates can do the same. However, the PBOC has steadfastly refused to do anything on the latter; and this despite a two day movement in the money market rate of almost 250 basis points to 6.6%. In addition, the Yuan hit a new all-commers’ high today of 6.4716 to the US dollar. Okay, this was encouraged by the PBOC and will help inflation too (albeit further attracting hot money into the Chinese system).
Turning to share prices, China has not been alone in seeing a serious slump in share prices this week. Possible Greece sovereign default is front and centre and not budging right now. In any event, the Shanghai Composite is 2.3% off this week and 3.7% year-to-date and now at its lowest level since 30 September last year. At the same time, the Hang Seng has fallen 3.2% and 5.8% respectively and is also at its lowest level since September 2010 (20/09).
The push/pull from the bears and bulls continues with Nouriel Roubini hobnobbing with the former hard-landers and the likes of UBS and Blackrock (and me) in the softer herd. The Conference Board has also underlined the trend towards more moderate growth as have this week’s other data including bank lending (-12.5% year to date), M2 growth (at a 30 month low), PPI (unchanged in May), retail sales (below the five year average) and oil consumption (lowest annual growth since October).
Turning to real estate, S&P stole the headlines with its change in outlook for developers from “stable” to “negative” and its forecast of a possible 10% fall in house prices over the next 12 months. But this comes in contrast to the near 35% increase in property investment in the first five months of 2011; including a 9% increase in total floor space. There was also a Chinese real estate conference in Singapore organised by UBS – where the presenters were unanimously and vociferously bullish. Meantime, in Hong Kong, there is some circumspection in real estate (and added controls); nonetheless HKMA CEO Donald Tsang says home prices are rising at 2% per month.
I believe that we have come too far since the bottom of the GFC to regress now; and I expect a responsible solution to events in Greece (yes, this is a big ask). And in China, its wealth and solvent Government will will-out. But it will be a bumpy summer.
“But when you know that you've got a real friend somewhere, suddenly all the others are so much easier to bear” – JB
SHANGHAI COMPOSITE
Today: -0.81% to 2,642.82 at close
This week: -2.30%
May: -5.8%
June (to date) +0.2%
YTD: -3.7%
Since 05/07/10: +11.8%
Since 08/11/10: -16.4%
HANG SENG:
Today: -1.17% to 21,695.26 at close
This week: -3.23%
May: -0.2%
June (to date) -4.3%
YTD: -8.4%
Since 25/05/10 +14.3%
Since 08/11/10: -13.1%
OIL FUTURES: $93.40
GOLD FUTURES: $1526.70
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4225
HEADLINES
ECONOMY – data
• CPI in May was 5.5%, which is up from 5.3% in April; and the highest for 34 months
• Food prices rose 11.7% in May which compares with 11.2% in April (and just 7.5% in August 2010)
• PPI rose 6.8% in May which was unchanged on April
• Retail sales rose 16.9% in May, which is less than the average for the past five years
• FDI in first five months rises 23.4% to $48 billion; with May at +13.4%
• Oil demand in May topped 9 million bpd for seventh month in a row; albeit annualised growth slowed to 8.3% - which is lowest since October 2010
• Conference Board leading indicators shows more moderate growth: +0.2% to 154.5 in May (after a dip in April)
• Public expectations on inflation ease, says PBOC survey
• China’s industrial production rose 13.3% in May
• China fiscal revenue in May rises 34% yoy
ECONOMY – opinion
• Blackrock says China is set for a soft landing
• Inflation maybe heading for 6% says USB and SocGen; interest rate rise inevitable?
• Credit Suisse eases key one year lending rate forecast: 7.16% at year end from 6.31% now
• Credit Suisse forecasts China GDP growth at 8.7% this year and 8.5% in 2012
• George Soros says China has missed a window to stem inflation; and now risks a hard landing
• UBS says China stock valuations are “very attractive”
• China’s economy is at risk of a hard landing after 2013 at the latest, says Nouriel Roubini
• China number one in gold transactions (2010: 604.61 metric tons)
MONEY SUPPLY
• PBOC raises Reserve Requirement Ratio (RRR) by 0.5% to 21.5% for larger banks in the sixth such move this year; but no it adds no such shift in interest rates
• Seven day repurchase rate hit 6.6% on Thursday after two day gain of almost 250 basis points
• Broad money supply, as measured by M2, grew at 15.1% in May which is a 30 month low
• New lending in May at Yuan 551.6 ($85.1 billion) misses expected level of Yuan 610 billion
• New loans, to date, so far in 2011 are running 12.5% less than 2010
• Informal or “grey” lending markets is said to be thriving
• PBOC has not set a target for lending this year, but it is expected to reach Yuan 7.5 billion; which is less than 2010’s tally: Yuan 7.9 billion
• M2 in 2011 is expected to grow by 16%
CASH
• China sells just two thirds (at average 3.9576%) of its Yuan 20 billion bond sale due to interest rate concerns; this is the second time this year that it has happened
• Central bank fixes Yuan mid-point at record high of 6.4716 on Friday, while spot Yuan also hits new record of 6.4716
• SAFE warns on capital inflows
• FX purchases in May rise 21%, month on month, to $58.1 billion
• “Shadow” banking system is a concern, says UBS i.e. banks moving loans to trust companies
• China Development Bank cancels bond sale due to markets
• China increases US Treasury holdings by $7.6 billion in May to $1.15 trillion; this is the first advance in five months
REAL ESTATE
• S&P cuts China property developers outlook from “stable” to “negative” and the Sector may face a deepening correction; and it may be that home prices fall by 10% over the next 12 months
• China’s property investment rose 34.6% in the first five months of the year to Yuan 1.87 trillion; this included an increase in total floor space of 9.1%
• Property trust companies raised a record monthly inflow in May of Yuan 25.6 billion; albeit slower growth is expected in H2
INTERNATIONAL
• Wen to visit Germany, Hungary and UK from 24 through 28 June
• Beijing says “vital” interests are at stake in Europe's debt crisis
• China sends out patrol ship to territorial disputes in South China Sea
• Hilary Clinton chastises China on internet access and “new colonialism” in Africa
DOMESTIC
• China and mineral-rich Mongolia agree $500 million partnership
• Government pledges to improve lives in Inner Mongolia
• Corrupt officials took $124 billion out of China over 15 years, says PBOC report
• Social unrest is getting out of control, according to the Economic Time Bomb Fund
• Starwood Hotels says China will be its largest growth market in three-to-four years; it currently has 90 hotels under construction
• Heavy handedness used to quell riots in Hubei & Guangzhou
• Government boost to affordable homes funding, says Xinhua
• Individual tourism to Taiwan starts late June
• China’s second moon orbiter (Chang’e-2) goes to outer space
HONG KONG
• China wealth is fuelling Hong Kong home price surge (at around 2% per month), according to CEO Donald Tsang
• Home sales collapsed by 58% last weekend due to new HKMA rules
• HKMA raises home loan down payments in battle to ease house price inflation: 50% for HK$10 million or more
• Developers say prices may fall as a high profile luxury sale (Borrett Road) misses estimates
• Authority says it will supply land for 6,000 housing units in Q3
• Short selling climbed to an eight month high (as of 07/06) in Hong Kong on concerns about China
COMMODITIES
• Australia eschews ‘hard landing’ concerns for China
• China’s steel output in May rose to record on property build demand
• Australia’s resource exports dropped in Q1 due to the weather and flooding; but earnings here in 2011-12 fiscal year should still rise 16%
• Commodities bubble will not burst, says Excelsior Mining CEO
• Glencore may make $19.5 billion bid for ENRC, says UK Sunday Times
• Rio Tinto accelerates $676 million investment in Australian iron ore
• Rio is to offer portfolio of iron ore pricing
• Xstrata commences magnetite iron ore shipments from Australia
• Sable Mining acquires 60% of iron ore range in Liberia
• Essar plans iron ore terminal in Mozambique for Zimbabwe exports
• Essar says it will buy more coal and iron ore assets in Indonesian, Australian and African resources to meet India’s domestic demand
• Norilsk seeks to add copper, coal and iron ore assets in Indonesia and Latin America to reduce its reliance on nickel
• Maoist rebels kills 15 security personnel in India, which could stop investment in iron ore and other minerals
This is what I think the Chinese Government and the PBOC are doing, despite the ‘reality’ of this week’s higher inflation, soaring money market rates, a record high for the Yuan and a tanking stock market; plus the odd bit of civil unrest. Okay, I have had my head in the (too-busy-in-London) sand this week, too, which is why you haven’t heard from me until now; hence, the raft of headlines below.
