"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