The 11th month

“No shade, no shine, no butterflies, no bees, no fruits, no flowers, no leaves, no birds. November” – Thomas Wood

With apologies to Southern Hemisphere readers, those of us in the North know that November (even with one day to go) can be a miserable month; and in Shanghai share prices showed the first month on month fall (-5.3%) since June. Further monetary tightening is imminent and, in many ways, it would be better if the Government simply got on with it, rather than sitting on its hands. In fact money market rates (after a pause for breath yesterday) are already there as the seven day repurchase rate rose 63 basis points today to 3.31%. Similarly, the Chinese Academy of Social Sciences says benchmark interest rates could rise 200 basis points (albeit with no timetable).

Nor does the background noise from Europe help; and let’s not forget that this is China’s single biggest (albeit multi-national) market taking around one fifth of exports. Tensions on the Korean Peninsula continue, too, albeit WikiLeaks points to evidence that China may be beginning to distance itself from, North Korea and in one exchange between China and the US - apparently - China’s Vice Foreign Minister said the Government in Pyongyang was acting “like a spoiled child”.

In real estate, Moody’s gives with one hand and takes away with the other i.e. the property market was given a stable outlook but with a moderate downward correction. “The improved liquidity positions of developers, resulting from robust sales over the last year, and the low debt leverage of buyers together reduce the risk of any panic sales”; and this will help “avoid any drastic correction”. However, the latest set of regulatory measures will be “progressively enforced”.

Moody’s also says that contracted sales values, or a combination of sales volumes and prices, for the 23 Chinese developers tracked by the credit rating company will drop 15 to 20% in 2011. But this is “manageable” for most of the real estate companies. Similarly, home sales volumes in 17 of 35 major cities increased last week from the previous week, according to SouFun, which operates China’s biggest real estate website. That said, the dollar bonds of China real estate companies had their first loss (-0.35%) of this half year after the PBOC imposed restrictions intended to limit developers’ access to bank loans and slow mortgage growth.

Back in the stock market, only Citigroup remains positive. “The liquidity driven rally will likely carry on in the next six months. We remain bullish on China in coming months”. Given the inflationary environment and prospects for further Yuan appreciation, Citigroup recommends an “overweight” allocation for cement companies, automakers, heath care companies as well as technology stocks.

“Happiness is an attitude. We either make ourselves miserable, or happy and strong. The amount of work is the same” - Francesca Reigler

Shanghai Composite:
Today: -1.61% to 2,820.18 at close
This week: -1.8%
In November: -5.3%
Since 5 July: +19.5%
YTD: -13.9%

Hang Seng:
Today: -0.68% to 23,007.99 at close
This week: +0.6%
In November: -0.4%
YTD: +5.2%

Oil futures: $85.64
Gold futures: $1369.80
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3103

EQUITIES & MONEY

• Stocks set to show first month’s fall since June; Citigroup remains positive
• Seven day repurchase rate rise 63 basis points to 3.31%
• “Prudent” monetary policy advocated by former banker
• Yuan trades near three week low
• Emerging markets attract new record level of funds at $84 billion; as China has best week since September

KOREA

• China is beginning to distance itself from North Korea, according to WikiLeaks

REAL ESTATE

• Moody’s sees stable outlook property but also a 15 to 20% drop in contracted sales values in 2011
• Real estate US dollar bonds show first loss

DOMESTIC

• China will cut prices of 17 medications
• Rolls-Royce pushes $990,000 cars among China’s new rich
• China approves 5.6 gigawatts of hydropower projects in Sichuan Province

HONG KONG

• China’s Yuan 3 billion debt sale in Hong Kong to individuals may offer 2% yield
• PBOC is unlikely to expand Yuan quota for Hong Kong

IRON & STEEL

• Baltic Index drops for three days running as capesize vessel supply increases
• Seaborne iron ore volumes set for 6% rise in 2010
• Chinese steel prices rise 7.2% in November; as production rises
• Vale may invest $158 million in Malaysia next year, says Business Times

Über alles?