Taking these in turn, consumer price inflation in May (5.5%) was at its highest level for 34 months; and included an 11.7% shift in food prices (in August 2010 food price inflation was 7.5%). In response, the PBOC raised the RRR for the largest banks by 50 basis points to 21.5%; the sixth such move this year. This is designed to squeeze liquidity but higher interest rates can do the same. However, the PBOC has steadfastly refused to do anything on the latter; and this despite a two day movement in the money market rate of almost 250 basis points to 6.6%. In addition, the Yuan hit a new all-commers’ high today of 6.4716 to the US dollar. Okay, this was encouraged by the PBOC and will help inflation too (albeit further attracting hot money into the Chinese system).
Turning to share prices, China has not been alone in seeing a serious slump in share prices this week. Possible Greece sovereign default is front and centre and not budging right now. In any event, the Shanghai Composite is 2.3% off this week and 3.7% year-to-date and now at its lowest level since 30 September last year. At the same time, the Hang Seng has fallen 3.2% and 5.8% respectively and is also at its lowest level since September 2010 (20/09).
The push/pull from the bears and bulls continues with Nouriel Roubini hobnobbing with the former hard-landers and the likes of UBS and Blackrock (and me) in the softer herd. The Conference Board has also underlined the trend towards more moderate growth as have this week’s other data including bank lending (-12.5% year to date), M2 growth (at a 30 month low), PPI (unchanged in May), retail sales (below the five year average) and oil consumption (lowest annual growth since October).
Turning to real estate, S&P stole the headlines with its change in outlook for developers from “stable” to “negative” and its forecast of a possible 10% fall in house prices over the next 12 months. But this comes in contrast to the near 35% increase in property investment in the first five months of 2011; including a 9% increase in total floor space. There was also a Chinese real estate conference in Singapore organised by UBS – where the presenters were unanimously and vociferously bullish. Meantime, in Hong Kong, there is some circumspection in real estate (and added controls); nonetheless HKMA CEO Donald Tsang says home prices are rising at 2% per month.
I believe that we have come too far since the bottom of the GFC to regress now; and I expect a responsible solution to events in Greece (yes, this is a big ask). And in China, its wealth and solvent Government will will-out. But it will be a bumpy summer.
“But when you know that you've got a real friend somewhere, suddenly all the others are so much easier to bear” – JB
SHANGHAI COMPOSITE
Today: -0.81% to 2,642.82 at close
This week: -2.30%
May: -5.8%
June (to date) +0.2%
YTD: -3.7%
Since 05/07/10: +11.8%
Since 08/11/10: -16.4%
HANG SENG:
Today: -1.17% to 21,695.26 at close
This week: -3.23%
May: -0.2%
June (to date) -4.3%
YTD: -8.4%
Since 25/05/10 +14.3%
Since 08/11/10: -13.1%
OIL FUTURES: $93.40
GOLD FUTURES: $1526.70
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4225
HEADLINES
ECONOMY – data
• CPI in May was 5.5%, which is up from 5.3% in April; and the highest for 34 months
• Food prices rose 11.7% in May which compares with 11.2% in April (and just 7.5% in August 2010)
• PPI rose 6.8% in May which was unchanged on April
• Retail sales rose 16.9% in May, which is less than the average for the past five years
• FDI in first five months rises 23.4% to $48 billion; with May at +13.4%
• Oil demand in May topped 9 million bpd for seventh month in a row; albeit annualised growth slowed to 8.3% - which is lowest since October 2010
• Conference Board leading indicators shows more moderate growth: +0.2% to 154.5 in May (after a dip in April)
• Public expectations on inflation ease, says PBOC survey
• China’s industrial production rose 13.3% in May
• China fiscal revenue in May rises 34% yoy
ECONOMY – opinion
• Blackrock says China is set for a soft landing
• Inflation maybe heading for 6% says USB and SocGen; interest rate rise inevitable?
• Credit Suisse eases key one year lending rate forecast: 7.16% at year end from 6.31% now
• Credit Suisse forecasts China GDP growth at 8.7% this year and 8.5% in 2012
• George Soros says China has missed a window to stem inflation; and now risks a hard landing
• UBS says China stock valuations are “very attractive”
• China’s economy is at risk of a hard landing after 2013 at the latest, says Nouriel Roubini
• China number one in gold transactions (2010: 604.61 metric tons)
MONEY SUPPLY
• PBOC raises Reserve Requirement Ratio (RRR) by 0.5% to 21.5% for larger banks in the sixth such move this year; but no it adds no such shift in interest rates
• Seven day repurchase rate hit 6.6% on Thursday after two day gain of almost 250 basis points
• Broad money supply, as measured by M2, grew at 15.1% in May which is a 30 month low
• New lending in May at Yuan 551.6 ($85.1 billion) misses expected level of Yuan 610 billion
• New loans, to date, so far in 2011 are running 12.5% less than 2010
• Informal or “grey” lending markets is said to be thriving
• PBOC has not set a target for lending this year, but it is expected to reach Yuan 7.5 billion; which is less than 2010’s tally: Yuan 7.9 billion
• M2 in 2011 is expected to grow by 16%
CASH
• China sells just two thirds (at average 3.9576%) of its Yuan 20 billion bond sale due to interest rate concerns; this is the second time this year that it has happened
• Central bank fixes Yuan mid-point at record high of 6.4716 on Friday, while spot Yuan also hits new record of 6.4716
• SAFE warns on capital inflows
• FX purchases in May rise 21%, month on month, to $58.1 billion
• “Shadow” banking system is a concern, says UBS i.e. banks moving loans to trust companies
• China Development Bank cancels bond sale due to markets
• China increases US Treasury holdings by $7.6 billion in May to $1.15 trillion; this is the first advance in five months
REAL ESTATE
• S&P cuts China property developers outlook from “stable” to “negative” and the Sector may face a deepening correction; and it may be that home prices fall by 10% over the next 12 months
• China’s property investment rose 34.6% in the first five months of the year to Yuan 1.87 trillion; this included an increase in total floor space of 9.1%
• Property trust companies raised a record monthly inflow in May of Yuan 25.6 billion; albeit slower growth is expected in H2
INTERNATIONAL
• Wen to visit Germany, Hungary and UK from 24 through 28 June
• Beijing says “vital” interests are at stake in Europe's debt crisis
• China sends out patrol ship to territorial disputes in South China Sea
• Hilary Clinton chastises China on internet access and “new colonialism” in Africa
DOMESTIC
• China and mineral-rich Mongolia agree $500 million partnership
• Government pledges to improve lives in Inner Mongolia
• Corrupt officials took $124 billion out of China over 15 years, says PBOC report
• Social unrest is getting out of control, according to the Economic Time Bomb Fund
• Starwood Hotels says China will be its largest growth market in three-to-four years; it currently has 90 hotels under construction
• Heavy handedness used to quell riots in Hubei & Guangzhou
• Government boost to affordable homes funding, says Xinhua
• Individual tourism to Taiwan starts late June
• China’s second moon orbiter (Chang’e-2) goes to outer space
HONG KONG
• China wealth is fuelling Hong Kong home price surge (at around 2% per month), according to CEO Donald Tsang
• Home sales collapsed by 58% last weekend due to new HKMA rules
• HKMA raises home loan down payments in battle to ease house price inflation: 50% for HK$10 million or more
• Developers say prices may fall as a high profile luxury sale (Borrett Road) misses estimates
• Authority says it will supply land for 6,000 housing units in Q3
• Short selling climbed to an eight month high (as of 07/06) in Hong Kong on concerns about China
COMMODITIES
• Australia eschews ‘hard landing’ concerns for China
• China’s steel output in May rose to record on property build demand
• Australia’s resource exports dropped in Q1 due to the weather and flooding; but earnings here in 2011-12 fiscal year should still rise 16%
• Commodities bubble will not burst, says Excelsior Mining CEO
• Glencore may make $19.5 billion bid for ENRC, says UK Sunday Times
• Rio Tinto accelerates $676 million investment in Australian iron ore
• Rio is to offer portfolio of iron ore pricing
• Xstrata commences magnetite iron ore shipments from Australia
• Sable Mining acquires 60% of iron ore range in Liberia
• Essar plans iron ore terminal in Mozambique for Zimbabwe exports
• Essar says it will buy more coal and iron ore assets in Indonesian, Australian and African resources to meet India’s domestic demand
• Norilsk seeks to add copper, coal and iron ore assets in Indonesia and Latin America to reduce its reliance on nickel
• Maoist rebels kills 15 security personnel in India, which could stop investment in iron ore and other minerals
Friday 10 June 2011
“Beginning of the Great Revival”
This is the title of the latest Chinese blockbuster movie which was launched at a glittering party this week. It was pure Hollywood, unlike the subject matter which marks the 90th anniversary of the Chinese Communist Party and traces its origins from the 1911 revolution through the official founding on 31 July 1921. It is part of a series of events.
