"Yeah, right"

The Yuan rose for the first time in six days (+0.2% to 6.7948) as the PBOC said it favours two-way fluctuations to deter speculative flows of capital…....Yeah right. Elsewhere, FDI rose for the 12 consecutive month in July (+29%) and is now up 21% in the year to date at $58.4 billion. Meantime, the Conference Board says the economy continues to expand moderately and domestic markets offer the most dynamic business opportunities (remember CB data can be prone to revisions). The Government is also selling down its stocks of US Treasuries as yields hit all-time lows but has done very nicely along the way thank you. And finally, the best (potential) news of the day is the probable merger of A and B Shares in Shanghai.

Shanghai Composite:
Today: +0.38% at 2,671.89 at close
This week: +2.5%
YTD: -18.5%

Hang Seng:
Today: +0.31% at 21,137.43 at close
This week: +0.1%
YTD: -3.4%

Oil: $75.88
Gold: $1228.90
Euro/$: 1.2888

Headlines

• FDI into China increases in July for 12th consecutive month
• China leading economic index rises for second month says Conference Board
• China cuts long term US Treasuries by most ever as yields drop
• Yuan ends five day drop as China favours two-way moves to ease speculation
• China B-Shares to advance on possible A-Share merger, according to CICC
• PBOC sells one year bills at unchanged yield of 2.0929%
• Home sales rise 26% in Shanghai

Donor fatigue

DF is a phenomenon in which people no longer give to charities. There are a number of causes of it, including overstretched budgets and frustration with badly managed charities; plus simply being over-whelmed by the number and scale of global disasters. I can understand how it happens, but can anyone not be palpably moved by the scenes from both Pakistan and Gansu in China at this time?

The Indus River is the most important river in Pakistan, and, at 3,200 kilometres it is also the longest. It flows the full length of the Nation from Tibet to the Arabian Sea and is a vital life source. Right now this is hard to believe as it breaks its banks and floods at almost every twist and turn. At least 1,600 people are dead and up to 20 million (from a total of 180 million) are displaced. Cholera has broken out.

In Gansu and the town of Zhouqu, in particular, the scenes defy belief. The centre is simply filled with glutinous mud and debris up to the third storey; and lower rise buildings have simply been swept away. It is impossible to imagine, the terror in the darkness when this tsunami of water, mud, rocks and trees swept through Main Street with no warning. Members of single families survived sleeping upstairs whilst their relatives downstairs disappeared, some never to be found. The latest count is 1,200 dead with more than 500 missing.

Such events put investor fatigue and whether the Karachi 100 or the Shanghai Composite goes up or down into perspective. But we go on; we go on because we must.

Turning to today’s headlines, China now looks like a shoe-in to be the World’s number two economy this year after Japan’s GDP rose marginally (by an annualised 0.4%) in the three months ended 30 June. Nonetheless, Japan is still favoured by China’s sovereign wealth fund along with Europe – and at the expense of the US. The Nation has been buying “quite a lot” of European bonds, according to Yu Yongding, a former adviser to the PBOC. Similarly, China bought $20.1 billion more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years. China’s $2.45 trillion of foreign exchange reserves are the World’s largest.

However, “stocks won’t have a big jump simply because China will surpass Japan in terms of the GDP” said China Construction Bank. “What we are looking at is the quality of the GDP such as per capita disposable income and energy consumption per unit of GDP. Stocks will react positively only when China has successfully transformed the structure of its economy”. Other commentators focus on rising inflation and, thus, favour gold stocks; or as Nomura says higher food inflation make equities a “more appealing asset class” relative to fixed income. “The recent rise in inflation supports the case for local equities to experience fund flows from deposits”. Morgan Stanley also likes property shares (down by an average 12% this year) in China and expects a rebound in prices, despite Chongqing’s probable introduction of a property tax.