In the first seven months of this year, China’s two way trade with its three largest trading partners - the US, Japan and South Korea - was $484.7 billion. During the same period, trade between China and North Korea amounted to $1.65 billion (okay, this makes the PRC the North’s largest trading partner and supplier of much of its foreign currency, fuel and food). From a pure economic point of view, then, there would appear be a huge, relative economic benefit to China in keeping sweet with the ‘Big 3’ rather than the ‘little Northern 1’.

People a lot smarter than me (some say it is not difficult) at the Brookings Institution and Center for Strategic and International Studies (CSIS), both in Washington DC, say the following. The Chinese Government’s principal goal is to preserve regional stability by preventing the collapse of Kim Jong-il and his regime, which might lead to a flood of refugees into north east China along a 1,415 kilometre (880 mile) border. Additionally, it might also create a unified and democratic Korea allied with the US i.e. “the Chinese worry about refugees and chaos from a North Korean collapse in the short term and, in the long term, of the magnetic effect of having a strong modernised Korea of 75 million people on their border” concludes CSIS. However, Professor Zhu Feng at Peking University adds that the recent attack by North Korea on the South has “injected growing anxiety about the stability of North Korean behaviour among Chinese diplomats and officials”. This will most likely put more pressure on the five day visit to China - which begins tomorrow - of Choe Tae Bok, Chairman of North Korea’s Supreme People’s Assembly.

In the short term, too, China’s call to resume six party talks (the two Koreas, the US, Japan, Russia and itself) has fallen on deaf ears. But there are two views on this. Brookings says China wants to look like it is taking “some initiatives on this important matter”; and North Korea also would like to resume the talks, so this is “the best possible action for China, from China’s perspective”. However, CSIS believes the initiative is “totally useless. People have been calling for getting back to talks for the past three years. It’s typical no risk, no cost, no commitment China”.

In other news, the Yuan recorded its biggest weekly loss (-0.42%), last week, since December 2008 as investors eschewed Asian currencies and plumped for the US dollar as South Korea, in particular, resisted calls for six party talks (as above). The currency was also off today to 6.6745 and Yuan Forwards are forecasting just 1.5% appreciation over the next 12 months. That said, analysts estimates range to 6%+ over the same period. Capital adequacy at China’s banks has also been increased by the regulator to 8% plus two lots of 2.5% - one as a “surplus” and one as a “counter-cyclical buffer”. The Government will also meet, it is reported, on 11 and 12 December to discuss monetary and fiscal policy and may introduce a new inflation rate of 4.0% (the old one was 3.0%). However Dazhong Insurance lamented that the past weekend was almost a vacuum for news on Government policies – and this added to uncertainties regarding the future control measures in the market. “Investors remain cautious on speculation of tighter policies including interest rate hikes. The fluctuations will continue with downward pressure”.

“We must always seek to ally ourselves with that part of the enemy that knows what is right” - Mahatma Gandhi

Shanghai Composite:
Today: -0.19% to 2,866.36 at close
Last week: -0.6%
In November: -3.8%
Since 5 July: +21.3%
YTD: -12.5%

Hang Seng:
Today: +1.26% to 23,166.20 at close
Last week: -3.1%
In November: +0.3%
YTD: +5.9%

Oil futures: $84.78
Gold futures: $1367.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3285

KOREA

• China calls for six party talks as US and South Korean naval exercises begin

MONEY

• Yuan sees biggest weekly loss (-0.42%) since December 2008
• Yuan declines to three week low today; with Yuan Forwards now at +1.5%
• Capital adequacy raised to 8% plus 2.5% (surplus) plus 2.5% (‘counter-cyclical buffer)
• Yuan positions at China’s banks rise most in 30 months
• Futures traders will need to hold more cash