How the PBOC must wish that reality-imitates-art and that “Beginning the Great Revival” could also be a stock market headline. At the close today, the Shanghai Composite had nudged up but was still nearly 1% down this week, which makes it minus 3.7% for the year and minus 11.4% from April’s peak. This is despite, a growing number of commentators (the latest being HSBC, Credit Suisse and Deutsche) saying that it is time to buy the market, with HSBC looking for a 20% bounce by year-end.
But there is clearly no audio loop in this cinema and nor will there be until the PBOC raises interest rates. South Korea did so today (up 25 basis points to 3.25%) for what will be the same reasons as China. This was a bit of a surprise, though, whereas it won’t be in China. And, by way or a trailer, the repo rate has risen 130 basis points this week to 4.77% (in morning trade), the biggest gain since January and including some 63 basis points today. In any event, the main movie, May’s RPI data, is shown on Tuesday (14/06).
By way of a happier first feature, China today reported a less than expected $13.1 billion trade surplus for May as imports jumped 28% and exports slowed to 19% growth. Okay, this is up on April’s $11.4 billion but it was also significantly less than May 2010 ($19.5 billion). The bulls took this to mean that the Government is managing the economy and easing it away from being an export-led economy towards a consumer society; whereas the bears said the data underlined a slowing World economy and a domestic hard landing.
In its title credits, the PBOC can also claim to be directing the Yuan with some aplomb. For example, the spot rate dipped today to 6.4779 - after the Bank eased its fixing rate. This follows a record spot high of 6.4755 on Wednesday. It is clear now that appreciation of the currency (+1.7% this year) has a supporting role in the fight against inflation. Nonetheless, the PBOC maintains a hands-on approach towards the pace of gains with a weather eye on other economic variables.
In the real estate cinema, May made a very good showing with Agile, Gemdale, Poly RE and Yuexiu all reporting higher sales values and volumes in the month; with Gemdale in the lead role with a tripling to Yuan 2 billion ($309 million). Not that the prime investment audience agrees and the property sub-index within the Shanghai Composite is down nearly 4% so far this year. Also negative, is the story that home purchase restrictions may be extended to China’s third and fourth tier cities, according to China Business Journal. More positive, though, is the fact that the nationwide construction of low cost housing (36 million units over five years) should begin by the end of November, reports the Shanghai Securities News. Similarly, the Government has allocated Yuan 5 billion in a special fund to improve the safety of primary and junior high school buildings across the Country.
Have we seen this one before? I hope so; and I was always a sucker for a happy ending.
SHANGHAI COMPOSITE
Today: +0.07% to 2,705.13 at close
This week: -0.84%
May: -5.8%
June (to date) -1.4%
YTD: -3.7%
Since 05/07/10: +14.4%
Since 08/11/10: -14.4%
HANG SENG:
Today: -0.84% to 22,420.37 at close
This week: -2.312%
May: -0.2%
June (to date) -5.3%
YTD: -2.3%
Since 25/05/10 +18.1%
Since 08/11/10: -10.2%
OIL FUTURES: $101.57
GOLD FUTURES: $1545.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4479
ECONOMY
• May’s trade surplus is less than expected at $13.1 billion
• China is an “economic success story”, says Warburg Pincus
• Every boom busts and China will be no exception, says Blackhorse
EQUITIES
• Shanghai stocks to rally 20% by year end
• Deutsche Bank upgrades too
• Car sales dip in April after two stellar years
CASH
• Money market's seven day repurchase rate is on target for its largest weekly increase since January
• Yuan Forwards rise
• Yuan edges lower on PBOC direction; although further appreciation is expected
• Rising Yuan will help rebalance Chinese economy, says IMF
REAL ESTATE
• Developers see sales in May soar, with Gemdale tripling
• China to extend home purchase restrictions as speculative buying increases in lower-tier cities
• Affordable housing push will begin by the end of November, reports Shanghai Securities News
DOMESTIC
• China launches star-studded propaganda movie
• Floods kill 18 and injure over 100 in central China
• Earthquake measuring 5.3 hit Toksun County on Wednesday
INTERNATIONAL
• China to develop economic development zones in North Korea
• CICC’s UK Unit becomes LSE's first Chinese member firm
COMMODITIES
• Baosteel announces a reduction in cuts July steel product prices by Yuan 100-200 per tonne
• Iron ore prices may remain around a two week high, says SSY
• UBS says there is potential for 500 million of new iron ore supply
• Noble Group trumps Exxaro bid for Australia’s Territory Resources
• Miners search far and wide in Australia for new sources of iron ore
How the PBOC must wish that reality-imitates-art and that “Beginning the Great Revival” could also be a stock market headline. At the close today, the Shanghai Composite had nudged up but was still nearly 1% down this week, which makes it minus 3.7% for the year and minus 11.4% from April’s peak. This is despite, a growing number of commentators (the latest being HSBC, Credit Suisse and Deutsche) saying that it is time to buy the market, with HSBC looking for a 20% bounce by year-end.
But there is clearly no audio loop in this cinema and nor will there be until the PBOC raises interest rates. South Korea did so today (up 25 basis points to 3.25%) for what will be the same reasons as China. This was a bit of a surprise, though, whereas it won’t be in China. And, by way or a trailer, the repo rate has risen 130 basis points this week to 4.77% (in morning trade), the biggest gain since January and including some 63 basis points today. In any event, the main movie, May’s RPI data, is shown on Tuesday (14/06).
By way of a happier first feature, China today reported a less than expected $13.1 billion trade surplus for May as imports jumped 28% and exports slowed to 19% growth. Okay, this is up on April’s $11.4 billion but it was also significantly less than May 2010 ($19.5 billion). The bulls took this to mean that the Government is managing the economy and easing it away from being an export-led economy towards a consumer society; whereas the bears said the data underlined a slowing World economy and a domestic hard landing.