Elsewhere, power consumption grew 14% in July which sharpens focus on the Nation’s forthcoming $736 billion of alternative energy investment. And, finally, the Yuan continues its longest losing streak for a year and AgriBank becomes officially the World’s largest IPO at $22.1 billion.

“There are two big forces at work, external and internal. We have very little control over external forces such as tornadoes, earthquakes, floods, disasters, illness and pain. What really matters is the internal force. How do I respond to those disasters? Over that I have complete control”. Leo F. Buscaglia

Shanghai Composite:
Today: +2.11% at 2,661.71 at close
Last week: -1.9%
YTD: -18.8%

Hang Seng:
Today: +0.19% at 21112.12 at close
Last week: -2.8%
YTD: -3.5%

Oil:
$75.28
Gold:
$1220.20
Euro/$:
1.2805

Headlines

• Morgan Stanley favours property shares in China and now expects a rebound
• Chongqing to introduce property tax on a trial basis
• China may make list of developers hoarding homes
• Urbanisation is expected to lead to the demolition of half the old houses in China
• Economic planner sees new factors pushing up prices in China in third quarter
• Power consumption rises 14% in July as targets for reductions loom large
• China may introduce alternative energy plan next month
• Yuan has longest losing streak in a year on slowing growth
• Finance Ministry sells $4.1 billion of 30 year China bonds at a yield of 3.96%
• China should raise deposit rates, says PBOC Adviser
• ICBC Credit Suisse seeks to raise $2.1 billion for largest China bond fund
• Agricultural Bank of China sets IPO record as size raised to $22.1 billion
• West China Cement raises $179 million in Hong Kong
• China mourns mudslide deaths

Friday the 13th

Movie buffs all over the World will be familiar with the eponymous American horror franchise which now consists of twelve slasher films (and I can’t wait for the 13th 13th). As you know, the majority of the characters in these films are not what you would call fortunate and in Western superstition today is also deemed to be an unlucky day. In the Gregorian calendar, Friday the 13th occurs at least once, but at most three times a year and if any month begins on a Sunday, its 13th day will be a Friday.

Today was neither lucky nor unlucky in Shanghai (the Composite rose by around 1%) and closed the week (-1.9%) in marginally negative territory (but this was not bad considering Wall Street fell 2.5% in a single day on Wednesday). For me those wise folk at West China Securities summed it up: “the economy is really cooling but expectations are growing that there will be counter-measures from the Government to stem the drop in growth. It’s a game between investors and the Government. The market will be range-bound until there’s a clear sign which side will gain the upper hand”. For its part, too, the China Real Estate Association has called for Central Government restraint, while Credit Suisse raised its forecast for export growth this year (24.6%) but almost halved it to 9% for 2011. In other news, the Yuan saw its biggest weekly drop (-0.3%) for 21 months when I (and Tim Geithner) thought it should be going the other way.

On a brighter note, consumer confidence ticked up in Q2 and Blackstone’s fabulously named Byron Wien (who I used to work with at Morgan Stanley) still loves China – calling it the engine of global growth. Meantime, real estate companies maybe able to tap the bond market for funding. Similarly, Credit Suisse (again) says that the Chinese populace hide $1.4 trillion of income annually, which is one explanation for the surge of spending on luxury goods.

And finally, spare a thought for Hong Kong’s unlucky stockbrokers who face the prospect of having their lunch break cut from two to one hour and are complaining bitterly about it. Perhaps they need a reality check with Jason at Camp Crystal Lake?

Shanghai Composite:
Today: +1.21% at 2,606.70 at close
This week: -1.9%
YTD: -20.5%

Hang Seng:
Today: -0.16% at 21,071.57 at close
This week: -2.8%
YTD: -3.7%

Oil:
$76.31
Gold:
$1219.10
Euro/$:
1.2858

Headlines

• Yuan sees largest weekly drop since December 2008
• China Q2 consumer confidence index rises, says Nielsen
• China is the top global growth engine, says Blackstone's Wien
• Credit Suisse raises China export growth forecast for 2010; but cuts 2011
• Real estate industry ask Government for restraint
• Shanghai mortgages collapse more than 90% in July
• China bank clampdown may trigger a “flood” of bond sales by property firms
• China's rich have $1.4 trillion in hidden income
• China to spend $220 billion in Guangxi on infrastructure
• China imported more than 55% of oil needs in H1; which puts July’s 15% dip in perspective
• Hong Kong brokers balk at prospect of losing their long lunch
• Torrential rain hampers relief work in mudslides

"Last night in Soho...."

