Surprise, surprise

Posted on Monday, 13 September 2010 [GMT +1]

Children and equity markets like pleasant surprises and, whether choreographed, or not that is what we had this morning. On Friday, speculation was rife that the reason behind the Government’s early publication of economic data (on Saturday rather than Monday) was a forerunner of an increase in benchmark Chinese interest rates (lending, deposit or both). It didn’t happen. What we did get, though, was confirmation of a still vibrant economy, albeit one in which the pace of growth is moderating - to the extent that CICC called it ‘Goldilocks’: not too hot; not too cold (and with fewer bears sitting at the kitchen table). On a more prosaic note, Merrill Lynch said GDP will expand at least 9.4% this quarter and 9.0% in Q4; and that “domestic demand is robust and the Chinese economy is heading for a smoother and softer landing than people had feared”.

Inflation remains a concern at 3.5% in August, albeit 1.8% of this was driven by agricultural pricing. Similarly, producer prices dipped from 4.8 to 4.3%. Nonetheless, a satisfactory performance here remains a vital metric.

Urban fixed asset investment also remains strong, with a run-rate of 25% (January through August), while bank lending rose for the first time in four months in August (+2.3%); as did M2, the broadest measure of money supply (+19% year-on-year in August and the first pickup in nine months). Despite this proving that there has been some financial loosening, most commentators believe the Government’s target of a 22% reduction in new lending (to Yuan 7.5 trillion) this year remains viable. That said, the debate on raising interest rates, especially for deposits, continues. South Korea, Malaysia and India already have.

Elsewhere, the Yuan hit a record high against the US dollar today of 6.7568 (correct at time of going to press); although this will, inevitably, not be sufficient for US legislators. However, the US-China Council (comprising more than 200 companies, including the likes of Caterpillar) says leave China and its currency alone. It can only see opportunity in the Country and believes tariffs and the like are “counterproductive”.

“The surprise is half the battle. Many things are half the battle, losing is half the battle. Let’s think about what’s the whole battle”. (David Mamet).

Shanghai Composite:
Today: +0.94 at 2,688.32 at close
Last week: +0.3
YTD: -18.0

Hang Seng:
Today: +1.89 at 21,658.25 at close
Last week: +1.4
YTD: -1.0

Oil futures: $77.95
Gold futures: $1245.70
Euro/$ spot: 1.2839

Headlines

• Record high for the Yuan versus US dollar
• Inflation hits 3.5%; but producer prices dip half a point to 4.3%
• China faces upward pressure on CPI from agricultural pricing, says NBS
• Industrial output tops forecast on “robust” growth
• Urban fixed-asset investment rises nearly 25% in first eight months of 2010
• New lending, rebounds and money supply unexpectedly picks up speed
• Goldilocks without the bears (?) as CICC and JPM like what they see, especially in small cap. stocks
• State economist says there is no need to raise rates; however…
• ……deposit rates should be raised, says PBOC advisor
• Swap rates rise to one month high as concerns of an economic slowdown ease
• CBRC may require core capital of 4% of assets, says China Business News
• US-China Council, including Caterpillar, is lobbying to block measures by the US on China’s currency (Ed: yes, this is correct); Stephen Roach adds warning too
• Yuan flexibility is a long term goal to meet economic needs, says Dow Jones
• China has 24 million job seekers and 12 million vacancies, reports Xinhua
• August power output surges to record due to very hot summer
• China will pass US as the largest credit card market by the year 2020, says MasterCard
• The historic China and Taiwan economic agreement took effect on 12 September
• China is also to allow individual tourists to Taiwan
  

Electric

A record 13,102 bolts of lightning struck ground in Hong Kong in the hour after midnight today as a storm raged from 21.00 yesterday through 04.00. If China raises interest rates on Monday morning, as speculated, this would be similarly shocking. Such conjecture arose because the Government has brought forward the announcement of its inflation figures to tomorrow (Saturday) instead of Monday. Industrial output is also promulgated tomorrow.

Today, China posted its third straight monthly trade surplus in excess of $20 billion (i.e. $20.03 billion) and although this is significantly up on the same month last year ($15.7 billion), it is lower than July’s tally of $28.7 billion; imports actually grew a tad more than exports in percentage terms. Similarly, the total for the year through August narrowed 14.6% to $103.9 billion. Not that this will provide succor to the US Yuan hawks, even as the Chinese currency posted its biggest weekly gain (+0.47%) since the end of June.

The property sector remained front and centre, too, as prices in 70 major cities climbed by an annual 9.3% in August. But this was the slowest in eight months and showed no change over July. Transactions and investment (+34% to $66 billion) continued to perform robustly, though, and opinion is divided on whether prices will fall or not (albeit, Jing Ulrich and I think they will). If they don’t, however, the Government is expected to introduce more controls. In any event the sub-index of property stocks in Shanghai slid a further 1.7% today to where it is off 28% year to date.