ECONOMY

• China’s Government is to meet on 11-12 December to discuss monetary and fiscal policy, it is reported; this may include a new inflation target of 4.0%
• China to increase supplies of sugar, cooking oil and cement (mixing not advisable)
• China’s coal prices rise to two year high
• Gas prices increases halted in some provinces

INTERNATIONAL

• Black Friday sales in the US rise 0.3% as shoppers wait for retailers to cut prices
• Chinese firm wins contract for $46 million Ethiopian highway

REAL ESTATE

• Wharf Holdings buys residential land in Wuhan for a total of Yuan 1.02 billion
• Hubei to invest in $27 billion in port expansion

DOMESTIC

• Cnooc JV to buy Pan American Energy stake for $7.1 billion from BP
• China Huaneng to acquire 50% stake in InterGen in a deal worth $1.23 billion

HONG KONG & TAIWAN

• Huge demand for Yuan debt in Hong Kong
• Taiwan’s relations with China may improve after ruling KMT party’s election win
• Hong Kong home sales look like slowing further

IRON & STEEL

• Rio and BHP may increase iron ore quarterly contracts by 7%, says MB…..….while the Steel Index says +7.7%
• Sweden to invest $2.9 billion iron pellet production to meet demand from China

"Black Friday"

The day after Thanksgiving in the US (which is always a Friday), is known as ‘Black Friday’ – because it is the biggest shopping day of the year ($18 billion last year) and the day on which the majority of US retailers move (from the red) into the black profit-wise. It is also a lead indicator for the entire Christmas season. This year, too, there appears to be an unprecedented level of price discounting in order to attract buyers. Subsequently, the US Retail Federation predicts a gain of 2.3% for the entire holiday season (to $447 billion) which is also consistent with an incipient recovery in consumer spending: +2.8% in Q3; the best since Q4 2006. For the record, too, consumer spending accounts for more than two-thirds of US GDP.

To my knowledge, China does not celebrate Thanksgiving - and while it is good news for China’s exporters that US consumer spending is on the up - today is not ‘Black Friday’ either. In fact, it is more like ‘Moribund Friday’ as China’s Finance Ministry failed to draw enough demand at a bill sale for the first time since June i.e. it placed 58% of the Yuan 20 billion on offer. In turn, this reflects a cash shortage at the banks after the PBOC increased their reserve requirements twice this month. Similarly, the money markets continue to point the way to higher interest rates; and the seven day repurchase rate, which measures lending costs between banks, rose 25 basis points to 2.73%, the highest level since 30 September. In addition, Guotai Junan Securities, China’s largest stockbroker by revenue, is forecasting a hat trick of increases in benchmark rates by end-June next year.

Unsurprisingly, the Shanghai Composite drifted as investors adopt a ‘wait and see’ stance although consumer staples and cement stocks were in demand. Indeed, it is reported that cement prices in eastern China have risen 40% since August – and Anhui Conch had its best day (on Thursday) since the end of August. Elsewhere, the Asian Games in Guangzhou close tomorrow and the event has had a very significant economic benefit on the City with its budget of $18.3 billion. Did you know, too, that Guangzhou has a GDP greater than many small countries, including Vietnam and Morocco?

“Only Robinson Crusoe had everything done by Friday” - Anon

Shanghai Composite:
Today: -0.92% to 2,871.70 at close
This week: -0.6%
In November: -3.6%
Since 5 July: +21.5%
YTD: -12.4%

Hang Seng:
Today: -0.77% to 22,877.25 at close
This week: -3.1%
In November: -1.0%
YTD: +4.6%

Oil futures: $85.58
Gold futures: $1367.60
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3237

EQUITIES & TRADING

• Stocks drop on tightening concerns
• Cement stocks advance on demand and prices (+40% in eastern China since August)
• Shanghai Futures trading is being tightening up
• Dalian Exchange to lift margins and daily trading limits to stabilise prices
• China’s credit-default swaps trading begins as the regulator seeks to implement tighter controls