In its title credits, the PBOC can also claim to be directing the Yuan with some aplomb. For example, the spot rate dipped today to 6.4779 - after the Bank eased its fixing rate. This follows a record spot high of 6.4755 on Wednesday. It is clear now that appreciation of the currency (+1.7% this year) has a supporting role in the fight against inflation. Nonetheless, the PBOC maintains a hands-on approach towards the pace of gains with a weather eye on other economic variables.
In the real estate cinema, May made a very good showing with Agile, Gemdale, Poly RE and Yuexiu all reporting higher sales values and volumes in the month; with Gemdale in the lead role with a tripling to Yuan 2 billion ($309 million). Not that the prime investment audience agrees and the property sub-index within the Shanghai Composite is down nearly 4% so far this year. Also negative, is the story that home purchase restrictions may be extended to China’s third and fourth tier cities, according to China Business Journal. More positive, though, is the fact that the nationwide construction of low cost housing (36 million units over five years) should begin by the end of November, reports the Shanghai Securities News. Similarly, the Government has allocated Yuan 5 billion in a special fund to improve the safety of primary and junior high school buildings across the Country.
Have we seen this one before? I hope so; and I was always a sucker for a happy ending.
SHANGHAI COMPOSITE
Today: +0.07% to 2,705.13 at close
This week: -0.84%
May: -5.8%
June (to date) -1.4%
YTD: -3.7%
Since 05/07/10: +14.4%
Since 08/11/10: -14.4%
HANG SENG:
Today: -0.84% to 22,420.37 at close
This week: -2.312%
May: -0.2%
June (to date) -5.3%
YTD: -2.3%
Since 25/05/10 +18.1%
Since 08/11/10: -10.2%
OIL FUTURES: $101.57
GOLD FUTURES: $1545.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4479
ECONOMY
• May’s trade surplus is less than expected at $13.1 billion
• China is an “economic success story”, says Warburg Pincus
• Every boom busts and China will be no exception, says Blackhorse
EQUITIES
• Shanghai stocks to rally 20% by year end
• Deutsche Bank upgrades too
• Car sales dip in April after two stellar years
CASH
• Money market's seven day repurchase rate is on target for its largest weekly increase since January
• Yuan Forwards rise
• Yuan edges lower on PBOC direction; although further appreciation is expected
• Rising Yuan will help rebalance Chinese economy, says IMF
REAL ESTATE
• Developers see sales in May soar, with Gemdale tripling
• China to extend home purchase restrictions as speculative buying increases in lower-tier cities
• Affordable housing push will begin by the end of November, reports Shanghai Securities News
DOMESTIC
• China launches star-studded propaganda movie
• Floods kill 18 and injure over 100 in central China
• Earthquake measuring 5.3 hit Toksun County on Wednesday
INTERNATIONAL
• China to develop economic development zones in North Korea
• CICC’s UK Unit becomes LSE's first Chinese member firm
COMMODITIES
• Baosteel announces a reduction in cuts July steel product prices by Yuan 100-200 per tonne
• Iron ore prices may remain around a two week high, says SSY
• UBS says there is potential for 500 million of new iron ore supply
• Noble Group trumps Exxaro bid for Australia’s Territory Resources
• Miners search far and wide in Australia for new sources of iron ore
Wednesday 8 June 2011
Bet on growth
“Worry less about inflation and more about growth” are the wise words from Garry Evans Head of Global Strategy at HSBC. This is true of many locations, but China in particular; and this from a commentator who thinks that national CPI inflation might well hit 6% this month. But this would be temporary and Garry also believes that it will be 3% by year end.
The more exotically-named Hans Goetti, CIO of Finaport Investment Intelligence agrees and says that the stock market in China has pulled back because of fears of a hard landing; and, to be fair, you can make a case for it. However, he added that a slowdown is a buying opportunity – in fact every growth scare is a buying opportunity. Sure China’s growth is slowing and inflation is rising; and there will be a further rise in both interest rates and the RRR. However, both M1 and M2 have been slowing and China is the only country to make a success out of QE and what sets it apart is the PBOC’s ability to turn the liquidity tap on and off; and it does.
Third in a hat-trick of commentators, is Jim McGregor of APCO Worldwide (who is also a former CEO of Dow Jones China). He said that in financial markets China does not make big moves, but instead it acts in a very, very gradual way.
This is why the PBOC has not been rushed into a further rise in interest rates despite the OECD and the Chairman of Construction Bank saying that it should. The Bank of Communications agrees but also implied that this could be the last hike. Inflation is not out of control and is likely to fall in the second half.
Indeed, after due consideration and ample market prep, though, it is almost inevitable that the PBOC will act this month and raise interest rates. When this does happen, though, the stock market is likely to rise not fall.
In another leg of monetary strategy, the spot Yuan hit a new record high of 6.4759 against the US dollar today. This followed the PBOC setting its mid-point fixing rate also at a record high (6.4766). The Yuan has gained more than 1.7% in 2011 to date and the smart money is that it will rise by a total of 5 to 6% for the year as a whole.
In a bout of sabre-ratting, too, China’s State Administration of Foreign Exchange said the US dollar would continue to weaken. It also warned about the risk of excessive US dollar holdings. While the dollar dipped (including a record low against the Swiss Franc), no one really expects China to do anything about its vast investment in US Treasuries (circa $1 trillion at the last count), save for a new-found diversification (of cash) into Japanese Government bonds. When you are sitting on $3 trillion of FX reserves, you have to put it somewhere; even the PBOC’s mattress is only so big.
Unusually, there was some good news for the property sector today when China Vanke, the Nation’s largest developer by sales, said that May’s revenue jumped 76.4% to Yuan 9 billion ($1.4 billion), which followed April’s dismal gain of 1.3%. In the broader market, too, commercial property transaction volumes across the Country in May rose 150% to a three year high of 3,347. The wonderfully named MOHURD (Ministry of Housing and Urban-Rural Development) has also said that it will renovate 2.65 million dilapidated homes in rural areas; albeit to spoil the party, land sale revenues in 128 Chinese cities dipped 5% year-on-year in the first five months of 2011.
Someone else not joining in the fun was Ben Bernanke with his speech last night and his view that the Fed should maintain record monetary stimulus to boost an “uneven” and “frustratingly slow” US economic recovery. Global equity markets fell. Nonetheless, I leave you the wise words of my former colleague Stephen Roach who is Morgan Stanley’s Chairman. China is not immune to issues and has an awful lot on its plate right now. But it also has a strategy to grow, a commitment to the strategy and the wherewithal to deliver. I would not bet against them in terms of staying the course of pretty impressive economic growth for years to come.