Remember, too as Willie Tyler said, “the reason lightning doesn’t strike twice in the same place is that the same place isn’t there the second time”.

Shanghai Composite:
Today: +0.26% at 2,663.21 at close
This week: +0.3%
YTD: -18.7%

Hang Seng:
Today: +0.43% at 21,257.39 at close
This week: +1.4%
YTD: -2.8%

Oil futures: $75.86
Gold futures: $1251.20
Euro/$ spot: 1.2726

Headlines

• China posts $20 billion trade surplus in August; Yuan has biggest weekly gain since late June
• China is set to announce inflation data earlier – which make point to an interest rate rise
• China property price gains slowed to 9.3% in August; slowest in eight months
• Investors are over-reacting to China’s credit growth as lending winds down, says UBS
• Banking regulator orders enhancements of risk management by trusts
• Top prices paid for building land in Beijing
• August passenger car sales growth accelerates to almost 19%
• China clean-energy aid triggers trade complaint from US union
• China trade unions plans to increase role at foreign companies
• Hong Kong public housing apartment sells for record price

Sweet and low

“China will soon hit another of its sweet spots, with an economy that is neither too hot nor too cold. They don’t come along too often these days, so don’t let it go to waste”. So says Stephen Green (no, not that one) who is Chief China Economist at Standard Chartered. Templeton agrees and says that China is a “bright spot” (it also says no global double-dip). These comments come ahead of a mass of economic data to be promulgated over the next few days, including trade figures (tomorrow) followed by industrial production and inflation (where the smart money says that its strength is short term and driven by a temporary spike in food).

Developers, however, remain unloved and their sub-index within the Shanghai Composite has fallen 26% this year, the worst performer among the five industry groups. At the time of writing, too, developers were down 1% today and look set to close at their lowest level since 19 July. JLL says that further constraints on property are inevitable. Jing Ulrich of JPMorgan (who is ranked by Forbes as among the 100 most powerful women in the World) disagrees and not only says that China should eschew further policy tightening (as the Government boosts the supply of affordable housing to ease prices) - but that it will not happen. PBOC Advisor Xia Bin agrees.

Meantime, US Treasury Secretary Tim Geithner said, yesterday, that Chinese officials need to allow the Yuan to rise more quickly against the dollar, in order to show China’s trading partners that it is following through on its promises. The currency gained 0.11% to 6.7868 per US dollar as of 10.29am in Shanghai, the first rise in three days. 12 month Non-deliverable Yuan Forwards, however, currently indicate appreciation of just 1.2%. In turn, this prompted International Strategy & Investment to say that “the greatest risk to the global economy in the coming years is US-China trade friction”.

Don’t worry though, because Goldman Sachs says that China’s stock market will be worth $41 billion against $5 trillion today, making it the World Number One; okay, that’s in 2030.

Shanghai Composite:
Today: -1.44% at 2,656.35 at close
This week: nc
YTD: -18.9%

Hang Seng:
Today: +0.37% at 21,167.27 at close
This week: +0.9%
YTD: -3.2%

Oil futures: $74.71
Gold futures: $1257.80
Euro/$ spot: 1.2697

Headlines

• China to introduce more property speculation measures, says Jones Lang LaSalle
• China does not need extra property controls amid new supply boost, says JPM’s Ulrich
• PBOC Adviser says property price increase is short term
• Gemdale property sales rose 41% in August; but are off 28% in first eight months
• China money rate drops to right-day low which supports demand for new debt
• PBOC may cut reserve requirement in H2
• PBOC sells three year bills at unchanged yield of 2.65%: and three months bills at 1.5704% (also unchanged)
• Templeton says World to avoid double-dip recession; and China is a "bright spot"
• Goldman sees $80 trillion emerging nations stock market by 2030, with China as number one at $41 billion
• Savile Row suit retailer expands in China
• Taiwan Stock Exchange looks to attract more than 50 listings on improved China ties

Back at work

Fresh from vacation, European sovereign debt scared just about everyone in the office yesterday; and out of sight has clearly been (albeit irrationally) out of mind. The contagion also spread to China where the Shanghai Composite eased back from a near four month high (and a whisker under 2,700). Nor did domestic news help, with 21st Century saying that a second round of measures to control the property market may now be introduced in the face of a continued surge in sales and prices. Similarly, the CBRC is reportedly drafting a plan which will require banks to maintain loan-loss reserves of 2.5% of total lending. At this time, only one (AgriBank) of the five largest State-owned banks exceeds this tally and, if introduced next year, it will reduce profits and restrict loan growth.