MONEY

• Money markets continue to point way to higher interest rates
• PBOC fails to complete bill sale for first time since June

REAL ESTATE

• Guangzhou is to close Asian Games tomorrow as the City booms with $18.3 billion of spending

HONG KONG

• Hong Kong’s debt rating is raised by Fitch on economic growth and fiscal strength

IRON & STEEL

• Vale seeking depositary receipt listing in Hong Kong
• Brazilian steelmakers under pressure
• South African Government seeks agreement on iron ore prices with ArcelorMittal and Kumba
  

Children

My son turned 23 yesterday which stimulates a panoply of emotions, atop of which is the shiver of ancientness and the realisation that you are, at the very least, MA (i.e. middle-aged). I am sure too that, psychosomatically, my perambulation over the last 24 hours has been a little slower and a little stiffer. Second, is that feeling of responsibility and the very clear memory of the very first moment you have a child; this is the day that you stop being one yourself and become an adult for the very first time.

North Korea (NK) is a child and a naughty one at that; and although not a direct descendant of China, it is - at the very least - a step child. ‘Father’ Wen Jiabao (who is on a visit to Russia) also finally said something about NK’s recent bellicose behaviour towards its southern relative (and the death of four people). He called for stability on the Korean Peninsular but, at the same time (through filial loyalty, perhaps) did not find fault with NK. Coincidentally or not, China’s foreign minister (aka NK’s Godfather) cancelled a visit today to South Korea due to scheduling issues (yeah, right).

As for the rest of the family, the Yuan rose for the first time in four days to 6.6502, albeit that it’s recent weakness (-0.31%) has had more to do with dollar strength on the back of Korean hostilities. Yuan Forwards are pointing to +2.2% over 12 months, albeit Standard Chartered says it is more likely to be +7.0% annualised in H1 next year; at the same time 2011 inflation is forecast to rise to 5.5% against 3.2% in the current 12 months. Similarly, money markets are presaging higher interest rates as the PBOC pledged to strengthen liquidity and “normalise” monetary conditions. The seven day repurchase rate, which measures lending costs between banks, jumped 15 basis points to 2.48% which is the highest level since 8 October. And as DBS Bank said “enough has been done on the supply side, but work needs to be done on the demand side”. In the same vein, new loan targets for next year may be as low as Yuan 6.0 to 6.5 trillion (down from Yuan 7.5 trillion+ in 2010).

Meantime, our cousins in real estate took a bit of a battering as the State Council said that it needed to introduce “harsher” measures to restrain speculation. It also pushed for an increase in the supply of affordable housing for low and middle income families. At the same time, the Government also plans to carry out a nationwide property inspection with a focus on local government land supply, affordable housing targets, idle land and misuse. Juxtaposing this, though, are number one developer China Vanke and its doubling of sales in October plus the property sector sub-Index rising 2.4% in early trading in Shanghai.

The bonds playground - Government and corporate - remains busy and Caterpillar has sold Yuan 1 billion of debt in Hong Kong. It is the second US corporate to do so after McDonalds. Chinese IPOs, however, have lost their shine both in Hong Kong and New York with two delayed (Bluestar Adisseo and China Datang) and one falling 15% on debut (Syswin, which provides services to property developers in 17 Chinese cities) respectively.

On a brighter note, Credit Suisse says China’s stocks may climb about 20% in 12 months as “abundant” liquidity and profit growth overshadows the risk inflation. Similarly, while a little more cautious in the short term, JPMorgan has maintained its medium term “positive stance”. It also says that the risk of inflation running out of control has been “exaggerated” while China still has a “solid” economic and corporate growth outlook”.