Most famously, it is the heart of London’s red light and theatre district. In Manhattan, it is a bijoux area “South of Houston” Street, while in Hong Kong it is an entertainment zone located in Mid-levels and bordering Sheung Wan within Central (i.e. “South of Hollywood” Road). It is also a hotel in Budapest, an observatory (Solar & Heliospheric) and a song (prefixed by “Last night in….”) by DDDBM&T.

But in China it is “Small Office, Small House” and the acronym for developer Soho China, which is the market leader in Beijing’s CBD with a stock market value of $3.7 billion. It’s CEO is Zhang Xin (her husband, Pan, is Chairman) and she rose from penniless sweat shop worker to become, at 45, one of the World’s richest ladies worth some $2.2 billion. On Thursday, I noted her reported comments dismissing the bears of China’s property boom. She hopes to prove sceptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai. “I don’t see any bubbles” said Zhang. “The next few months will be a fantastic time to buy”.

And, in June, she paid Yuan 2.25 billion ($332 million) for a 22,500 square metre plot of vacant land on the Bund, which is Shanghai’s stately colonial-era waterfront strip, with echoes of 19th Century in Europe. Two weeks later in Beijing, she launched marketing of an innovative 485,000 square metre commercial, retail and entertainment complex which is shaped like interlinked cocoons. It will be designed by Pritzker Prize-winning architect Zaha Hadid.

Zhang says success in real estate has come down to guessing what the Government will do next. In June, she gave her prediction: “everyone was so pessimistic, and I was saying that in the next six months or a year, prices will go up again. My guess is that it is austerity now, but at some point it will become stimulus again”.

Stephen Roach, Asia Chairman of Morgan Stanley, agrees with Zhang. China’s property bubble is confined to luxury properties, he says. The lending curbs are successfully deflating high end speculators in the top 10 cities, which collectively account for just 6% of the total market. “It’s a micro bubble, not a macro bubble”.

As DDDBMT sang “you came into my life like rain upon a barren desert”.

Shanghai Composite:
Today: +0.53% at 2,672.53 at close
Last week: +0.8%
YTD: -18.5%

Hang Seng:
Today: +0.57% at 21,801.59 at close
Last week: +3.1%
YTD: -0.3%

Oil:
$81.27
Gold:
$1210.70
Euro/$:
1.3295

Headlines

• The so-called ‘gauge of investor fear’ falls to lowest level since 2006
• Industrial production and trade data this week expected to confirm slow down
• 2087 companies have been ordered to shut outdated plants – which may inhibit economic growth
• “No hard landing” says Nobel Prize-winning economist Joseph Stiglitz in TV interview
• State researcher sees economy growing at 10 to 11%
• More economic stimulus would cause bubbles, says People's Daily newspaper
• Yuan Forwards rise most in two weeks on US recovery doubts
• China plans $738 billion of new energy investment
• Average house prices declines in Hainan Province
• Gemdale’s property sales drop 42% for first seven months
• Finance Ministry sells three-year local govt. debt at 2.37%
• HSBC to sell its first Yuan certificates of deposit in HK
• Wheat prices fall
• Landslides kill 127 in Northwest

TTD;TTW

A topsy turvy* day in a topsy turvy* week…..which looks set to close narrowly ahead of were it started on Monday. Within that, too, a sub-index of property stocks, which forms part of the Shanghai Composite, is headed for its worst week (-4.2%) in three months after the banking regulator reiterated higher down payment and mortgage rates for purchases of third homes (last month, real estate shares bounced 18% from their 2010 low on 1 July).

