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