It's OK to be late! Early really IS the new wrong!!

Gosh, those Merrill ("BAS-ML") analysts are being productive, these days. Wonder why?

Nigel SuperQuant Tupper has an interesting piece out... you know how everybody's saying "Early is the New Wrong" (along with "Down 10% is the new Up")?

Well, Nigel now proves that it's OK to be late... Globally, it's better to be late than early. If you invest 4 mos too early, you lose 22%, while those who invest 4 mos late miss only 8% on avg (since 1988).

(For Asia ex-Japan, he writes: "the bounce in performance after a trough (+27%) is about as dramatic as the fall in performance before the trough (-23%), on average. Invest $100, lose 23% ($77), gain 27% ($97.79), and you’re slightly worse off than having waited.")


Well, that'll be a relief for the long only managers out there. (As for the remaining "fast money" guys desperately trying to justify 2/20... )

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Now, the shape of that global chart looks a bit familiar, doesn't it? HSCEI (China H-share index, traded in HK) with an 8 day moving average) below. So we have maybe a month to decide if that end-October trough really was the trough. Looks startlingly like Nigel's above, but about twice the fall to the trough, and, so far, twice (roughly) the rise since then...:
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The American Dream lives on... in CHINA!

Bloomberg reports this morning that China has approved short selling just as the US and pretty much the whole rest of the world is imposing short selling restrictions, including outright bans.  (Larry Kudlow would approve.)  Strong rumours of this development yesterday sent Shanghai markets higher yesterday - ver-r-ry innnnteressstink.

Absolutely classic timing.

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China Approves Short Selling, Margin Lending to Develop Market 

By Zhao Yidi and Zhang Shidong

Sept. 26 (Bloomberg) -- China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

The State Council signed off on a China Securities Regulatory Commissionplan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue.

China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.

[REST OF THE ARTICLE HERE.]

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A(Drexel) I(Burnham) G(Lambert)

Investment bank Drexel Burnham Lambert lives on (in a very Drexel Burnham Lambert sort of way, actually,) in AIG's increasingly famous AIG Financial Products unit...

Michael ("Not Lewis") Lewitt, started his Op-Ed column in the NYTimes on Monday by recalling that day in February 1990 when Drexel, his shop at the time, folded.

"At the time, Drexel had $3.5 billion in assets and was the biggest underwriter of junk bonds..."

That was, of course, the last major investment bank to truly fold and file for bankruptcy protection (rather than get merged, rescued, bought out etc) prior to Lehman Bros.  He then pointed out, for colour, that at the time that Lehman folded, 

"Lehman owned more than $600 billion in assets. Financial institutions around the world have already reported more than half a trillion dollars of mortgage-related losses and that figure will most likely double or triple before the crisis exhausts itself."

Then on to the (still confusing) wonder that is AIG:

"But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds... There is (a) substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression... A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size."

And so on to the FT this morning... 

"As American International Group fights for survival, the question on everyone’s lips is how could what was once the world’s biggest insurer get itself into such a mess? The answer has its roots in a decision in the late 1980s to hire a group of derivatives specialists from Drexel Burnham Lambert.  These formed the basis of AIG Financial Products, which wrote billions of dollars of derivatives, which are now at the heart of AIG’s woes and are a long way from the mainstream insurance business that continues to lie at AIG’s core."

(See article from 1990 here.)

Where will the ex-Drexel team go next, I wonder?  

Actually, they are now virtually employed by the Federal Reserve, aren't they...??!!!

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Maybe more circularity some time in the (not-too?) distant future??

• AIG (founded in Shanghai in 1919 by an American) - market cap, based on after-market trading price: USD700m
  
• China Life (HQ in Beijing) - market cap based on yesterday's ADR close: USD84,700m
  

Well, you never know what the Fed may eventually want to do with its stake...!

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Stumble It!
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Nothing new under the sun...

Reluctant as I am to say it, but maybe it's different this time? As you well know by now, I am pretty bearish on equity markets, but believe that the pain trade continues to be to the upside for the time being...

