Tragedy

Focus is the touchstone in almost all life’s endeavours; but, like you, I am a little blurry around the edges today. Friday’s ghastly events in Norway have cast a long, grim shadow far and wide; darkened further because a truly wonderful Scandinavian innocence has been extinguished, perhaps forever. I feel guilty, too, that I have little compassion left for the more than 35 dead souls in China’s dreadful train accident, also on Friday. “We go on, though; we go on because we must”.

Back in the prosaic economic world, the sceptre of US national bankruptcy on 2 August remains omnipresent. Okay, we sort of know that this preposterous game of chicken (see James Dean’s ‘Rebel without a Cause’) will end and that the US will raise its borrowing limit; but it is woefully testing right now.

Why then has China increased its holdings of US Treasuries for the second month running? In May it bought $7.3 billion to take its tally to $1.16 trillion. What does it know that we don't?

More understandable has been the PBOC’s addition of the Yuan to the anti-inflation armoury. On Friday, it reached its highest level (6.4455) since 1993 when the Nation took the first step to currency deregulation. Similarly, a firm money market rate is serving to tighten liquidity and could well absolve a further reserve ratio requirement move. For example, at local lunchtime today the seven day repurchase or ‘repo’ rate was still at 5.2697% (albeit off a touch or two from Friday's 5.4070%).

Elsewhere, the IMF has taken its double-edged sword to China. On the one hand, it says that the economy remains on a “solid footing” with GDP growth of perhaps 9.6% this year and 9.5% in 2012. Similarly, inflation should slow to an average 3.3% next year compared with 4.7% in 2011. However, the main near-term risks are inflation (as above), the threat of a property bubble and bad loans after stimulus spending. The IMF also warns of risks in local government debt funding.

China should also let the Yuan gain in order to boost demand and global economic stability, continues the Fund, and concludes that the currency remains undervalued by 3 to 23% depending on methodology. Finally, the IMF advocates an economic rebalancing including a crucial (and one assumes dramatic) reduction in household and corporate savings rates. To be fair, none of this is terribly new; but I guess it carries weight because it is the IMF saying it – and doing so more emphatically than in days of yore.

Turning to the vexed issue of ‘is the economy slowing or not?’, a flash forecast (ahead of official date on 1 August), looks like China’s manufacturing is; and, in July, it may well have contracted for the first time in a year. This comes from HSBC/Markit’s preliminary PPI for July which is 48.9, down from a final 50.1 for June. Note, too, that anything below 50 represents contraction. So, seasonal issues aside, maybe this galvanises official policy; but, of course, the economy cannot be allowed to slow too slowly, which underlines the policy dilemma.

The above is supported by the National School of Development at Peking University, which says that Q3 GDP is likely to slow to 9.3% in Q3 from 9.5% in Q2 (albeit with inflation staying stubbornly high). In Q1, GDP growth was 9.7 %. That said, the Conference Board’s leading indicator climbed for a third straight month in May. The index rose 0.5% to a preliminary 155 which, in turn, underlines prospects over the coming six months. The leading index has successfully signalled turning points in China’s economic cycle if plotted back to 1986, says the Board.

More immediate is today’s 3% fall in the Shanghai Composite, which is the worst since 17 January (also -3.0%). The US crisis was undoubtedly a factor, but more palpable was Friday night’s train wreck. Understandably there has been a knee jerk reaction in the value of any business (or official) associated with railways. For example, CSR, the Nation’s largest train maker, tumbled 8.9% (to Yuan 6.04). Similarly, developers were sharply lower as prospects for new schemes along the expanding high speed rail network were immediately deemed less viable. This means that the property sub-index within the SHI was off 4.1% (at 3380.72)at the close; albeit above its worst for the day.

“Tragedy should be utilised as a source of strength. No matter what sort of difficulties, how painful experience is, if we lose our hope, that’s our real disaster” - Dalai Lama XIV

SHANGHAI COMPOSITE
Today: -2.96% to 2,688.75 at close
Last week: -1.75%
July: -2.7%
YTD: -4.2%
Year ago: +4.5%

HANG SENG:
Today: -0.67% to 22,293.40 at close
Last week: +2.60%
July: -0.5%
YTD: -3.2%
Year ago: +7.1%

OIL FUTURES: $99.28
GOLD FUTURES: $1618.30
(new ‘immediate delivery’, intra-day high of $1624.07 on 25 July 2011)
EURO/$ SPOT: 1.4394