Elsewhere, steel company share prices eased, too, after Monday and Tuesday’s surge on production constraints and higher product prices. There was also caution from the Government on the economy with the Ministry of Industry talking about a slowdown, and VP Xi saying that, while there are positives, “the global recovery isn’t yet firmly established”. The Yuan is also being kept firmly under control (despite US fretting) with the reference rate seeing the steepest cut (0.16%) since 12 August; again with a weather eye on Euro sovereign debt. That said, the Chinese currency will soon be tradable with the Russian Ruble. Also on a positive note, Ernst & Young says that China is the most attractive country in which to invest in renewable energy.

And, finally, as Elbert Hubbard said “no one needs a vacation so much as the person who has just had one”.

Shanghai Composite:
Today: -0.11% at 2,695.29 at close
This week: +1.5%
YTD: -17.8%

Hang Seng:
Today: -1.46% at 21,088.86 at close
This week: +0.6%
YTD: -3.6%

Oil futures: $73.41
Gold futures: $1260.30
Euro/$ spot: 1.2684

Headlines

• Surging property sales trigger speculation of further tightening
• Property collateral is being used for consumption loans to fund third homes, says China Business News
• Yuan drops as China resists US pressure
• Yuan trading against Russian Ruble said to start within weeks in Shanghai
• Industrial output slowdown will deepen in H2, says Ministry
• Global economy emerging from “shadow” of crisis, says China VP Xi Jinping
• CBRC to require 2.5% loan-loss reserves, says Guosen
• Repurchase rate rises
• PBOC sells one year bills at unchanged yield of 2.0929%
• China takes top spot from US in Ernst & Young’s ranking for renewable energy
• Gates and Buffett to issue public explanation for trip to China
• Yangzijiang rises in debut of first China company to sell shares in Taiwan

Kiwi logic

For probably the first time in the thirty years or so that I have lived away from the country of my birth, New Zealand, it took the top spot in most news bulletins on Saturday, including CNN. Sadly, this was due to a 7.1 earthquake in Christchurch, the Nation’s second city. Miraculously, too, there was no loss of life (due to the tremblor’s timing at around 04.00 hours) but some $US1.4 billion of damage was caused. Typically, too, the NZ stock market closed up 1.2% today as building companies leapt 4 or 5%, which more than made up for insurance companies (including AMP) going the other way.

It is not surprising that New Zealand is not in the news so much, given its population of just 4.3 million. Chongqing (the World’s largest City), for example is nearly 7.5x larger – let only China, itself, which is more than 300 times the size. For me this underlines the awesome scale that is the PRC; not to mention its equally awesome potential.

My second lesson from the weekend and Monday’s events is the naked efficiency of the stock market. How could it be otherwise? But equity markets are not always correct and they often move too far in one direction or the other (i.e. up or down).

The Shanghai Composite is down some 18% in the year to date, but last week it rose 1.7% (with Hong Kong a touch better) and both started this week similarly. Positive economic news from the US was the catalyst. There was also a veritable crescendo of domestic news over the weekend, most of it positive. Of particular note, too, is the performance of Chinese property company bonds, most of which have recovered some 75% of their losses since May. As International Strategy and Investment said “credit investors are looking over this valley and while there may be some disruptions in the short term, they can see that the underlying demand for housing in China remains strong”.

Similarly, SAP talks about the “thrilling potential” that is China and wants to make its “second home” here. The IMF has also perked up after a conference in South Korea, while both RCM and BNP Paribas are buyers of Chinese stocks. The Yuan is also being polite to its latest US visitor (Larry Summers), who is to be followed soon by Warren Buffett and Bill Gates. Finally (okay there’s much more to talk about), FDI looks set to top $100 billion this year, after last year’s $90 billion.

As a New Zealand pragmatist might say: “she’ll be right, mate”.

Shanghai Composite:
Today: +1.54% at 2,696.25 at close
Last week: +1.7%
YTD: -17.7%

