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