“Children are like wet cement. Whatever falls on them makes an impression” - Dr Haim Ginott

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: +0.13% to 23,054.68 at close
This week: -2.3%
In November: -0.2%
YTD: +5.4%

Oil futures: $83.65
Gold futures: $1372.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3312

KOREA & EQUITIES

• Wen calls for stability on Korean Peninsula
• Stocks may gain 20% in 2011 on liquidity and profit growth, says Credit Suisse

MONEY

• PBOC says it will strengthen liquidity management and normalise monetary conditions
• Money market rate climbs to highest level in a month
• Yuan rises for first time in four days; with Yuan Forwards pointing to +2.2%
• Yuan appreciation to quicken with inflation, says Standard Chartered in HK
• Commodity exchanges in China increase fees to combat threat of speculation
• Shanghai Futures Exchange to suspend preferential trading fees by charging both sides of transactions

BONDS

• PBOC sells three month bills at static yield of 1.8131%; and same for three year offer at 3.0%
• Seven year bonds sold at 3.83%
• Caterpillar raises $150 million in Hong Kong sale of Yuan bonds
• Chinese State-owned companies look set to double US dollar bond sales

REAL ESTATE

• China needs “harsher”property restraints and increased supply of lower cost housing, says Cabinet official
• Cheng says China may curb developers further
• Ministries to carry out property inspections
• Shimao Property and China Vanke (especially) see very good sales advances in October
• Developers shares rise 2.4% in largest gain since 13 October (but still 5% down in November to date)

INTERNATIONAL

• Syswin shares retreat as Chinese IPOs lose momentum on the New York Stock Exchange
• Tokyo follows Hong Kong with shorter stock market lunch break - back to one hour

DOMESTIC

• China builds French-designed nuclear reactor for 40% less
• China may face power supply issues this winter
• Citigroup may double number of staff in China to 10,000 over three years
• China to encourage foreign investment in “high level” manufacturing
• Machinery industry to grow at 15 to 20%, with focus on items for use in construction

HONG KONG

• Bluestar and Datang delay $2.6 billion Hong Kong IPOs on worries about volatility

IRON & STEEL

• Iron ore investment opportunities abound on London’s AIM
• Steel and cement output to rise as power limits ease, says CICC; selling prices to fall
• Hunan Valin sells $189 million stake in Fortescue Metals

"Lunch is for wimps"

"LIFW" was the disdaining description of business mores from Gordon Gekko in Wall Street 1. And, in Hong Kong, they are clearly listening as the traditional two hour lunch break will be cut by 30 minutes next March and then by a further 30 minutes in March 2012 to a single hour. Was this the reason that Hong Kong fell 2.7% today to its lowest level since 7 October? I don’t think so. The market fell because of worries over the border in China and a domestic property sector being hammered by Government constraints. By way of a kindred spirit, the Shanghai Composite joined in with a near 2% drop to its lowest since 11 October as it - amazingly – settled at 2828.28…..Lucky for some?

Investors are worried that the Chinese Government will ratchet up its fight against inflation. This was evidenced by a People’s Daily editorial on its front page saying that the Nation should designate more goods as important commodities and intervene in prices where necessary. Citigroup also talked about the ‘supper cycle’ (as opposed to the ‘super cycle’). By this it meant that “when iron ore prices double, it hardly touches rural Chinese workers. But when food prices rise by 10-15% every year, it does”. Similarly, Standard Chartered is forecasting a consumer price index peak of 6.3% in June.

Already, too, the money markets are anticipating a further interest rate rise as the seven day repurchase rate, which measures lending costs between banks, advanced to 2.22% as at 10.23 hours in Shanghai, which is the highest since 8 October. That said, China International Fund Management believes that China’s economy may bottom out in the second quarter next year; and that “the market will seek support at a lower level in the short term as we are in the midst of very severe tightening”. Similarly Tesco remains positive on the PRC as it plans to quadruple sales by 2015 to £4 billion; and Rolls-Royce has just sold $1.8 billion of jet engines to Air China. Plus a 1,920 kilometre high speed rail link between Yunnan and Yangon, the capital of Myanmar, is due to commence construction work in two months.

It is also reported, but not confirmed, that - with 38 days to go in 2010 - China’s banks have already lend their PBOC limit of Yuan 7.5 trillion; which is good and bad.