... but not because of this chart from Morgan Stanley, which I got this afternoon, which shows "the evolution of 3 bubbles - the Nikkei in the 1980's, the Nasdaq in the 1990's and China A-shares in this decade. The peak of each market has been aligned to coincide. According to this chart and if history is to be repeated, we could see a dead cat bounce of about 20% before the market resumes its fall of another 50%."

Quality broking.

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Stumble It!
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The Olympic MARKET Record! (So China will...)

So the rumour mill is working overtime in HK/China and pumping up the market with talk of various Government led schemes (like new short selling restrictions, bailouts of sponsored entities and... wait... oh, that's the other one) to ramp up the stock-markets post-Olympics, which, as we all know, is traditionally a time of economic and market misery after a helluva party in the lead up. Or is it?!

Turns out that that little snippet of conventional wisdom (at least for the equity markets) maybe ain't quite so wise after all.

The record is actually, based on Jan to end June and July to end December performance, surprisingly even, over the past 8 Summer Olympiads (ex-Moscow) at three apiece between Going-from-Up-to-Up and Going-from-Up-to-Down.

So there! (Actual numbers visible if you click below, showing China traded A-shares as well as HK traded H-shares, plus the HSI for good measure. And just in case you're wondering, nobody gives a sh1t about B-shares anymore.)

But then again, none of the other home markets were down 48% in the first half year of their Summer Olympics, either, so perhaps China will try and manipulate the markets and "do an LA'84" which saw markets off 7% in the first half before closing out the year almost flat with a 9% Carl and Mary Lou inspired 2H burst.

(Not that I'm implying that anybody in power in the US would ever look to manipulate the markets in the cradle of free market capitalism, no no no. No. No!)

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Stumble It!
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Foreign Reserves - no correlation with land mass, amazingly enough!

8.8.8!

So if the % of world reserves were proportional to land area...

• The US (0.6% of world reserves/ 6.5% by area) would be the size of Nigeria (0.87% of reserves.)
• Japan (13.9% reserves/ 0.25% area) would be larger than Russia (8.5% rsvs), say with an Indonesia (0.9% rsvs) or Libya (1.3% rsvs) stuck on the side.
• Both The Untied Kingdom, sans Empire, (0.7%/ 0.16%) and the ECB (0.7%/ 3.0%) would be about the size of Egypt (0.5%) or Mauritania (0.009%)
• China (25.9%!/ 6.4%) would a bit larger than Russia (8.5%), Canada (0.6%) and the US (0.6%) combined.
• Singapore (2.5%/ <0.01%) would be bigger than India (4.3%.)
• So would Brazil (2.6%/ 5.7%), for that matter...
• ... while India (4.3%/ 2.3% would be itself... PLUS Argentina (0.6%.)

You get the idea.

And no, I really can't draw any investment conclusions from this "analysis"!!

==============

I won't do the exact same thing with populations (too obvious!) but I will say that China's current population is about that of the whole world in ~1850. India's lagging behind only slightly, matching the whole world maybe twenty years earlier? The USA, #3 in the headcount stakes, clocks in at about 1,000 AD (or CE) with #4 Indonesia only about 100 years earlier. Brazil at #5 is only 200 years into AD-space, while #6 Pakistan and #7 Bangladesh individually would be like the world about 200 years the other direction, ie ~200BC (or BCE.)

Err... Buy the BRICS? Yeah! Think about the compounding effect since 1850! Scratch that.

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Stumble It!
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China's manufacturing contraction... tighter money or...

The latest from that "great sucking sound"*...


So which way will the PBOC move - ever more inflation bashing tightness? Yes for rhetoric, IMHO, but not by action.

(As suggested here a couple of weeks ago.)

(* Originally of manufacturing jobs going to China)

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Stumble It!
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2008 Beijing Olympic Manners

1) Wear no more than 3 colours (bye bye, Thais)
2) Shake hands for no more than 3 seconds (Team India, please cancel your flights)
3) No white socks with black shoes (the English squad should stay home, then)
4) Do not jump queue, spit, or remove shoes in public (don't get on the plane, Malaysians)
5) "Older women" must wear skirts that extend to 3cm below the knees (Philippine team... think again)
6) Men should avoid helping women carry their handbags (so long, Singaporeans - no golds for you...)
7) Avoid sticking your face too close to members of the opposite sex when talking in public (see ya in 2012, Koreans)
8) Do not visit your neighbours in your pyjamas & slippers (OK, this really IS Chinese)

(Actually just for Beijing citizens, apparently)

(AP)
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Stumble It!
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Lower GDP and CPI than expected usually means less tight policies, right?