“I would not bet against them” – Stephen Roach, Chairman of Morgan Stanley
SHANGHAI COMPOSITE
Today: +0.22% to 2,750.23 at close
This week: +0.82%
May: -5.8%
June (to date) +0.2%
YTD: -2.1%
Since 05/07/10: +16.3%
Since 08/11/10: -13.0%
HANG SENG:
Today: -0.91% to 22,661.63 at close
This week: -1.25%
May: -0.2%
June (to date) -4.3%
YTD: -1.6%
Since 25/05/10 +19.4%
Since 08/11/10: -8.1%
OIL FUTURES: $98.32
GOLD FUTURES: $1537.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4657
ECONOMY
• OECD says China must lift rates by another 50 basis points
• Construction Bank Chairman has said that China needs to raise its interest rates
• China may stop raising interest rates soon, says BoC
• China is likely to avoid Japan growth policy mistakes, says Morgan Stanley’s Stephen Roach
MONEY
• Yuan hits record high (6.4759) as inflation pressures stay elevated
• US Dollar Index hits a one month low as China warns on its value and US Treasuries; the dollar also hit a new all-time low against the Swiss Franc (0.8328)
• Money market rate drops as maturing bills add cash
• PBOC may widen Yuan trading band to 1%, says Standard Chartered
• China purchases of Japan debt reach a new record
REAL ESTATE
• China Vanke’s property sales rise 76% in May pct
• Volume and value of residential land sales fell 5% in first five months; nonetheless commercial property transactions remain strong (+150% in May)
• Apartment sales in Beijing's most expensive complex suspended
• China to renovate 2.65 million dilapidated houses in rural areas
INDUSTRY
• Passenger car sales in May rise by 25 % year-on-year; albeit 11% down on April [CORRECTION]
DOMESTIC
• US Defense Secretary-elect says China appears to be building up military capability on its borders
• Libya Interim Council Foreign Minister visits China
• Floods kill at least 20 in Guizhou and even more are missing, reports Xinhua
• China gives bleak assessment of its battered environment
HONG KONG
• Hong Kong banks lead the way on higher mortgage rates which has eased the boom in home prices
• Property deals in Hong Kong rise 21% on new project sales
COMMODITIES
• Iron ore spot rise as Chinese mill restock
• China dry bulk volumes are slowing, says COSCO
• Rio Tinto says $10 billion Guinea iron ore mine is attracting sovereign wealth funds; Chalco is already an investor with 44.7%; and Baosteel is “very interested”
• Rio says it is on track to produce over 240 million tonnes of iron ore in 2011 (2010: 239 mt)
• ArcelorMittal resumes iron ore production in Liberia
• Kumba may face a strike call in RSA
• Expect short term commodity price slowdown, followed by long term strength, says Macquarie
• Anglo American may sell stake in Brazilian iron ore mine
• Baltic Dry Index sustains two month high due to coal demand
• Owners reduce vessel speeds to try and save margins
• Palmer ends fourth try at $3.6 billion Resourcehouse IPO
The more exotically-named Hans Goetti, CIO of Finaport Investment Intelligence agrees and says that the stock market in China has pulled back because of fears of a hard landing; and, to be fair, you can make a case for it. However, he added that a slowdown is a buying opportunity – in fact every growth scare is a buying opportunity. Sure China’s growth is slowing and inflation is rising; and there will be a further rise in both interest rates and the RRR. However, both M1 and M2 have been slowing and China is the only country to make a success out of QE and what sets it apart is the PBOC’s ability to turn the liquidity tap on and off; and it does.
Third in a hat-trick of commentators, is Jim McGregor of APCO Worldwide (who is also a former CEO of Dow Jones China). He said that in financial markets China does not make big moves, but instead it acts in a very, very gradual way.
This is why the PBOC has not been rushed into a further rise in interest rates despite the OECD and the Chairman of Construction Bank saying that it should. The Bank of Communications agrees but also implied that this could be the last hike. Inflation is not out of control and is likely to fall in the second half.
Indeed, after due consideration and ample market prep, though, it is almost inevitable that the PBOC will act this month and raise interest rates. When this does happen, though, the stock market is likely to rise not fall.
In another leg of monetary strategy, the spot Yuan hit a new record high of 6.4759 against the US dollar today. This followed the PBOC setting its mid-point fixing rate also at a record high (6.4766). The Yuan has gained more than 1.7% in 2011 to date and the smart money is that it will rise by a total of 5 to 6% for the year as a whole.
In a bout of sabre-ratting, too, China’s State Administration of Foreign Exchange said the US dollar would continue to weaken. It also warned about the risk of excessive US dollar holdings. While the dollar dipped (including a record low against the Swiss Franc), no one really expects China to do anything about its vast investment in US Treasuries (circa $1 trillion at the last count), save for a new-found diversification (of cash) into Japanese Government bonds. When you are sitting on $3 trillion of FX reserves, you have to put it somewhere; even the PBOC’s mattress is only so big.
Unusually, there was some good news for the property sector today when China Vanke, the Nation’s largest developer by sales, said that May’s revenue jumped 76.4% to Yuan 9 billion ($1.4 billion), which followed April’s dismal gain of 1.3%. In the broader market, too, commercial property transaction volumes across the Country in May rose 150% to a three year high of 3,347. The wonderfully named MOHURD (Ministry of Housing and Urban-Rural Development) has also said that it will renovate 2.65 million dilapidated homes in rural areas; albeit to spoil the party, land sale revenues in 128 Chinese cities dipped 5% year-on-year in the first five months of 2011.
Someone else not joining in the fun was Ben Bernanke with his speech last night and his view that the Fed should maintain record monetary stimulus to boost an “uneven” and “frustratingly slow” US economic recovery. Global equity markets fell. Nonetheless, I leave you the wise words of my former colleague Stephen Roach who is Morgan Stanley’s Chairman. China is not immune to issues and has an awful lot on its plate right now. But it also has a strategy to grow, a commitment to the strategy and the wherewithal to deliver. I would not bet against them in terms of staying the course of pretty impressive economic growth for years to come.
“I would not bet against them” – Stephen Roach, Chairman of Morgan Stanley
SHANGHAI COMPOSITE
Today: +0.22% to 2,750.23 at close
This week: +0.82%
May: -5.8%
June (to date) +0.2%
YTD: -2.1%
Since 05/07/10: +16.3%
Since 08/11/10: -13.0%
HANG SENG:
Today: -0.91% to 22,661.63 at close
This week: -1.25%
May: -0.2%
June (to date) -4.3%
YTD: -1.6%
Since 25/05/10 +19.4%
Since 08/11/10: -8.1%
OIL FUTURES: $98.32
GOLD FUTURES: $1537.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4657
ECONOMY
• OECD says China must lift rates by another 50 basis points
• Construction Bank Chairman has said that China needs to raise its interest rates
• China may stop raising interest rates soon, says BoC
• China is likely to avoid Japan growth policy mistakes, says Morgan Stanley’s Stephen Roach
MONEY
• Yuan hits record high (6.4759) as inflation pressures stay elevated
• US Dollar Index hits a one month low as China warns on its value and US Treasuries; the dollar also hit a new all-time low against the Swiss Franc (0.8328)
• Money market rate drops as maturing bills add cash
• PBOC may widen Yuan trading band to 1%, says Standard Chartered
• China purchases of Japan debt reach a new record
REAL ESTATE
• China Vanke’s property sales rise 76% in May pct
• Volume and value of residential land sales fell 5% in first five months; nonetheless commercial property transactions remain strong (+150% in May)
• Apartment sales in Beijing's most expensive complex suspended
• China to renovate 2.65 million dilapidated houses in rural areas
INDUSTRY
• Passenger car sales in May rise by 25 % year-on-year; albeit 11% down on April [CORRECTION]
DOMESTIC
• US Defense Secretary-elect says China appears to be building up military capability on its borders
• Libya Interim Council Foreign Minister visits China
• Floods kill at least 20 in Guizhou and even more are missing, reports Xinhua
• China gives bleak assessment of its battered environment
HONG KONG
• Hong Kong banks lead the way on higher mortgage rates which has eased the boom in home prices
• Property deals in Hong Kong rise 21% on new project sales
COMMODITIES
• Iron ore spot rise as Chinese mill restock
• China dry bulk volumes are slowing, says COSCO
• Rio Tinto says $10 billion Guinea iron ore mine is attracting sovereign wealth funds; Chalco is already an investor with 44.7%; and Baosteel is “very interested”
• Rio says it is on track to produce over 240 million tonnes of iron ore in 2011 (2010: 239 mt)
• ArcelorMittal resumes iron ore production in Liberia
• Kumba may face a strike call in RSA
• Expect short term commodity price slowdown, followed by long term strength, says Macquarie
• Anglo American may sell stake in Brazilian iron ore mine
• Baltic Dry Index sustains two month high due to coal demand
• Owners reduce vessel speeds to try and save margins
• Palmer ends fourth try at $3.6 billion Resourcehouse IPO
Friday 3 June 2011
Elephant in the room
Glimpses of large wildlife, for most of us, are reserved for the zoo and, on any given holiday weekend (as it is in China now), this is a popular destination. Chief poacher turned game-keeper, the PBOC, agrees. But every now and again, it has to take Jumbo to the vet; even on a long weekend. Of course, this risks disappointing the punters, but it also means a healthier animal and a healthier zoo.