Finally, as South Korea scrambles fighter jets due to the fact that its northern neighbour lobbed artillery shells into its backyard this morning (actually one of its back-islands called Yeonpyeong), it maybe time to don your tin hat, actual and figurative.

“The most valuable commodity I know of is information” - GG

Shanghai Composite:
Today: -1.95% to 2,828.28 at close
This week: -2.1%
In November: -5.1%
Since 5 July: +19.6%
YTD: -13.7%

Hang Seng:
Today: -2.67% to 22,896.14 at close
This week: -3.1%
In November: -0.9%
YTD: +4.7%

Oil futures: $81.07
Gold futures: $1363.70
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3558


EQUITIES, BONDS, YUAN & BANKS

• Stocks fall to a six week low on tightening
• One year bill year sold at same yield of 2.3437%; but less of them are offered
• Yuan Forwards now at +2.6% as US dollar strengthens
• Yuan/Ruble trades begin
• China's bank “has reached” its limit of Yuan 7.5 trillion this year with a month-and-a-bit to go
• PBOC adviser Li says China can consider selling US Treasuries, as price rises

DOMESTIC

• China will meet 2010 energy reduction goal, says NRDC
• Rolls-Royce wins $1.8 billion engine contract for Air China
• Tesco plans to for a four-fold rise in sales from double the number of stores by 2015
• China to start work on Myanmar high speed rail project
• China’s rare earth exports fell by 77% in October

HONG KONG

• Hong Kong stocks decline for a third day
• Centaline halts expansion as is predicts Hong Kong home sales may halve from peak
• Hong Kong brokers see their lunch cut by 30 minutes (to 90) and an extension of trading hours from 7 March; a further 30 minutes will be cut in 2012

29 and 29

29 miners remain trapped in a coal mine in New Zealand while 29 were rescued in Sichuan in south west China. At the same time, national financial efficacies are equally divergent. For example, Standard & Poor’s has lowered its credit rating outlook for New Zealand (incidentally, also the Nation of my birth) to negative; albeit that it remains at AA+, the second highest grade and the same as Hong Kong. At the core of this view is the danger of a “prolonged” struggle to recover from the global recession due to diminished demand for its goods and services in the US, UK and Japan; and a widening current account deficit which leaves the country increasingly dependent on foreign capital.

Earlier in November, Moody’s raised China’s debt rating to its fourth highest Aa3 (from A1) with a positive outlook. China, of course, also has a massive current account surplus (at the end of last year it was just shy of $300 billion) plus foreign currency reserves of $2.45 trillion. But it also has inflation (with some 2011 estimates now north of 6%). In turn, this led, after hours on Friday, to the PBOC raising the reserve ratio for banks for the fifth time this year by 50 basis points (to 18.0% for the larger banks); which removes as much as $53 billion of cash from circulation.

Typically, the PBOC did not do what the market expected i.e. raise interest rates. Nonetheless, the smart money says this is a matter of time; and by the ‘smart money’, I mean HSBC, BNP Paribas, Citigroup, Credit Suisse, UBS and ANZ who all say that the central bank will raise rates before the end of the year by at least 0.25% (the benchmark one-year lending rate is currently 5.56%). ANZ, too, expects another 150 basis points on the reserve ratio.

More smart money at RBC added that, prior to Friday, people had thought we were nearer the end of the China tightening cycle. But the tightening is being extended further than the market expected. But this means that “China is now giving a very clear indication that they’re very intent on conquering inflation”. And, “there will be a very attractive opportunity to buy Chinese stocks as we get towards the end of the China tightening cycle, particularly those sensitive to interest rates. It’s probably early now, but we’re brewing towards quite an attractive opportunity”.