... but HK/China markets seem not to be seeing it quite that way, if you look at how the equity markets were performing late in the morning session.

	Actual	Survey		Prior
China CPI YoY, %	7.1	7.3	Lower than expected!	7.7	Down on prev. month!
China Real GDP YoY, %	10.1	10.3	Slower than expected!	10.6	Down on prev. month!

(Bloomberg data and ests)

Asia - flattened by an Un-Flattening World

Excellent note from MS last night entitled HIGH TRANSPORT COSTS TO 'UN-FLATTEN' THE WORLD in which their economists note, in a glass-half-full sort of way, that with high oil prices driving transportation costs through the roof and the Asian export model under serious threat as a result, the development of domestic and regional consumption is a positive.

"We believe that, with rising transport costs, trade globalisation may slow significantly and the world will 'become more round'. Asia's trade model will be particularly affected. The near-term impact, in our view, is not positive for Asia; however, in the long run, this shock could coerce Asia into moving away from the export-led growth model."

(Maybe India rather than China has it right after all? Just a thought!)

The FT writes this morning, coincidentally, of P&G's rethinking of its supply network in the light of massively higher transport prices:

"Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill."

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I wrote about the effect of transport costs on Asia recently here and here, but obviously didn't think it through quite as far as MS (and P&G)!

X vs. PKX... and the winnah is...

Here's the ADR of POSCO (ticker PKX in yellow, formerly Pohang Iron & Steel, or something like that) vs US Steel (ticker X in white, formerly known as USX, and before that, Federal Steel + National Tube + American Steel Hoop Co etc and, before that, US Steel.)

The market cap of PKX at USD45bn is (at the moment) almost exactly double that of X - a massive change from the ratio as recently as a year ago:


Both trade in USD, but obviously facing very different operating environments... From an article yesterday in Bloomberg entitled: "Bernanke's Inflation Cure Wanes as Import Costs Rise"

• The surging oil prices that are raising exporters' costs to ship everything from steel to sofas to America are encouragingc ustomers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices.
• ``Higher freight rates were the final straw in tipping the balance to domestic producers,'' coming, as they did, on top of a weaker dollar
• `` A weak dollar means that domestic producers are better sheltered from competition by foreign suppliers,'' Edmund Phelps, winner of the 2006 Nobel Prize for economics ... ``So the domestic producers here in the United States will have every incentive, therefore, to take advantage of that greater protection from competition by raising their markups.''
• Chinese steelmakers are doubly disadvantaged by higher oil prices. Not only do they face the added cost of shipping products to the U.S., they also must pay more to transport iron ore to their mills from Brazil and Australia.
• Pittsburgh-based U.S. Steel Corp. in contrast, is able to meet the majority of its iron-ore needs in North America from its two mines in Minnesota.

(I've mentioned shipping costs and Asian exports here before - but that didn't address the double-whammy mentioned above!)

=====================

Sure enough, being stuck between a rapidly shrinking lump of iron ore and a hard place, the Chinese steel producers today agreed to cough up to RIO and BHP for basically the same c.i.f. price that they're paying for iron ore from Vale (formerly known as CVRD, which stood for... oh, never mind), ie up to double what they'd previously been paying, and higher than expectations. (So did Nippon Steel & others, I believe.)

OMG! China raises gas, diesel and jet fuel prices!!!!!! OMG OMG OMG!!!!

Off the top of my head (tips of my fingers) here are some houses that I noticed discussing, in published research, just this sort of move over the last 2 weeks alone:

• Credit Suisse
• JP Morgan
• Citibank
• CLSA
• ...
  

So... OMG! OMG! OMG! OMG!

Maybe it's not the hyper-bullish paradigm change and rerating catalyst that they and others are saying it is... that they knew all along, and that nobody else out on the street was onto, and that... (zzzzz...)

Still looking to cover some of my higher beta shorts, but taking my time.


