90 not out

The time to be nervous, as any self-respecting batter in cricket will tell you, is when you approach that milestone of milestones 100 runs (or, for readers in North America, 100 ‘points’). This is especially true when you are nine-tenths of the way there.

So it is with the Communist Party of China or CPC, which celebrated its 90th anniversary on Friday (1 July). Sure, there have been a myriad of colourful celebrations across this seemingly limitless Nation and much glad-handing. Nonetheless, as the Chinese population becomes more affluent and more geopolitically (and cyber) aware, there is pressure for change. The latter centres on individual and political freedom plus the gargantuan wealth gap between the haves and the have-nots (8% of the population shared 35% of the GDP in 2009). But there is a split here, too, between those who want a more democratic government and, what has been dubbed ‘the new left’, which is plumping for populist authoritarianism (not an oxymoron).

The smart money says it is more likely to be the latter than the former, but the CPC has not been in charge for 90 years without being dynamic; and this will continue. For example, in President Hu Jintao’s keynote (and celebratory speech) on Friday, there were many references to the people and improving their lives. In my view, too, there was a sub-text of ‘adapt or die’.

Fundamental to delivering Hu’s promises is the management and performance of the economy, and there are headwinds here right now. These, too, were forecast by China’s Vice Premier Wang Oishan speaking at the weekend to the State Council. He said that the Government’s economic growth target for this year (8%) will be “very challenging” to achieve. He added that the domestic and global situation is “extremely complicated and uncertain”, making it more difficult for the Government to strike a good balance between developing the economy and curbing inflation. No argument here. Wen, too, admitted - on his European tour - that China’s inflation target for 2011 is now more like “under 5%” than the original 4% (although it is under control and will recede). In addition, a number of commentators see the CPI clearing, temporarily, 6% for June (data are out on 15 July).

But Hu, Wen and Wang have not been sitting on their hands and monetary policy tightening is making itself felt. For example, the official manufacturing PMI from the China Federation of Logistics and Purchasing (CFLP) hit a 28 month low of 50.9 in June (down from 52.0 in May). Note, too, that input prices were sharply lower (56.7 versus 60.3). The same goes for China’s non-manufacturing industries, which expanded at the slowest pace in four months in June i.e. the CFLP said today that its latest PMI showed a drop from 61.9 in May to 57.0 in June. Input inflation eased here, too, from 62.0 to 61.6. The Federation also said that the Nation’s services or non-manufacturing sector (which still accounts for less than 45% of GDP) is maintaining quite quick growth; and affordable housing construction has accelerated. It added, too, that Chinese stocks are “oversold” as concerns such as bank loans to local government and the slowdown in real estate are being factored in by investors.

Equally impressive is the movement in the seven day repurchase rate, which measures interbank funding availability. It fell 116 basis points in morning trade today in Shanghai to 4.74%. In the week commencing 20 June it topped out at 9.2%. Does this point to there being no further interest rate hikes in the near term? I reckon it might, as does Standard Chartered which says China’s stocks are the “most attractive” and investors should buy more of its equities as the Government achieves a “soft landing”. “The China market is the most promising market among the major markets in the World”. Nomura is also a buyer due to valuations having already factored in monetary policy tightening amid “less aggressive” interest rate increases. A slowdown in consumer price inflation, more fiscal stimulus and increased efforts to boost investment will also lift equities, it said; plus “a soft-landing scenario”. China Business went on step further and said that there may even be some imminent (albeit selective) policy easing.

The Shanghai Composite has risen 7.3% since 20 June, the Monday of the week before Wen’s seminal Thursday article in the FT ahead of his European tour: “there is concern as to whether China can rein in inflation and sustain its rapid development - my answer is an emphatic yes”.

“They came to see me bat not to see you bowl”
- W. G. Grace (1848-1915) cricketer, physician and surgeon

SHANGHAI COMPOSITE
Today: +1.94% to 2,812.21
Last week: +0.48%
June: +0.7%
Q2: -5.7%
YTD: +0.2%
Year ago: +18.0%

HANG SENG:
Today: +1.66% to 22,770.47
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -1.2%
Year ago: +14.4%

OIL FUTURES: $95.30
GOLD FUTURES: $1494.60
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4530

