“The Grand Old Duke of York……

……he had ten thousand men.
He marched them up to the top of the hill and he marched them down again.
And when they were up, they were up; and when they were down, they were down.
And when they were only half-way up, they were neither up nor down".

The above is a celebrated English children’s nursery rhyme, whose lyrics have become proverbial for futile action. It was also often performed on stage with the audience being asked to play out the verses and even call out “up” or “down”; the actor’s intent, of course, to catch people out.

So it is with the Shanghai Composite (SCI) which - in the first 20 trading days of August - has gone up on eight and tramped down 11 (including today). Make your mind up!

Okay there was a modicum of optimism today when it was announced that Shaanxi Coal Industry is to IPO in Shanghai with the aim of raising up to Yuan 17.3 billion ($2.7 billion) in what could be China’s largest IPO this year. The China Securities Regulatory Commission (CSRC) will look at it on Monday (which is also my birthday). Shaanxi would be China’s third largest listed coal miner. This meant that the SCI closed the week 3.1% to the good having been down 2.3% the one before.

It may also be that the central authorities are in an easier frame of mind and the official China Securities Journal said as much on Wednesday. And this was reflected in the money market today, too, when the seven day repurchase rate fell 42 basis points to 4.0709% (the last time I looked); whereas on Tuesday it was 5.2%.

The Yuan continues to be firm, too, and, finally, moved up a tad at the close today from 6.39 to 6.3868. There are, however, divergent views about where it goes from here (and 12 Month Yuan Forwards are at a fence-sitting 1.62% premium). My view is that the Yuan will continue to rise and that its new record of 6.3820 will be soon tested. This is especially true, given that China may need to wait until September’s CPI, to see an actual dip in the rate of inflation. Similarly, Finance Minister, Xie Xuren reiterated yesterday that stable prices remain the top priority for the Chinese Government, but that any policy moves must avoid hurting economic growth. He also said that China will step up its efforts to rein in local government debt.

‘The Disciples of the Soft Landing’ continue to multiply as well and, earlier this week, a preliminary estimate for August manufacturing output said it was moderating but not collapsing. This originated from HSBC/Markit Economics and their manufacturing index which inched up to 49.8 from a final July reading of 49.3 (the first time below 50 in a year; indicating contraction). HSBC also said that the slide in the index in July may have been a one-off “blip”. Note, too, that the official manufacturing index for July from the NBS and the China Federation of Logistics and Purchasing was 50.7.

Furthermore, HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13% in industrial output and a 9% expansion in GDP, even if it indicates a contraction in factory activity on the month to month basis. For the record, in July, the flash reading was 48.9, compared with the final reading of 49.3 and these preliminary indices are based on 85 to 90% of responses to a survey of executives in more than 400 companies.The final August number is due out on 1 September.

Elsewhere, a number of global banks have been tinkering with their GDP forecasts for China and the consensus of the four below for the current year is now around 9.0% (having been 9.2%). Similarly, in 2012, the number is now around 8.4% which is 0.5% adrift of previous expectations.

Bank 2011 and 2012
% New (Old) New (Old)
Citi: for 2011 only 9.0 (9.2)
UBS: 9.0 (9.3) and 8.3 (9.0)
MS: for 2012 only 8.7 (9.0)
DB: 8.9 (9.1) and 8.3 (8.6)
Notes: MS is Morgan Stanley; DB is Deutsche Bank

It is also worth noting that Citi does not expect an interest rate hike this year but does see faster Yuan appreciation. Meantime, UBS says that its forecast changes reflect weaker growth prospects in developed economies (and thus exports) and that the PBOC may relax policy if the economy falters. In fact in 2012, UBS says that export growth may be as low as 5.5% which compares with a previous forecast of 12% and net exports could deduct around one percentage point from China’s GDP growth in 2012. The Swiss bank also says that the PBOC is likely to keep interest rates on hold for now and could opt to ease policy if exports, investment, and industrial production slow sharply.

UBS has also cut its inflation outlook for China from 5.3 to 5.2% in 2011 and from 4.0 to 3.5% in 2012.

For its part, Morgan Stanley says that the evolution of China’s economic growth in 2012 is important slowing from 9.7% in Q1 to 8.1% in Q4. Similarly, Deutsche says that the chance of China’s economic expansion slowing to 7% has jumped from 5 to 15%. Finally, RBS adds (a little more positively) that if growth in the US falls to zero this year, China’s GDP growth will probably decline, on a full year basis, by only 60 basis points. “So, growth will still be between the 8.5 and 9.0% range”.

And the last word, comes from Nomura, whose technical boffins say that China’s stocks are approaching oversold levels. This after the Shanghai Composite had fallen 17.4% from this year’s 18 April peak (on 8, 9 and 22 August); it is now off 14.6% on the same basis. “China is on track for a soft landing despite the external risks, with accelerating inland growth and investment in public housing and new projects”.

“To climb steep hills requires slow pace at first” – Shakespeare

SHANGHAI COMPOSITE:
Today: -0.12% to 2,612.19 at close
This week: +3.07%
Last week: -2.27%
August: -3.3%
YTD: -7.0%
Year ago: -0.3%

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: $84.91
GOLD: $1786.40
(immediate delivery/intra-day high of $1,917.90 on 23 August 2011)
EURO/$: 1.4426