Elsewhere, the Yuan is firm and Non-deliverable Forwards are pointing to +2.9% over 12 months from the spot rate of 6.6378. However, consensus forecasts point to +6.1% to 6.26 by year-end (note, too, that the currency briefly touched a 17 year high on 11 November of 6.6173). Similarly, one year Yuan interest rate swaps climbed to the highest level since October 2008 in Hong Kong on Friday. As we mentioned on Friday, too, an appreciating Yuan is likely to be an important weapon in fighting inflation (and Li Daokui from the PBOC agrees).

The State Council has highlighted the “importance and urgency” of tackling inflation; and at the same time the PBOC Governor Zhou Xiaochuan said China is under “pressure” from capital inflows and that the central bank will “strengthen liquidity management” (which it is doing). By way of background noise, too, there are also signs that the Chinese economy is maintaining momentum and both the World Bank and the OECD are forecasting 10% growth this year; and the latter is on the same number in 2011 and 2012. Similarly, the newly IPO-ed General Motors Company of Detroit expects sales in China to rise 15% next year.

And, finally, UBS says Shanghai and Beijing’s luxury home prices may increase 15% each year to overtake Hong Kong (where new controls have been introduced) in the next five to 10 years. China’s tightening measures will not stop prices from rising and may only “delay” the gains, it said. Similarly, “monetary policies may also be eased over time to avoid a rise in unemployment. It doesn’t matter what the Government is doing, whether we have 100 new measures or 10,000 new measures. In the long term, all these are noises and will disappear, and only one variable matters - and that's money supply”.

“When you say one thing, the clever person understands three” – Chinese proverb

Shanghai Composite:
Today: -0.15% to 2,884.37 at close
Last week: -3.2%
In November: -3.2%
Since 5 July: +22.0%
YTD: -12.0%

Hang Seng:
Today: -0.35% to 23,524.02 at close
Last week: -2.6%
In November: +1.9%
YTD: +7.6%

Oil futures: $82.42
Gold futures: $1361.10
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3737

RESERVES ETC

• China to raise bank reserve ratio by 50 basis points from Monday 29 November 2010
• Inflation fighting by China and higher reserve ratios may harm equities and bonds
• UBS says liquidity is the issue; interest rates rise to follow
• Obama repeats call for surplus nations to allow currency gains
• Credit-default swaps for Chinese companies build in greater risk than their for their US counterparts

YUAN & BONDS

• Yuan Forwards point to +2.9% over 12 months; albeit consensus forecasts point to +6.1% by year-end
• Yuan appreciation can reduce inflation, says PBOC Advisor
• Merrill Lynch starts Yuan services as hedge fund demand grows
• China to sell $1.2 billion of Yuan bonds in Hong Kong

REAL ESTATE

• Shanghai and Beijing's luxury house prices to over-take Hong Kong, says UBS
• CIC holds 7.4% of General Growth Properties

INTERNATIONAL

• Food prices to rise by only 2% after crop costs surge, says US Agriculture Secretary

DOMESTIC

• Japan military deployment near disputed islands may damage further relations with China
• GM expects sales in China to rise 15% next year
• China’s corn stockpiles are “ample”, says State Administration of Grain; same goes for other grains
• All 29 trapped Chinese coal miners are rescued alive

HONG KONG & TAIWAN

• Hong Kong increases tax on property re-sold within two years to cool market
• Weekend home sales collapse
• Developers fall by a further 3.3% - biggest drop since May
• Yuan loses out to Taiwan Dollar as GDP rates converge

IRON & STEEL

• Indian iron ore export ban from Kanataka upheld by court
• Fortescue approves $8.4 billion iron ore expansion
• The ‘Big 3’ to expand capacity by 400 million tons

China buys Ireland

Okay, I made that headline up; but it could. Irish GDP this year is around $227 billion, although its enterprise value is much larger. Officially the budget deficit is 14.3% of GDP, but some estimates put it as high as 24% which would add a further $50 billion or so to the purchase price. But this is small beans when compared with China’s reserves of $2.45 trillion.

