China Weekly 06.14

China submitted its latest impressive economic data, in the form a trade surplus which widened sharply in May from its level in April, marking the second straight month of gains, aided by a faster than expected rise in exports for the month. The trade surplus totaled $19.5 billion, up more than 11-fold from $1.7 billion in April. Economists had forecast a trade surplus of $8.2 billion. Exports surged 48.5% - outpacing the forecast rise of 30.2% - in May from a year earlier to $131.76 billion, while imports were up rising 48.3% to $112.23 billion. Analysts at Barclays Capital urged investor caution when reacting to these figures and warned that going forward the recent weakness of the euro is likely to dampen Europe’s demand for China’s goods and services, clouding the outlooks for exports. 

 

The real estate sector also reported its data, which showed that property prices in China’s biggest cities rose for the 12th straight month in May, though the rate of appreciation eased slightly. Prices in 70 large and medium sized cities rose 12.4% from a year earlier, easing slightly from the 12.8% rise in April according to the National Bureau of Statistics. Prices were up 0.2% on a month-on-month basis though this was a marked slowdown from the 1.4% rise from March. 

 

Moving away from data, in rare public comments, China Investment Corp’s – China’s massive sovereign wealth fund – Executive Vice President Jesse Wang said recent corrections in Western markets had peeled off one-tenth of the funds value. “In May and June, because of the decline of the US and European market, we had about 10% mark-to-market losses” Wang was quoted as saying at an event hosted by the Federal Reserve Bank of San Francisco. The recent drop compared to gains in 2009, which Wang called “a good year for us”, as CIC managed a return of 17% overall, though official 2009 numbers are slated for release only next month. Wang said that while CIC had hope bonds and other fixed-income holdings would shield it from volatility, the portfolio was hit by the euro’s fall against other major currencies. Wang was reported as saying that CIC wanted to reduce its current exposure to emerging markets, amid fears of potential asset bubbles. 

 

Turning to iron ore, the China Securities Journal reported last week that Anglo-Australian resource giant Rio Tinto Ltd notified Chinese steelmakers that the price of iron ore for the July-September period will be raised some 20% from the previous quarter. An official from the trading department of a large steel mill confirmed the offer was for $147 a metric ton and a reply has not been sent yet to Rio Tinto. The quarterly hike in iron ore prices is similar to what Rio Tinto offered to Japanese steelmakers. 

 

Staying with metals and mining, shares of these firms have suffered significant declines so far this year, but the drop may be overdone despite the potential for a slowdown in construction activity. Markets have been “braved for the worst on China property and Europe slowdown fears” according to analysts at HSBC, “but the reality is far less dramatic with few signs yet of a sharp pullback in demand”. Recent data reinforces this point, project completions are up 14% in the year to April and construction starts are up 64% year on year. Macquarie analysts said that construction activity may even strengthen towards the end of the year. Macquarie’s economics teams believes that the next economic policy move from Beijing is “more likely to be loosening than tightening” and that such a move could come in the fourth quarter of 2010 or even before, allowing for “sequential improvement in construction activity at the end of Q4” the analysts said. 

 

Moving onto the banking sector, HSBC said it expects to raise “a significant amount” of funds from its planned listing in Shanghai to facilitate its expansion in China, where the UK-based lender is seeking to strengthen its presence and form a securities venture. The bank, which has the largest network of any international bank in China, opened its 100th outlet on Wednesday. It aims to tap ample liquidity in the world’s third-largest economy and is working toward becoming one of the first foreign companies to list in China when regulations allow. Chief Executive Michael Geoghegan – who relocated to Hong Kong last year – didn’t specify a fund raising target but people familiar with the situation said the offering could raise as much as $5 billion.

 

Elsewhere, wind-turbine maker Xinjiang Goldwin Science and Technology Co. is the latest company to shelve its Hong Kong IPO because of volatile market conditions. The decision comes after China Tian Yuan Mining and Swire Properties decided not to go ahead with their Hong Kong IPOs due to deterioration in market sentiment. At $1.2 billion, Xinjiang Goldwind’s IPO was set to be the second-biggest in Hong Kong this year, after Russian aluminum giant UC Rusal PLC raised $2.24 billion in January. About 90% of the IPO will be sold to international investors and institutional investors in Hong Kong the company had said. XinJiang Goldwind, the world’s fifth-largest wind turbine maker by capacity, said it expected its 2010 net profit to jump to 2.24 billion yuan from 1.75 billion yuan in 2009.