Hu is an insider?

When the Chinese authorities raised interest rates on Wednesday evening (25 basis points to 6.56%), it is clear now that they already knew that June’s inflation number was a gut-busting 6.4%; the latter was announced on Saturday morning, ostensibly as a means to prevented leaks. Good job.

Food was the principal issue here (+14%) and, more specifically pork, which added 1.4 percentage points to the Consumer Price Index; yes, without it, the number would been 5.0%. Much overlooked, too, was a Producer Price Index which showed a very significant 7.1% rise in June (in October last year it was 5.0%).

As expected, there was much collective huffing and puffing from President Hu, Premier Wen and PBOC Governor Zhou about their commitment to keeping inflation under control – and supporting growth. As best as I can judge, too, a narrow majority of commentators believes that we will have one more hike in interest rates this cycle and in calendar 2011 i.e. inflation is now a larger risk than slowing growth, they say. Note, however, that the seven day repurchase rate dipped 82 basis points today to 5.3225%.

In what was a busy weekend for Chinese statisticians, we also had June’s trade figures on Sunday and while these showed the highest surplus ($22.3 billion) for seven months, the rate of import growth did slow down. Note, too, that the trade surplus in the first six months of 2011 dropped 18% to $44.9 billion, which is the lowest in seven years.

For the record, exports climbed 17.9%, the least since December (after excluding seasonal adjustment) to a record $162 billion (in May the gain was 19.4%). Meantime, imports rose by 19.3% to $139.7 billion, the weakest since November 2009 (in May the gain was 28.4%). Month on month, the trend is even more revealing with June’s exports up 3.1%, but imports down 3.0% on the same basis.

The trade surplus, of course, adds to the amount of cash in the system and makes it more difficult to fight inflation; and the trick is, of course, to achieve the latter without killing off growth. Similarly, if as an average Chinese citizen you live on $11 a day, a 57% increase in the price of pork in a year is life-changing. Nor was revolution or social discontent acted out on full bellies.

Okay, the slow down in imports was taken as a positive indicator that the economy was slowing in a sensible manner towards a soft landing. More evidence is expected here, too, on Wednesday when the Q2 GDP numbers are promulgated. The smart money is on 9.3% down from 9.7% in Q1.

Some analysts also look to an appreciating Yuan to help reduce inflation; but this is a double edged sabre, insofar as it makes exports less competitive. In any event on Friday, Non-deliverable Yuan Forwards were indicating a gain of some 1.3% against the dollar in the next 12 months. The Yuan closed at 6.4650 per dollar in Shanghai on Friday; it hit 6.4599 on 4 July, the strongest level since partial currency deregulation in 1993.

There were further push/pulls from the National Bureau of Statistics which said that its business confidence index fell to 132.4 in the second quarter from 137.4 in Q1 (in Q4 2008 it was 94.6). However, the Business Climate Index rose from 133.8 in Q1 to 135.6 in Q2. China’s passenger car sales in June also rose 3.5% from a year earlier to 1.02 million units, according to China’s Passenger Car Association. And, the State Council is reported to have agreed to spend in excess of Yuan 1.5 trillion ($232 billion) on development of the Country’s aviation industry over the next five years. This will include 45 new airports bringing to total to 220.

The background noise of local authority lending also grew louder and the National Audit Office (NAO) today denied understating the debts of local governments. This follows Moody’s Investors Service saying that liabilities may be as much as a third more than the NAO’s estimate i.e. an extra Yuan 3.5 billion on top of the official Yuan 10.7 trillion or $1.65 trillion. These are staggering sums indeed – either taking them gross or net (so to speak); just as the Nation’s $3 billion of foreign exchange reserves are - and the legendary savings of the World’s most populous nation.

"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics” - Thomas Sowell

SHANGHAI COMPOSITE
Today: +0.18% to 2,802.69 at close
Last week: +1.39%
June: +0.7%
Q2: -5.7%
YTD: -0.2%
Year ago: +13.4%

HANG SENG:
Today: -1.67% to 22,347.20 at close
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -3.0%
Year ago: +9.7%

OIL FUTURES: $94.73
GOLD FUTURES: $1553.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4071

HEADLINES

INFLATION
• Inflation hits 6.4% in June and a three year high; with 1.4 percentage points accounted for by pork
• China must keep inflation under control and support growth, says PBOC Governor
• PBOC advisor expects inflation to ease

TRADE
• Trade surplus hits seven month high of $22.5 billion
• Imports rose 17.9% annualised in June, the lowest since November 2009; and dipped 3% month on month
• Exports rose by annualised 17.9% in June, the lowest since December; but were ahead 3.1% month on month

ECONOMY
• Q1 current account surplus falls 21% to $28.8 billion
• Wen and PBOC Governor Zhou speak of stability and prudence
• Slowing growth leaves Government with few options
• China Q2 business confidence index dips from Q1
• Passenger car sales rise by an annualised 3.5% in June
• China’s aviation to exceed $232 billion over the next five years; including 45 new airports

EQUITIES
• Inflation jump will not upset share price rally, say Shenyin & Wango plus Bank of America-Merrill Lynch
• China Communications Construction delays $3 billion IPO
• Singapore’s state investor, Temasek, says it is bullish on China even after it sells share in two banks
• Chinese stocks to rally on policy easing, says Deutsche’s Jun Ma
• JPMorgan cuts China & HK stock recommendation to underweight

CASH
• Money market rate falls 82 basis points to 5.3225%
• No bailout needed for local government debt, says CCB Chairman
• China to implement minimum leverage ratio on lenders from 2012
• China debt sale fails for third time in 2011 as Finance Ministry raises Yuan 11.8 billion from Yuan 15 billion target at 3.3%
• China’s seven year bond draws least demand (1.55x) in 10 months on cash crunch for Yuan 30 billion at 3.7%
• Central Government sells Yuan 200 billion of five year bonds on behalf of local authorities at 3.84%; first such offering in 2011
• Local Government Financing Vehicles (LGFV) have seen their bonds yield trade at least 30 basis points higher in recent weeks
• China says it is taking “effective” measures on local debt, says State Auditor
• National Audit Office denies understating debt of local governments after Moodys said that it was Yuan 3.5 trillion grater than the official Yuan 10.7 billion ($1.65 trillion): of which 63% will be paid by central government, with a further 22% guaranteed by it
• China to punish local officials for excessive debts: report

REAL ESTATE
• A number of banks are raising property down payments percentages in selected cities; 30 to 40% for first time buyers at CCB in Zhejiang and Guangzhou says Beijing News

INTERNATIONAL
• Cheung Kong offers $3.88 billion for the UK’s Northumbrian Water
• US Chairman of US Joint Chiefs of Staff, Admiral Mike Mullen visits China
• China criticises US over military exercises in South China Sea; and its level of defence spending at a time of economic travails