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