So it is with monetary policy, and loathe as the PBOC is to raise interest rates this weekend (in what would be the fifth such move since September); it may be best for the Country and its inflation; and long term interest-rate-swaps agree. It is a fine line, of course, particularly as the economic doves say that inflation will subside in the second half (even if it tops 6% before then). The hawks, however, says move now and perhaps by a total of 100 basis points by the end of the year.
The deafening background noise this week, too, has been local authority debt which may run to some Yuan 10 trillion ($1.54 trillion); and how much of it will turn sour. This is particularly pertinent, too, as local authorities earn less from land sales. Credit Suisse says that the average price of land sold this year has fallen 51%. Hand in hand comes concern over central and local government funding of 36 million new homes by 2015, some 10 million of which are planned this year. Should that come to pass, Standard Chartered says that the ‘financing hole’ in 2011 is of the order of Yuan 817 million to 1.4 trillion which will have to come from bank loans.
Similarly, Fitch says - in what I hope is a worse case scenario - that 30% of GDP may be needed to address any “future banking difficulties”. That said, it also points out that China did not suffer the same as the West in the GFC and that China’s 2010 debt-to-GDP ratio was around 19%, according to IMF data. This compares with: the US at 93% last year; Japan at 226%; and Spain at 64%.
It is perhaps surprising then that the Shanghai Composite closed the week off just a touch (0.6%). However it remains negative for the year to date (-2.9%) and is still a “correctional” 10.8% off its April high. Haitong Securities said “there’s limited room for declines now as earnings are still growing, though possibly at a slower pace. There’s some speculation that inflation might peak in the second half of the year and that’ll help improve the market sentiment”. And, it is a sentiment driven market.
The very excellent Jing Ulrich of JPM said something similar i.e. China’s stock market won’t stabilise until inflation peaks; and Government policies may be more accommodating in the fourth quarter after economic growth moderates in the previous three months. In the same vein, Government economist (and former PBOC advisor) Fang Gang said that inflation will probably peak at the end of this month, averting a hard landing for the economy. He also said that commodity prices have stabilised as tighter monetary policies over the past eight months have absorbed excess liquidity.
In the real economy, two PMIs for non-manufacturing or services showed divergent paths in May, while AlixPartners expects the light vehicle market to grow at 12-15% per annum through 2016; plus the Beijing-Shanghai Bullet train is ready to depart (later this month).
Finally, hats off to Li Na who thrashed Maria Sharapova at the French Tennis Open. This is the first time a Chinese player has made the final in Paris.
“Success in sport is the cream atop the geopolitical leadership cake” - Anon
SHANGHAI COMPOSITE
Today: +0.84% to 2,728.02 at close
This week: -0.56%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.9%
Since 05/07/10: +15.4%
Since 08/11/10: -13.7%
HANG SENG:
Today: -1.31% to 22,949.56 at close
This week: -1.01%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: -0.4%
Since 25/05/10 +20.9%
Since 08/11/10: -8.1%
OIL FUTURES: $99.70
GOLD FUTURES: $1533.40
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4494
ECONOMY
• China’s non-manufacturing sector growth shows both a rise and a fall in May according to two PMIs
CASH
• Money market rate declines by the most since March
• Long term interest-rate-swaps rise on interest rate fears
• Yuan strengthens 40 basis points to hit 6.4805 - close to near 17 year high of 6.4777 on Wednesday
• Government economist Fang Gang predicts Yuan may stop rising after two to three years; no hard landing and less interest rate hikes
• PBOC urges “paying attention” local government debt risk.
• China must consider selling municipal bonds, says PBOC
• China to be global banking king by 2023, says PwC
REAL ESTATE
• Property market controls are ‘permanent’
• Shanghai new house prices dip 0.64% in May, says UWin
• Average transaction land prices fell 32% in April; and 51% since the start of the year – which exacerbates local government funding
• 36 million new homes by 2015 is laudable, but question remain about funding
INDUSTRY
• Passenger car sales fall an annualised 1% in May; 11% on month
• China automobile market is set to grow 12-15% per annum through 2016, says AlixPartners survey
DOMESTIC
• Beijing-Shanghai Bullet Train ‘leaves station’ later this month
• China to double solar power by 2015, says Securities
COMMODITIES
• Rio Tinto to study pricing iron ore in Yuan
• Singapore iron ore swap volume hits record in May
• Resourcehouse considers cutting IPO price
• Asian steel prices are weakening, says Steel Market Intelligence
• S&P says there is a risk that a “sudden” slowdown in China could lead to a 75% collapse in commodity prices; nonetheless, its ‘base case’ is much more sanguine
• ArcelorMittal may build $1 billion Brazil plant, says Reuters
So it is with monetary policy, and loathe as the PBOC is to raise interest rates this weekend (in what would be the fifth such move since September); it may be best for the Country and its inflation; and long term interest-rate-swaps agree. It is a fine line, of course, particularly as the economic doves say that inflation will subside in the second half (even if it tops 6% before then). The hawks, however, says move now and perhaps by a total of 100 basis points by the end of the year.
The deafening background noise this week, too, has been local authority debt which may run to some Yuan 10 trillion ($1.54 trillion); and how much of it will turn sour. This is particularly pertinent, too, as local authorities earn less from land sales. Credit Suisse says that the average price of land sold this year has fallen 51%. Hand in hand comes concern over central and local government funding of 36 million new homes by 2015, some 10 million of which are planned this year. Should that come to pass, Standard Chartered says that the ‘financing hole’ in 2011 is of the order of Yuan 817 million to 1.4 trillion which will have to come from bank loans.
Similarly, Fitch says - in what I hope is a worse case scenario - that 30% of GDP may be needed to address any “future banking difficulties”. That said, it also points out that China did not suffer the same as the West in the GFC and that China’s 2010 debt-to-GDP ratio was around 19%, according to IMF data. This compares with: the US at 93% last year; Japan at 226%; and Spain at 64%.
It is perhaps surprising then that the Shanghai Composite closed the week off just a touch (0.6%). However it remains negative for the year to date (-2.9%) and is still a “correctional” 10.8% off its April high. Haitong Securities said “there’s limited room for declines now as earnings are still growing, though possibly at a slower pace. There’s some speculation that inflation might peak in the second half of the year and that’ll help improve the market sentiment”. And, it is a sentiment driven market.
The very excellent Jing Ulrich of JPM said something similar i.e. China’s stock market won’t stabilise until inflation peaks; and Government policies may be more accommodating in the fourth quarter after economic growth moderates in the previous three months. In the same vein, Government economist (and former PBOC advisor) Fang Gang said that inflation will probably peak at the end of this month, averting a hard landing for the economy. He also said that commodity prices have stabilised as tighter monetary policies over the past eight months have absorbed excess liquidity.
In the real economy, two PMIs for non-manufacturing or services showed divergent paths in May, while AlixPartners expects the light vehicle market to grow at 12-15% per annum through 2016; plus the Beijing-Shanghai Bullet train is ready to depart (later this month).
Finally, hats off to Li Na who thrashed Maria Sharapova at the French Tennis Open. This is the first time a Chinese player has made the final in Paris.
“Success in sport is the cream atop the geopolitical leadership cake” - Anon
SHANGHAI COMPOSITE
Today: +0.84% to 2,728.02 at close
This week: -0.56%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.9%
Since 05/07/10: +15.4%
Since 08/11/10: -13.7%
HANG SENG:
Today: -1.31% to 22,949.56 at close
This week: -1.01%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: -0.4%
Since 25/05/10 +20.9%
Since 08/11/10: -8.1%
OIL FUTURES: $99.70
GOLD FUTURES: $1533.40
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4494
ECONOMY
• China’s non-manufacturing sector growth shows both a rise and a fall in May according to two PMIs
CASH
• Money market rate declines by the most since March
• Long term interest-rate-swaps rise on interest rate fears
• Yuan strengthens 40 basis points to hit 6.4805 - close to near 17 year high of 6.4777 on Wednesday
• Government economist Fang Gang predicts Yuan may stop rising after two to three years; no hard landing and less interest rate hikes
• PBOC urges “paying attention” local government debt risk.