(The FT article on the news here.)
====================

Perfectly timed note yesterday from Lan Xue at Citi... not the earliest on this theme (I am pretty sure that Dong Tao was, a couple of weeks ago) but great timing anyway!

• "Chinese utility and energy prices are just too low — China has not revised electricity prices since 2Q06 and gasoline diesel prices since Oct 2007, although both coal and oil prices have risen sharply.
• At current levels, China’s utility and energy prices are at least 50% below international prices, which clearly are unsustainable in the long run.
• If meaningful adjustments are made to electricity and utility prices, sectors such as airlines, auto and manufacturing in particular would be hurt.
• But we think such a move would be positive for the overall market, as it would signal a more market-oriented policy approach from the government, rather than continued price intervention."

Equally perfect timing from Frank "Bang-A" Gong across the road at Mr Dimon's new shop, JP in a note also released yesterday, prior to the NDRC announcements:

• "We are upgrading China to overweight within our Asian and Emerging Markets portfolios; based on a resumption of Renminbi appreciation, declining headline inflation and a potential switch in policy focus from inflation to growth. As is the case for the balance of North Asia, China would also benefit from a decline in the oil price.
• A fall in Chinese headline inflation to below 6% provides the flexibility to raise controlled fuel and commodity prices; this would benefit IPPs and refiners.
• The property sector should benefit from a change in government rhetoric from inflation to growth concerns."

===================

Interestingly, Dong Tao of CS concludes his own comments from this morning with a warning that: "there will be a bigger risk for the government launching harsh austerity if inflation gets out of control." He notes, rather more bearishly than his peers, that:

• "(it) is our view, that the hike of fuel and power prices... may push inflation toward double digits. This is just one of several possible outcomes, but we do caution that it could trigger aggressive tightening similar to the austerity engineered by then vice premier Zhu Rongji.
  
• Zhu raised interest rates by almost 150 bps in one and a half year and virtually cut off all bank lending through administrative measure. RMB devalued by almost 40% in the beginning of 1995.
  
• We estimate less than 0.3 pp down in GDP for 2008 due to the fuel and electricity price hike, which is minor and manageable. However, this does increase the risk of greater inflationary pressure, as wage growth is already accelerating.

• Beijing has moved toward the right direction by adjusting the increasingly outdated energy prices, but more are needed and will probably be done, in our view. The current price structure between input and output have not only caused heavy losses to the fuel and power suppliers; some of them may even get into cash flow problems soon.
  
• Under tight price control, inflation was transformed into fuel shortages, which has started to affect the operation of the economy through power interruptions and paralysis of truck transportation.
  
• We believe that Beijing will eventually move towards a complete liberalization of fuel and power prices, but the pace of such a process would depend on inflation. This goal may take two to four years to achieve."

The Rise (and Rise and Rise) of Rice

Comment from Merrill Lynch (link to a note this morning):

• "There are many tsunamis in the agri world, but this is a big one The floods in Southern China will cause huge damage to China's rice production. There will be extensive damage to a host of other crops but let's focus on Asia's staple : rice.
• "David Cui reckons that up to 13m tonnes may be lost, or over 10% of China's harvest. To put it into context, 13m is equivalent to the total exports out of Thailand and Vietnam combined : the world's top 2 exporters. It's two years' worth of US production. The equivalent in the oil world would be Russia not producing any oil for four months... Where would oil prices be then?
• "And another snippet : if China wants to replace this lost crop by importing, that would soak up 50% of global trade... so where do we think rice prices are going to head in that monopsonistic scenario ?
  
• The point is that China subsidizes rice prices by about 40% vs global prices and these floods have to put pressure on global prices exacerbating the situation. Unless China raises domestic prices, smuggling, already an issue, will escalate."

(What would I buy to play this? Noodles.)

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A word from my distant past that I've not heard in ages:

In economics, a monopsony (from Ancient Greek μόνος (monos) "single" + ὀψωνία (opsōnia) "purchase") is a market form with only one buyer, called "monopsonist," facing many sellers.

(Thank you, Wikipedia!) And yes, the writer's a Brit.

What's worse for Asia than fewer orders from the US?

We get the WSJ in print, but I'm too cheap to also pay for it online (Rupert, are you there? I get FT.com free with my paper...) If you do, you can see the article here.

