6.3820

The eagle-eyed amongst you will know that this number is the new all-time spot trading peak for the Yuan against the US dollar during what has been described as a Government-led “mini-revaluation”. In the same vein, the official China Securities Journal this week jumped on the band wagon with a front-page editorial saying that the time “is ripe” for China to widen the Yuan’s trading band, versus the dollar, which will pave the way for a more flexible exchange rate.

Okay, the new Yuan rate was recorded on Tuesday just before the close of business in China – and today it has eased a little to 6.3873 (the last time I looked). However, probable heir apparent to the PRC Premiership, Li Keqiang (56) is in Hong Kong today throwing Yuan around like a man with no hands. Ostensibly he is fronting the China Ministry of Finance’s Yuan 20 billion ($3.1 billion) ‘dim sum’ international bond offer (the largest ever) which will be launched tomorrow. However, he also said that foreign investors will now be allowed to buy mainland securities up to an initial quota, also, of Yuan 20 billion; although no timetable for this ‘mini-QFII’ has been set. Plus he pledged support for Hong Kong’s financial sector; and he’s only been in town one day.

The clever cash now says that the Yuan is in the front line in the battle against domestic inflation (+6.5% in July including food at +14.8%), while interest rates and RRRs are on leave. Note, too, that the seven day repurchase or repo rate is, today, at 3.23% (again, the last time I looked); at the end of July it was north of 5%.

US Vice President Joe Biden is in China this week and will welcome the news on China’s currency; while at the same time having his ‘the-US-is-good-for-it debts’ cap very much in hand.

It may also be the case that the Yuan will begin appreciating against other major currencies: in a torpid world, China remains the fastest growing major economy. Indeed, while the Chinese currency has risen nearly 7% since being de-pegged, its nominal effective exchange rate against a trade-weighted basket of others, has fallen by some 4.5% since June 2010, according to the Bank for International Settlements.

Soft landing
More broadly, support for a soft landing for the economy has come from The Conference Board (TCB), a US research group. It’s leading index for China rose 1% in June to 158.9, which follows a 0.6% gain in May. “The economy is significantly moderating right now and also over the next couple of months. We still expect it to be pretty much a soft landing”. However, beyond six months, the Chinese economy may face “more problems” as a result of bank lending which remains at levels which are probably not sustainable, added TCB. That said, new lending in July was the lowest this year at Yuan 492.6 billion ($77 billion) and money supply, as measured by M2, rose 14.7% after June’s 15.9%. The same is true of industrial production in July which rose at 14% against June’s 15.1%. Producer prices, however, remain a concern at +7.5% in July versus 7.1% in June.

This trend towards economic moderation is supported by the State Information Center which says GDP will slow from 9.5% in Q2 to 9.3% in Q3. Inflows of capital will help sustain growth, although this also impacts on PBOC policies to control inflation. That said, UBS sees CPI moderating to 4% by the year end.

Nor is there any let up in FDI or Foreign Direct Investment in China which rose 19.8% in July to $8.3 billion from a year earlier; and for the first seven months of the year, the increase was 18.6% to $69.2 billion, according to the Ministry of Commerce. The same goes for fixed asset investment (ex. rural households) which was 25.4% ahead in the seven months January through July. And, in July itself, retail sales rose 17.2% with car sales ahead 6.7%. Indeed, China’s growth and expanding consumer market have encouraged companies including Nissan ($7.8 billion by 2015) and McDonalds to increase their presence; the latter reckons on opening an outlet a day in China over the next three to four years.

It was, thus, perhaps surprising that China’s trade surplus in July ($31.5 billion) was the highest for more than 24 months as exports hit record levels: up an annualised 20.4% to $175 billion. And this despite the fact that imports in July rose by more in percentage terms at +22.9%; but they were worth less at $143.6 billion. Similarly, China’s current account surplus jumped to some $70 billion in Q2 said SAFE i.e. the State Administration of Foreign Exchange. This means it has more than doubled between the ends of Q1 (from $29 billion) and Q2.

Local authority debt
Turning to the vexed question of local authority debt, the Chairman of the China Bank Regulatory, Liu Mingkang, said today that the clean-up of local government debt is moving ahead smoothly and that risk from more than $1 trillion in loans is under control. He also reiterated that Chinese banks are prohibited from lending to local governments that do not meet loan requirements.

The Ministry of Finance (MOF) has also sought to calm the markets on the scale and efficacy of local government debt. As we know, S&P estimates that as much as 30% of China’s lending to local governments may go sour, after the loan book reached Yuan 10.7 trillion ($1.7 trillion) at the end of 2010 (and Moody’s thinks it is more than this – which is disputed by MOF). Similarly, Societe Generale is also cautious saying that the banking sector’s non-performing loan ratio is already at 7% and local government debts could push that above 16%. Separately, the China Securities Journal says that local governments will see Yuan 4.6 trillion of debt (or 43% of the total) mature by next year. Similarly, the risk weighting for banks on local government loans is 300%, it says.

MOF has admitted that the ability of some regions to meet liabilities is weak; and some local governments rely too heavily on land income to pay back debt. However, it also says that China’s local governments have fixed assets, land, natural resources and many other assets; and the national economy is at a stage of fast growth. MOF is also reported to have drafted a preliminary plan which would allow some provincial and city governments to sell bonds to investors on a trial basis. And, some Yuan 2.1 trillion of local government liabilities are also believed to have been reclassified as normal corporate credit.

US debt
Turning to the international markets, it is also interesting/perplexing that China has raised its holdings of US government debt for a third straight month to $1.17 trillion in June; and this included the first bill purchases since January. Other foreign investors, meantime, were sellers of Treasuries for the first time since 2009. Is this because China believes in the US or that it simply wants more power over its largest trading partner?

ACC
Finally, I must mention my old friend Anhui Conch Cement, the Nation’s largest cement producer, and a first class barometer of domestic economic health. Its H1 net income rose 234% to Yuan 6 billion ($939 million) and, this week, its share price (Yuan 25.52) is within Yuan 4.0 of its all time high.

“The China story will remain appealing for many years to come” - Fang Sihai, Chief economist at Hong Yuan Securities

SHANGHAI COMPOSITE
Today: -0.26% to 2,601.26 at close
This week: +0.31%
Last week: -1.27%
August: -3.7%
YTD: -7.4%
Year ago: -2.6%

HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%

OIL: $87.27
GOLD: $1796.10
(new spot intra-day high of $1,817.60 on 11/08/11)
EURO/$ SPOT: 1.4379