Capacity is one thing, inclination another and right now the Chinese Government’s proclivity is domestic (aside from taking a near 1% stake in GM in its IPO). Inflation is rampant, especially in food and not only are interest rates almost certain set to rise, but also price controls and the mobilisation of food reserves are imminent.

The latter measures are, of course, artificial and may only have a short shelf-life. More fundamental is the issue of liquidity both imported and domestic. This has led a number of commentators to recommend treating the ‘illness’ not the ‘symptoms’. For example, Sandford Bernstein expects new bank loans to fall 12% next year to Yuan 6.6 billion (and other estimates are lower). Similarly, Standard Chartered sees three interest rate rises next year (in addition to the probable one of 0.25 to 5.56% before end-December). What’s wrong, too, with letting the Yuan appreciate further, which is a pretty painless way to reduce inflation?

Understandably, the Shanghai Composite is not a happy camper and, even after today’s respite, it has fallen almost 9% since its November high on the 8th (when it was also back to April’s level). And while I might sit on my hands for a day or two, I would not panic.

The OECD says China will grow by “about 10%” in 2011 and 2012. It also says that China’s current account surplus will stabilise at about 5.5% of output, and that the Government should allow the Yuan to strengthen further. “The stability of the domestic economy would be enhanced if the exchange rate policy were more oriented to allowing an appreciation against a basket of currencies. In addition, Government spending should continue to be reoriented to social objectives”. Note, too, the OECD has just reduced it global economic outlook bringing down its GDP forecast from 4.5 to 4.2% and is talking about a “soft spot” as stimulus spending fades – before investment spurs revival in 2012.

“Ireland is where strange tales begin and happy endings are possible” - Charles Haughey

Shanghai Composite:
Today: +0.81% to 2,888.57 at close
This week: -3.2%
In November: -3.0%
Since 5 July: +22.2%
YTD: -11.9%

Hang Seng:
Today: -0.13% to 23,605.71 at close
This week: -2.6%
In November: +2.2%
YTD: +7.9%

Oil futures: $85.42
Gold futures: $1359.50
(new ‘immediate delivery’ high of $1424.30 on 9 November)
Euro/$ spot: 1.3684

HEADLINES

EQUITIES

• Buy A-shares and ‘short’ H-shares as prices drop, says Credit Suisse; while JF is more positive

YUAN & RATES

• Money market rates point the way to higher rates
• Interest rate rise around the corner because price controls may be “insufficient”
• Yuan fails “freely usable” test for SDR basket, says IMF
• Bank lending target may be reduced 12% to Yuan trillion, says Sanford Bernstein
• China to raise rates twice more and Yuan to rise, says Aviva

ECONOMY

• OECD says China will grow by “about 10%” in 2011 and 2012

INTERNATIONAL

• OECD cuts Global growth outlook for next year to 4.2% and predicts “softspot”
• GM sells $500 million (0.97%) stake to Chinese partner SAIC as part of IPO
• World food import costs are $1 trillion+ this year says UN
• Nobel Committee may not present its Peace Prize to Liu (as it must be made to him of family member)

DOMESTIC

• China pledges adequate grain supplies
• China to give local governments more power on taxes
• Tibet lures hoteliers as China's big cities are over-supplied
• Chinese man uses SUV to knocks down 11 officials who were demolishing his house

HONG KONG & TAIWAN

• Hong Kong is said to be planning new property curbs
• IMF says Hong Kong economy risks boom and bust
• Yuan's Hong Kong premium shrinks from 2.6 to 0.6%
• Taiwan's GDP grows 9.8% in Q3 which underlines Asia’s recovery and capital flows

IRON & STEEL

• Baosteel and Taiwan’s China Steel in iron ore move
• Wuhan and Angang reduce steel prices for December, according to Mysteel
• Rio Tinto’s CEO says Governments face “populist pressures” on foreign bids; but adds that China’s economic strategy is “sensible”
• Baosteel expects quarterly iron ore pricing to stay