For its part, the China Banking Regulatory Commission said banks can decide on their own whether to stop mortgage loans to buyers of third homes, based on risk conditions. Similarly, down payment ratios and mortgage rates for such homes should be increased to “a large extent”, it said.

“The Government is in a dilemma as it does not have much maneuvering room to manage the economy given an accelerating inflation outlook” said Dazhong Insurance. “There isn’t a big possibility that there will be dramatic loosening of current policies”. BNP Paribas agrees saying that “China is unlikely to relax existing real estate industry policies anytime soon and the strict implementation of these measures may damp a recent recovery in sales, disappointing investors. We expect the sector will be under downward pressure in the short term”.

However, BNP analysts also say that China’s developers may report a 38% gain in H1 profit. Similarly, China is unlikely to issue new tightening measures for the property market, according to Zhu Zhongyi, Vice Chairman of the China Real Estate Association. In the same vein, JPM’s Jing Ulrich does not believe the hype about a 60% fall in house prices; although in July they were off 1.32%.

Best of all, though, was the confidence of Hong Kong’s richest man: 82-year old Li Ka-shing (worth $21 billion) who is regarded as a “Superman” due to his investing skills. He was speaking at announcements by his companies Hutchison Whampoa and developer Cheung Kong (which owns 49.9% of the former) and was in robust mood, as was his son, Victor, who is Vice Chairman of Cheung Kong. At the meeting, Li (Senior) said he was optimistic about the World economy and China’s growth; and was also “full confidence” in China’s banks. “Don’t worry” he said and reminded his audience that the largest shareholder in these banks was the PRC Government. His son also said that the property market in China did not feel like a bubble and by far the majority of its buyers were “users” not “speculators”.

Finally, China’s stock-index futures rose, signalling the benchmark indices may pare a weekly loss, on the prospect that corporate earnings will withstand a slowdown in the economy. For example, H1 corporate earnings have beaten market estimates and that has led to good expectations about profits in Q3.
*turned or positioned upside down

Shanghai Composite:
Today: 1.23% at 2,653.10 at 14.02
This week: +0.6%
YTD: -19.0%

Hang Seng:
Today: +0.56% at 21,671.55 at 12.35
This week: +3.1%
YTD: -0.9%

Oil:
$82.23
Gold:
$1199.66
Euro/$
1.3190

Headlines

• China car sales to rise 10% in 2010
• House prices dip 1.32% in July
• JPM’s Ulrich says house price drop of 60% “very unlikely”
• PBOC predicts inflation risks as economy is stabilising
• China may commence environment tax trial in four provinces
• China car sales to rise 10% in 2010

Over 10 and over 50

We are half-way to a ‘nouveau’ bull market in China on the back of July’s 10% gain (and a further 1% or so today); and at least one PMI survey - the more important one from FLP and the Government - defied the Jeremiahs by being on the right side of 50 i.e. 51.2. Any digit above 50 means expansion not contraction, albeit growth was the slowest for 17 months and the HSBC/Markit version was at 49.4. Similarly, I was encouraged by the fact that the FLP employment sub-index rose in July. What’s more listed companies in China posted a 50% gain in net income in the first half of 2010 (based on the 264 companies which had released earnings results as of end July).

The bulls (including the youngsters) continue to edge out the bears, with even Vale snorting. Meantime, Elliott Wave International forecasts a set of eponymous surges in the stock market following a so-called correction - which has lasted almost a year. Indeed, the market has reached a consensus view that the Government will ease current measures to rein in growth as data show the economy is already slowing down.

Even real estate shares have joined in and this sub-sector has gained 16% in Shanghai since 1 July, which is the most among the five industry groups. Morgan Stanley, in particular, is very confident here. That said, there are doubting Thomases including the learned US National Bureau of Economic Research which says house prices could fall 40%; but don’t let that spoil the party.