• China must consider selling municipal bonds, says PBOC
• China to be global banking king by 2023, says PwC
REAL ESTATE
• Property market controls are ‘permanent’
• Shanghai new house prices dip 0.64% in May, says UWin
• Average transaction land prices fell 32% in April; and 51% since the start of the year – which exacerbates local government funding
• 36 million new homes by 2015 is laudable, but question remain about funding
INDUSTRY
• Passenger car sales fall an annualised 1% in May; 11% on month
• China automobile market is set to grow 12-15% per annum through 2016, says AlixPartners survey
DOMESTIC
• Beijing-Shanghai Bullet Train ‘leaves station’ later this month
• China to double solar power by 2015, says Securities
COMMODITIES
• Rio Tinto to study pricing iron ore in Yuan
• Singapore iron ore swap volume hits record in May
• Resourcehouse considers cutting IPO price
• Asian steel prices are weakening, says Steel Market Intelligence
• S&P says there is a risk that a “sudden” slowdown in China could lead to a 75% collapse in commodity prices; nonetheless, its ‘base case’ is much more sanguine
• ArcelorMittal may build $1 billion Brazil plant, says Reuters
Wednesday 1 June 2011
Deep doo-doo
“From a macroeconomic perspective if you don’t understand Chinese property, you probably don’t understand China” quipped Jonathan Anderson, an economist at UBS, in the FT. He also said that construction accounts directly for about 40% of Chinese steel usage. However, when home appliances, property-related infrastructure and other property-dependent sectors are included - it is as much as two thirds. China is broadly driven by property spending.
This means that, while the Government wants to rein back the rate of house price rises (as well as reducing general inflation), it does not want to throw the baby out with the bathwater. This puts into context the five year plan to construct 36 million affordable homes through 2015. It is also encouraging (or discouraging dependent upon your point of view) that house prices rose (+0.5%) for the ninth straight month in May as smaller cities proved resilient to Government restraints, according to SouFun, the Nation’s largest real estate website owner. It also said that prices increased in 76 out of 100 cities including the 'smaller cities' of Shanghai (+0.3%) and Beijing (+0.2%).
More worrying though is that the Government has ordered its banks to conduct stress tests to see how they would be affected if property prices fell by up to 50%. Furthermore, these tests are more stringent and factor in a larger drop in prices than those carried out over the past two years; although the Government was also quick to point out that the stress tests were not a prediction or an indication of its expectations. UBS, however, said “if property prices drop 50% we would be in big trouble; it would mean a hard landing for the economy”. Similarly, Emerging Global Advisers (EGA) added that, in an increasing G2 world (the US and China), a collapse in the Chinese economy would bring about an international depression – not recession. The smart money says this will not happen.
In support of the intelligent cash come two PMIs which show that China’s manufacturing expanded at the slowest pace in nine or 10 months in May, as the Government moves to calm inflation (and despite seasonal factors). First was the one from the Logistics Federation and Statistics Bureau which dipped from 52.9 in April to 52.0 in May, which was the lowest for nine months; with particular emphasis on input prices easing.
“The data suggest continued moderation in industrial activities” said Standard Chartered. But at the same time, the reading was strong enough to alleviate “fears of a sharp slowdown and, thus, marginally increases the chance of a further rate hike in the near term” i.e. the Nation’s fifth interest rate increase since mid-October may come as early as this weekend, which is extended by a holiday on Monday, it being the fifth day of the fifth Lunar month and the Dragon Boat Festival.
Similarly, a separate PMI released today indicated the weakest manufacturing growth in 10 months and a modest dip from April's 51.8 to 51.6 in May. This one comes from a joint survey by HSBC and Markit Economics.
Capital Economics added that “given current growth concerns, there is a risk of market overreaction to what may be a normal seasonal decline. Our view remains that the ongoing economic slowdown is gentle and highly unlikely to lead to a hard landing”.
Finally, China’s money market rate rose for a second day on speculation banks are hoarding cash before a public holiday next week. That is, the seven day repurchase rate gained six basis points to 3.91% at 11.18 in Shanghai, which is the highest since 27 May. “Companies might be holding on to cash before the holiday” said Societe Generale. But, “our view is the central bank will raise interest rates this month to cool the economy further after the less-than-expected fall in the PMI”.
Meantime, the Yuan halted a two day advance today, after trading near a 17 year high, on speculation that China will slow the pace of appreciation after manufacturing data added to signs of cooling. It was at 6.4797 per US dollar at 10.49 in Shanghai, compared with 6.4791 yesterday. The currency reached 6.4780 on 31 May, the strongest level since the Country unified official and market exchange rates at the end of 1993. Elsewhere, Twelve Month Non-deliverable Forwards gained 0.03% to 6.3585 in Hong Kong, a 1.9% premium to the onshore spot rate.
EGA (as above) also said that contrary to mainstream western media views, the PBOC is doing “not too bad a job” in a truly vast economy. Similarly, given the rate of growth which China is experiencing, of course there is inflation. In turn, this has been exacerbated by actual and economic “realities” (weather, food prices etc); and "there is no mathematical plug". Similarly, any monetary tightening has been measured and communicated well to the markets. In my view, too, the same applies this weekend should that interest rate rise come.
“If China gets it wrong we are all in deep doo-doo” – Richard Kang, Emerging Global Advisors
SHANGHAI COMPOSITE
Today: +0.02% to 2,743.97 at close
This week: +0.02%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.3%
Since 05/07/10: +16.1%
Since 08/11/10: -13.2%
HANG SENG:
Today: -0.24% to 23,626.43 at close
This week: -0.24%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: +2.6%
Since 25/05/10 +25.4%
Since 08/11/10: -5.4%
OIL FUTURES: $102.56
GOLD FUTURES: $1531.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4410
ECONOMY
• Manufacturing continues to grows at a slow pace
• China raises electricity prices for the first time in a year as short supply begins to impact output
CASH
• Money market rate climbs on speculation that the banks are hoarding cash
• Yuan trades near a 17 year high (6.4780)
• China may assume deleverage some local government debt this summer, says Reuters
REAL ESTATE
• Home prices rose in May for the ninth consecutive month as smaller cities gained
• China broadens stress tests for banks as property fears grow
• Beijing existing home sales may fall to 28 month low in May, says the Securities Times
DOMESTIC
• IPOs in May (22) at the lowest level in 22 months
• China millionaires exceed one million in number
• Four million mainland Chinese (up from 200,000 in 2008) may visit Taiwan next year now that individual ban is lifted
HONG KONG
• Retail sales jump 28% in April - the biggest rise since August 1991
COMMODITIES
• Vale confident in China's iron ore appetite; and high level prices
• Iron ore prices are under pressure for the next three month, says Standard Chartered
• Commodity prices see their largest monthly fall in a year
This means that, while the Government wants to rein back the rate of house price rises (as well as reducing general inflation), it does not want to throw the baby out with the bathwater. This puts into context the five year plan to construct 36 million affordable homes through 2015. It is also encouraging (or discouraging dependent upon your point of view) that house prices rose (+0.5%) for the ninth straight month in May as smaller cities proved resilient to Government restraints, according to SouFun, the Nation’s largest real estate website owner. It also said that prices increased in 76 out of 100 cities including the 'smaller cities' of Shanghai (+0.3%) and Beijing (+0.2%).
