Blue, red, blue, red and red

Germany’s GDP is roughly the same as China’s foreign exchange reserves which rose to a new record level of $3.2 trillion at the end of June. This is great per se but could well add further inflationary pressures. Note, too, that - although the PBOC purchased 26% less foreign currencies in June (with $42.9 million) than May - it increased buying by 136% on a year ago.

In terms of the Chinese currency this is ‘running fast to stand still’ i.e. as the central bank hoovers up the capital flows into China with Yuan, it releases local cash into the system; which it then buys back - seeking equilibrium. Given the three year high for inflation in June (6.4%), not always successfully; and perhaps this is by choice in that growth has been more important than inflation, until rampant food prices spoiled the party.

Unsurprisingly then, June’s new lending was Yuan 633.9 billion; and, while this was in line with market expectations, it was also 14.9% up on May and 6.4% ahead of last autumn. In turn, total loans rose 16.9% on the month to Yuan 51.4 trillion (and by 19.8% on September last year). But here is one for the Jeremiahs, who to my knowledge, never look at bank deposits. In June, for example, China’s bank deposits rose by Yuan 1.9 trillion to reach Yuan 78.6 trillion (which is nearly a fifth better than last summer). Now, while I am not suggesting that (like a Company’s gearing calculation), one nets cash off debt – I am tempted. At the very least it puts the alarmist headlines about bank debt into context; and the same goes for, what I believe will be, a soft landing.

In other news, Moody’s has issued warnings about accounting and governance at a number of Chinese companies with almost all of them having Moody’s so-called red flags planted on their front lawns. The rating agency said it looked at 49 companies rated as junk, and some with investment grades, against 20 red flags included under five headings: weak corporate governance; risky business models; fast growing strategies; poor earnings quality; and concerns over auditing. All 49 junk rated firms raised at least three red flags, with several flying 10 or more. Moody’s concluded by saying that some 80% of companies it rates with predominately Chinese operations have junk ratings.

Unsurprisingly, the companies highlighted by Moody’s saw their share prices fall, with West China Cement off by a record 26.5% at one point (before closing down 14% at HK$2.43). The Company is reported to have changed its auditor twice. But everyone else joined in, too, and the Hang Seng was - staggeringly - down nearly 700 points or 3.1%. The Shanghai Composite fared better, albeit it was still down 1.7%. Nor is it a good week for equities in other climes as fears about European sovereign debt and, perhaps, a shortage of it in the US do the damage. China’s Q2 GDP number is out tomorrow.

“If you can keep you head when all about you are losing theirs and blaming it on you” - Rudyard Kipling

FOREIGN EXCHANGE
FX reserves: a record $3.2 trillion at the end of June
- in line with forecasts
- up 5% in Q2; and +33% on a year ago
FX purchases: $42.9 billion in June
- up 26% on May; +136% on a year ago

LENDING
New loans: Yuan 633.9 billion
- in line with forecasts
- up 14.9% on May; and +6.4% on September 2010

Total loans: Yuan 51.4 trillion
- in line with forecasts
- up 16.9% on May; and +19.8% on September 2010

DEPOSITS
New deposits: Yuan 1.91 trillion
- up 72.1% on May; and +979.7% on October 2010
Total deposits: Yuan 78.6 trillion
- up 17.6% on May; and +18.5% on July 2010

MONEY SUPPLY
M2: +15.9%
- slightly ahead of consensus forecast of +15.2%
- compares with +15.1% in May; and +19.2% in July last year

Seven day repurchase rate on 12 July: 4.87% down 45 basis points

SHANGHAI COMPOSITE
Today: -1.72% to 2,754.58 at close
This week: -1.54%
June: +0.7%
Q2: -5.7%
YTD: -1.9%
Year ago: +10.6%

HANG SENG:
Today: -3.01% to 21,663.20 at close
This week: -4.68%
June: -6.4%
Q2: -4.8%
YTD: -6.0%
Year ago: +5.8%

OIL FUTURES: $94.43
GOLD FUTURES: $1547.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3950