HEADLINES

COMMUNIST PARTY OF CHINA (CPC) MARKS 90 YEAR ANNIVERSARY WITH KEYNOTE SPEECH BY PRESIDENT HU JINTAO
• three milestones: relying on the people; completing the new democratic revolution; plus winning national independence and liberation of the people
• uphold and adapt Marxism, scientifically, to new conditions and current times
• speed up the training of young talented people: “talent is the most important resource and a strategic resource...”
• adhere to and improve socialism with Chinese characteristics; plus create decent lives for its people
• all people are equal before law
• alienation from people is the greatest risk for CPC
• we must intensify our efforts to combat corruption
• continue reform and ‘opening up’ for future development
• China remains the largest developing country in World
• vigorous development and enrichment of socialist culture
• ensure and improve people's wellbeing
• “Without stability, nothing could be done, and even the achievements already made could be lost”
• the CPC has absolute leadership over army
• promote peaceful development of relations across Taiwan Straits
• actively and prudently carry out political structural reform to continue to promote world peace

ECONOMY
• Official manufacturing PMI hits 28 month low of 50.9 in June (from 52.0 in May) as monetary policy tighten and global demand eases; but imports also dipped (48.7 versus 50.5) as did input prices (56.7 versus 60.3)
• China services sector expands at slowest pace in four months as its PMI in June dips from 61.9 to 57.0 says Logistic Federation; but input inflation here also eased (from 62.0 to 61.6)
• China to grow above 9.3% in 2011, says NRDC’s State Information Centre (despite Q3 dip to less than 9%); with annualised inflation above-target at 4.9%
• China’s Vice Premier Wang Oishan says economic growth target for this year will be “very challenging”; and it is more difficult for the Government to strike a good balance between developing the economy and curbing inflation
• Inflation may climb to 6.5% in June because of surging pork prices, says Shenyin & Wanguo Securities; and borrowing costs may rise around the time of the release of June economic data (15 July)
• Industrial production forecast at 13.5% for 2011 (including 13.9% in H1) and exports at 21% (incl. 24.8% in H1), according to the State Information Centre
• Industrial profits in first five months of 2011 rise 27.9% year-on-year to $296.5 billion – which compares with 29.7% in first four months; however, ferrous metal mining companies posted a 56% jump in earnings

MONEY
• Yuan gains for a sixth quarter as China seeks to stem inflation; including +1.3% in Q2 to end at 6.4649 (after record of 6.4605 on 23 June); and 12 Month Forwards point to a further +1.4%
• Seven day repurchase or ‘repo’ rate falls 116 basis points today (Monday) to 4.74%, after peaking at 9.2% in w/c 20 June
• Some banks are offering double short-term deposit rates of 7% in order to attract cash
• Non-performing loans at Chinese banks could rise from 1 to 5% of total lending, says Moodys; but this will not hurt ratings (no time frame given)

WEN IN EUROPE (continued)
• Wen's European tour concludes with deals worth over $20 billion in Hungary, the UK and Germany
• Agrees that 4% inflation target is a struggle; plumps for ‘under 5%’
• Calls for greater democracy and reforms
• Wen says China will stimulate domestic demand and reduce its surplus on his European tour; he also popped into Stratford-upon-Avon, birthplace of William Shakespeare, who he admires
• China could easily solve the Euro crisis on its own, says Templeton’s Mark Mobius; it would be small change

INDUSTRY
• Buffett-backed BYD surged 41% to Yuan 25.45 on first day trading in Shenzhen
• Lafarge’s Sichuan Shuangma Cement plans to raise Yuan 2.8 billion from private share sale
• Chinese police arrest 36 over fraud at Alibaba.com – which is its biggest B2B e-commerce platform

DOMESTIC
• China lifts threshold for paying income tax from Yuan 2,000 to 3,500 ($542) – which is more than expected and follows a rare public outcry; it will be effective from 1 September and the change means that only 7.7% of China’s salary earners or 24 million people will pay income tax
• Average minimum wage is likely to grow by at least 13% per annum over the next five years, says Ministry of Human Resources and Social Security.; this follows +24% last year
• China opens World’s longest sea bridge 26 miles or 42 kilometres across Jiaozhou Bay from Qingdao to the island of Huangdao
• Hong Kong had a holiday on Friday 1 July for Establishment Day recognising the hand over, in 1997, of the City to the PRC

INTERNATIONAL
• 13 day freight rail link from China to Germany opens officially
• Taiwan raises its benchmark interest rates from 1.75 to 1.875%, to be effective from 30 June