More worrying though is that the Government has ordered its banks to conduct stress tests to see how they would be affected if property prices fell by up to 50%. Furthermore, these tests are more stringent and factor in a larger drop in prices than those carried out over the past two years; although the Government was also quick to point out that the stress tests were not a prediction or an indication of its expectations. UBS, however, said “if property prices drop 50% we would be in big trouble; it would mean a hard landing for the economy”. Similarly, Emerging Global Advisers (EGA) added that, in an increasing G2 world (the US and China), a collapse in the Chinese economy would bring about an international depression – not recession. The smart money says this will not happen.
In support of the intelligent cash come two PMIs which show that China’s manufacturing expanded at the slowest pace in nine or 10 months in May, as the Government moves to calm inflation (and despite seasonal factors). First was the one from the Logistics Federation and Statistics Bureau which dipped from 52.9 in April to 52.0 in May, which was the lowest for nine months; with particular emphasis on input prices easing.
“The data suggest continued moderation in industrial activities” said Standard Chartered. But at the same time, the reading was strong enough to alleviate “fears of a sharp slowdown and, thus, marginally increases the chance of a further rate hike in the near term” i.e. the Nation’s fifth interest rate increase since mid-October may come as early as this weekend, which is extended by a holiday on Monday, it being the fifth day of the fifth Lunar month and the Dragon Boat Festival.
Similarly, a separate PMI released today indicated the weakest manufacturing growth in 10 months and a modest dip from April's 51.8 to 51.6 in May. This one comes from a joint survey by HSBC and Markit Economics.
Capital Economics added that “given current growth concerns, there is a risk of market overreaction to what may be a normal seasonal decline. Our view remains that the ongoing economic slowdown is gentle and highly unlikely to lead to a hard landing”.
Finally, China’s money market rate rose for a second day on speculation banks are hoarding cash before a public holiday next week. That is, the seven day repurchase rate gained six basis points to 3.91% at 11.18 in Shanghai, which is the highest since 27 May. “Companies might be holding on to cash before the holiday” said Societe Generale. But, “our view is the central bank will raise interest rates this month to cool the economy further after the less-than-expected fall in the PMI”.
Meantime, the Yuan halted a two day advance today, after trading near a 17 year high, on speculation that China will slow the pace of appreciation after manufacturing data added to signs of cooling. It was at 6.4797 per US dollar at 10.49 in Shanghai, compared with 6.4791 yesterday. The currency reached 6.4780 on 31 May, the strongest level since the Country unified official and market exchange rates at the end of 1993. Elsewhere, Twelve Month Non-deliverable Forwards gained 0.03% to 6.3585 in Hong Kong, a 1.9% premium to the onshore spot rate.
EGA (as above) also said that contrary to mainstream western media views, the PBOC is doing “not too bad a job” in a truly vast economy. Similarly, given the rate of growth which China is experiencing, of course there is inflation. In turn, this has been exacerbated by actual and economic “realities” (weather, food prices etc); and "there is no mathematical plug". Similarly, any monetary tightening has been measured and communicated well to the markets. In my view, too, the same applies this weekend should that interest rate rise come.
“If China gets it wrong we are all in deep doo-doo” – Richard Kang, Emerging Global Advisors
SHANGHAI COMPOSITE
Today: +0.02% to 2,743.97 at close
This week: +0.02%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.3%
Since 05/07/10: +16.1%
Since 08/11/10: -13.2%
HANG SENG:
Today: -0.24% to 23,626.43 at close
This week: -0.24%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: +2.6%
Since 25/05/10 +25.4%
Since 08/11/10: -5.4%
OIL FUTURES: $102.56
GOLD FUTURES: $1531.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4410
ECONOMY
• Manufacturing continues to grows at a slow pace
• China raises electricity prices for the first time in a year as short supply begins to impact output
CASH
• Money market rate climbs on speculation that the banks are hoarding cash
• Yuan trades near a 17 year high (6.4780)
• China may assume deleverage some local government debt this summer, says Reuters
REAL ESTATE
• Home prices rose in May for the ninth consecutive month as smaller cities gained
• China broadens stress tests for banks as property fears grow
• Beijing existing home sales may fall to 28 month low in May, says the Securities Times
DOMESTIC
• IPOs in May (22) at the lowest level in 22 months
• China millionaires exceed one million in number
• Four million mainland Chinese (up from 200,000 in 2008) may visit Taiwan next year now that individual ban is lifted
HONG KONG
• Retail sales jump 28% in April - the biggest rise since August 1991
COMMODITIES
• Vale confident in China's iron ore appetite; and high level prices
• Iron ore prices are under pressure for the next three month, says Standard Chartered
• Commodity prices see their largest monthly fall in a year
Vale's CFO Cavalcanti is bullish on China iron ore demand and prices
Guilherme Cavalcanti, CFO of Vale is on record as saying that China shows no sign of falling demand for iron ore. He was speaking at the WA Business Leaders Forum in Perth, organised by The Australian and Deustche Bank. “22 new cities are being built every year in China. This will keep iron ore prices up”. He also said that his Company aimed “to invest as fast as possible” to meet its plan to double iron ore production capacity over the next five to six years. That commitment to Vale’s $24 billion investment programme for this year, reinforced by the Company's newly installed CEO, Murilo Ferreira, has also helped Vale’s shares start to recover, according to Cavalcanti. He continued, too, by adding that global prices for iron ore were today about $US170 a tonne on the spot market, “way higher than our production costs”; and they will remain at current high levels.
OTHER NEWS:
(i) Iron ore prices are under pressure for the next three month, says Standard Chartered; [Ed: and, yes, that would $5 per ton]
Iron ore prices will face “downward pressure” in the next three months because of increasing volumes from Brazil and weaker global steel demand, says Standard Chartered. There is also a risk of iron ore de-stocking in China. For example, the spot iron ore price for Indian product will be $170 a metric ton in Q3 compared with $175 a ton in Q2. “Softer steel markets in many regions have negatively impacted market sentiment. We expect modest declines in spot iron ore prices in the next three months as Brazil’s exports recover further and demand enters the off-peak season with the start of the summer holidays in Europe and the US”.
(ii) Commodity prices see their largest monthly fall in a year
Commodities recorded their largest monthly fall in a year as the European sovereign debt crisis and Chinese inflation, in particular, led to fears of a global slowdown. In May, the S&P GSCI Spot Index of 24 raw materials dropped 6.8%, the first decline since August and the most since May 2010. Silver led the way with -21%, joined by nickel and crude oil - which were both off around 10%. However, the Index rose 1.2% today. “The May sell-off is a broad-based risk averse move coming from a combination of concerns about Europe’s debt crisis, China’s inflation and US data” said H3 Global Advisors.
OTHER NEWS:
(i) Iron ore prices are under pressure for the next three month, says Standard Chartered; [Ed: and, yes, that would $5 per ton]
Iron ore prices will face “downward pressure” in the next three months because of increasing volumes from Brazil and weaker global steel demand, says Standard Chartered. There is also a risk of iron ore de-stocking in China. For example, the spot iron ore price for Indian product will be $170 a metric ton in Q3 compared with $175 a ton in Q2. “Softer steel markets in many regions have negatively impacted market sentiment. We expect modest declines in spot iron ore prices in the next three months as Brazil’s exports recover further and demand enters the off-peak season with the start of the summer holidays in Europe and the US”.
(ii) Commodity prices see their largest monthly fall in a year
Commodities recorded their largest monthly fall in a year as the European sovereign debt crisis and Chinese inflation, in particular, led to fears of a global slowdown. In May, the S&P GSCI Spot Index of 24 raw materials dropped 6.8%, the first decline since August and the most since May 2010. Silver led the way with -21%, joined by nickel and crude oil - which were both off around 10%. However, the Index rose 1.2% today. “The May sell-off is a broad-based risk averse move coming from a combination of concerns about Europe’s debt crisis, China’s inflation and US data” said H3 Global Advisors.
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