Hang Seng:
Today: +1.83% at 21,355.77 at close
Last week: +1.8%
YTD: -2.4%

Oil futures: $74.27
Gold futures: $1250.90
Euro/$ spot: 1.2886

Headlines

• Property bonds boom
• SAP talks of the "thrilling potential" in China and wants it to become “a second home”
• IMF underlines confidence in the global recovery
• China stocks advance as export outlook improves
• RCM says China shares are poised for a significant rally; BNP and others agree
• Yuan rises most in three weeks as US official visits China
• China’s 2010 Foreign Direct Investment may exceed $100 billion; up from $90 billion in 2009
• China to “aggressively” expand imports, say Ministry
• China to promote mergers in auto, cement and steel industries, says State Council
• Draft wage regulation to be revived
• China needs new measures to avoid carmaker overcapacity, says Xinhua
• Imax theatres to quadruple to 100+
• Chinese company profits rose 25% in 2009
• China allows insurers to invest and hold stakes in property assets of unlisted companies
• HSBC to distribute China Development Bank Certificates of Deposit in Yuan
• Shanghai to let banks and companies use offshore Yuan for investment in trial
• Chinese drive to list UK engineer, Precision Technologies
• China's small-cap stocks decline as restrictions on sale of shares expire
• Warren Buffett and Bill Gates to visit Beijing this month
• China may outstrip US retail sales at $5 trillion by 2016
• Traffic jam on Beijing-Tibet road begin to ease as car limits are removed
• Bank of China says its plans the sale of Yuan 5 Billion of bonds in Hong Kong
• Weekly house sales fall in Hong Kong's 10 largest projects
• Taiwan to study proposals for more financial industry investments in China

Butch & Sundance

Posted on Friday, 3 September 2010 [GMT +1]

Another day, another bearish property story……and as Butch Cassidy said to the Sundance Kid “don’t those guys get tried”. Evidently not, and today, the fabulously named, StarRock spoke about a “a very big bubble” in Chinese real estate and BNP Paribas added that house prices in China would fall (but it did not say by how much). More worrying, actually, are the latest estimates of local government loans at $1.6 trillion plus an up-tick in so-called ‘special-mention’ loans at China’s four State-owned banks (these loans are one level above non-performing).

In other news, ICBC has sold all of its Yuan 25 billion of bonds, while varying views on inflation continue. On a more positive note, Shenzhen is to spend $5.9 billion to make a ‘Manhattan’ in the Pearl River Delta and Hong Kong’s house sales have reached the highest in almost three years.

As Butch also said “I got vision, and the rest of the world wears bifocals”.

Shanghai Composite:
Today: -0.46% at 2,643.50 at 11.30
This week: +1.3%
YTD: -19.3%

Hang Seng:
Today: +0.07% at 20,882.54 at 11.57
This week: +1.4%
YTD: -4.5%

Oil futures: $74.75
Gold futures: $1252.10
Euro/$ spot: 1.2819

Headlines

• Local government loans may top $1.62 trillion
• Special-mention loans increase at the four State-owned banks (they are one level above non-performing)
• Property market in China in “very big bubble” says StarRock
• House prices in China to decline starting this month says BNP Paribas (although no number given)
• Shanghai issues regulations on property pre-sales
• China must reform Consumer Price Index calculation methodology, says researcher
• China does not face inflation risk this year, says former PBOC Advisor Fan
• China foreign currency reserves are ‘close to’ 65% in US dollars
• ICBC sells Yuan 25 Billion of six year convertible bonds
• Shenzhen to invest $5.9 billion in Qianhai area, says Securities Times
• Hong Kong house sales increased to highest in almost three years in August

Good in (almost all) parts

Today was also less-curate-like than yesterday with equities rising smartly (in excess of 1%) along with a 59% surge in August’s auto sales and the Yuan behaving itself (+0.18%). There was also positive (‘getting its own back’) news from China Vanke with Yuan 10 billion of apartment sales in August; plus in Shanghai, new home sales jumped 70%. The sole niggle was Deutsche Bank which said any hope that the Government will relax existing control measures on property had “vanished”; and they could well be strengthened (echoing yesterday’s sentiment from the CBRC).

Finally, I leave you with a statistic from John Lee, author of ‘Will China Fail?’ and a visiting fellow at the Hudson Institute in Washington DC. He says that China’s domestic consumption as a proportion of GDP, at just over 30%, is “the lowest of any major country in modern economic history”. Clearly this presents a wonderful opportunity but it is not a risk free one.

Shanghai Composite:
Today: +1.25% at 2,655.78 at close
This week: +1.7%
YTD: -19.0%

Hang Seng:
Today: +1.19% at 20,868.92 at close
This week: +1.3%
YTD: -4.6%

Oil futures: $73.82
Gold futures: $1250.30
Euro/$ spot: 1.2790

Headlines

• Yuan rises most (+0.18%) in two weeks on reference rate reflecting US dollar declines
• August’s auto sales climb 59%
• China may toughen property curbs, says Deutsche Bank; but China Vanke does well
• Shanghai's new home sales jump 70% in August as prices rebounded too
• China Railway Group aims to boost 2010 property sales 80%
• PBOC sells three month bills at unchanged 1.5704% yield
• Ping An to merge banking unit with Shenzhen Development Bank; and moves to majority control
• EU Chamber of Commerce speaks about “frustration” with pace and scope of Chinese deregulation