China – So far the Ox turned out to be a bull.

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese mainland stock markets continues up with domestic investors (A indices) as the key driver. No doubt that a part of the force is the fact that investors only can invest in real estate, stocks and place money on deposit.

Very understandable that stocks looks as the preferred alternative as long as the stimulus packages are rolled out. An example from last week was the ship builders that got a national protection, sending shares significant up within the same day. The usual question is, if this is sustainable?

It continues to be a matter of faith, where I continue to be skeptical. The reaction on economic data (particularly the Jan trade data) last week proves this situation. The absolute numbers were down, partly due to the Lunar New Year taking place in January instead of normally in February. Some economic models suggest an adjusted rise in exports, but does this day count game make sense when we know, for sure, that there is spare production capacity? If production had been running at its maximum, then holidays would have lead to a drop in output. Everybody knows when the Lunar New Year is, so with spare production capacity producers easily could have increased production in early January to meet demand during the month. The conclusions from different analysts depend on what direction they in general argue for.

The January credit growth data that I wrote about last week, continues to surprise. Even higher than first announced, so my reservation towards the cheerful analyst might be wrong. But very interesting has the Chinese central bank asked to get more details about how the commercial bank lending is allocated. PBoC has also heard the rumours about the lending not going to the sectors that are desired.

Over the weekend a couple of interesting things came up. According to a newspaper article, the company DDMA Market Research & Consulting released a survey showing that 60% of consumers in 5 big Chinese cities have reduced or plans to reduce spending. Unfortunately, the survey didn’t give the respondents the possibility to tick off “increased spending” just “not reduce spending” as the most expansive. Though the conclusion should be, that consumption risks entering the contractive zone – very much against expectations in the stock market.

A very important comment from Yi Gang, Vice Governor of the People’s Bank of China, where he in a speech Saturday hinted another possible interest rate cut. He also said that “China’s main task in the short term will be to fight against deflation”. Two immediate thoughts when I saw that one was, that if this is the case for China it could easily be the same for the rest of the world. Secondly, deflation is poison for assets…….

Last, a more Hong Kong and Hang Seng related comment from Hong Kong’s finance chief, Financial Secretary John Tsang who also spoke Saturday. He said that Hong Kong probably had negative growth in Q4 2008 and that the economy will deteriorate further in 2009. Very realistic he also said, that he was not sure when the global financial downturn will come to an end. Unemployment will continue to rise, particularly when college students graduate around mid 2009. He thinks this will be the peak.

I remain a bear in general and therefore cautious even regarding China and keep the targets.   

Targets: Hang Seng 11.000     Shanghai B 110

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