Finally, and by way of further girding the loins, I refer you to a new book about China, “The Party”, written by Michael Sheridan who was the bureau chief for the Financial Times in China. It makes startling reading about the Nation’s hierarchy and its focus on success: “sheng zhe wei wang bai zhe wei kou”. Roughly translated, this means “the winner is king and the loser is a mere outlaw”.

Shanghai Composite:
Today: +1.33% at 2,672.52 at close
Last week: +2.6%
In July: +10.0
YTD: -18.5%

Hang Seng:
Today: +1.82% at 21,412.79 at close
Last week: +1.0%
In July: +4.5
YTD: -2.1

Oil:
$79.60
Gold:
$1183.60
Euro/$
1.3064

Headlines

• Chinese manufacturing grows at slowest pace in 17 months say FLP and Government.....
• ......but HSBC/Markit’s survey says it was ‘below 50’
• Buy property ‘call spreads’ on Government policy relaxation, says Morgan Stanley
• Housing faces “meaningful correction” within two years, says economists from the NBER
• China will not relax property measures, says Securities Journal
• China stocks to outperform World markets, say Nomura
• Shanghai Composite set for “wave” of gains
• Yuan deposits rise in Hong Kong
• PBOC’s Hu says Yuan’s trading band is appropriate
• China’s TV commercial
• China’s Government news chief ‘missing’ in Britain
  

Positive Lightning

The irrational fear of lightning (and thunder) is astraphobia and someone who studies lightning is referred to as a fulminologist. I had a bit of both yesterday as ‘a father and mother’ of a storm descended on rural Sweden. Such freak weather is a typical by-product of a hot summer and, although only 100 or so people are killed worldwide every year by lightning, literally millions of computers, telephones and TVs are fried annually. So unusually, Building Value (“we never sleep”) was off the grid on Thursday save for the Blackberry which is not an ideal medium for lengthy communication.

This has meant a delayed celebration of the best month for a year on the Shanghai stock market; and at the time of writing July was showing a 10% gain. The prospect of looser economic policies, no rate rises and additional spending on tourism helped, as did rampant income growth. Net profits of Chinese industrial companies in 24 regions jumped 72% to $237.5 billion in the first half of 2010 from a year earlier. Similarly, new bank lending in July may have cleared Yuan 500 billion, with some Yuan 3 trillion expected for the whole of H2.

What could spoil the party, though (and cause Sunday lunch indigestion), is China’s Purchasing Managers’ Index for July which is invited on 1 August. It could slip below 50 for the first time since February 2009. Elsewhere, the Oriental Morning Post says that Shanghai will announce tightening measures for the real estate market in the second half of the year; and it quoted Zhou Bo, head of Shanghai’s National Development and Reform Commission.

Still, the likes of UBS (“fears of a so-called hard landing are overblown”), Macquarie (“a lot of value”), Nomura (“half way to a bull market”) and JPM (+21%) are all positive; albeit HSBC is less so.

“Bring in the bottled lightning, a clean tumbler and a corkscrew” (as Charles Dickens once said).

Shanghai Composite:
Today: -0.40% at 2,637.50 at close
This week: +2.6%
In July: +10.0
YTD: -19.5%

Hang Seng:
Today: -0.30% at 21,029.81 at close
This week: +1.0%
In July: +4.5
YTD: -3.9%

Oil: $78.12
Gold: $1171.20
Euro/$: 1.3076

Headlines:

• PBOC sees less need to lift interest rates, says IMF; but it can’t agree on the Yuan (which is undervalued by anything from 5 to 27%)
• Money market rate declines to a 13 week low of 1.68%
• PBOC sells three month (1.5704%) and three year bills (2.65%) at unchanged yields
• Demand for 30 year debt up as cash shortage eases (yield down from 4.03 to 3.96%)
• Sovereign wealth fund or CICC is planning bond sale
• Environment accidents in China double as growth takes its toll
• Nation needs $118 billion to build high speed rail lines