"Stung by Soaring Transport Costs, Factories Bring Jobs Home Again"

So basically, not only are you seeing inflationary wage pressures in the factories of Asia and the US's "Strong Dollar" so-called "policy" hurting costs on an FOB basis, (though FX translation gains for overseas sales remain the bright spot for US corporates,) NOW you have shipping transport costs driving costs at the CIF level through the roof too.

Net net, not good.


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The Strong Dollar Policy

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We already saw a bit of an impact on service jobs (in India) in this post. I thought it was funny at the time.

The PBOC says: "GrrrrRRR..."

Okay, this is a couple of days late, sorta, but I think it's relevant as we digest this morning's PPI figures from China and await the probably more important CPI numbers due out tomorrow. So, in reverse order:

Whisper (Chinese Whisper?) numbers suggest that May CPI will come in at 7.7% YoY (vs 8.0% currently expected, and 8.5% in April.) Whispers in China of this sort generally turn out to be quite accurate.


Meanwhile, this morning we saw the PPI numbers come in better (lighter) than expected. From CLSA:

"China reported 8.2% YoY Producer Price Index (ie the output PPI) for May, which outpacing April's 8.1% although slightly lower than market consensus of 8.3%. Meanwhile, May's Purchasing Price Index (ie the input PPI) reached 11.9%, 10bps higher than April's 11.8%, which may imply input costs are rising and only incompletely being passed on resulting in margin squeeze that we are seeing in company data."

And last Saturday, ahead of a long weekend ("take THAT, markets - hahaha...") we had the PBOC come up with not one, but two consecutive 50bp Reserve Requirement Ratio hikes. From Sherry Lin at Credit Suisse, in a note on the China banks this morning:

"We maintain that the RRR hike per se has limited negative impact on earnings of Hong Kong-listed China banks, which operate with relatively liquid balance sheets. We estimate that every 50 bps increase in RRR will reduce Hong Kong listed China banks’ earnings by less than 1%."

In other words, as I read it, the Chinese banks are not likely to be hit by this 100bp increase in the RRR (partly as the PBOC actually pays interest on it, I believe) as they are liquid - and given that they are liquid, it's unlikely to lead to a serious easing in their absolute capacity to lend. ("In the near term, China banks’ earnings will be more vulnerable to a sustained correction in local stock markets" as Sherry also notes.) The PBOC knows this and seems to be sending a message to the markets that its position continues to be that runaway inflation will not be tolerated...

BUT given softening industrial data (CS economist Dong Tao's comments here) and a massive natural disaster to cope with (and the fast approaching Beijing Olympics too) stamping hard on the brakes and driving economic growth through the floor is also clearly not the aim.

Still cautious on China consumer names, but surprise could be to the upside, especially given the sell-off post RRR/ long weekend/ Friday US tanking.


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The FT's Lex column suggests that the latest RRR move is to stem capital flows, of which a large part may be speculative, and that the next move may be to control capital inflows directly... and implicitly agreeing with my view that the PBOC is NOT trying to drive down China's growth.

That great sucking sound...

Remember that great sucking sound heard across Asia over the last few years? Of manufacturing jobs flying into China from Asia, and indeed the rest of the world? Well, Dong Tao of Credit Suisse in a short note this morning (will expand on it more later, I expect) is calling "The beginning of the end of an era – troubled export sector" - his key points are that the new labour law will further hurt competitiveness, adding to the existing pressures on exporters such as surging wage costs, currency appreciation, high material/energy prices, and reduced tax rebates. The hit is more likely to be felt in the Pearl River Delta (~ around HK) than in the Yangtze River Delta (~ around Shanghai,) and among Japanese and Korean companies with manufacturing there than by H-shares. Conclusion?

"The rising wage rates and improved labour right is bad for capitalists and export sector, but positive to workers and domestic consumption. We see the economy leaning towards domestic sector over the next decade, perhaps with slightly slower growth but better quality of growth."

So, find China domestic consumption plays for your long term long positions... A bit obvious, actually!

(... but I may try and come up with a short list of possible plays in the coming days/weeks.)




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I think I've sorted how to include links from CS. Here's Dong's April 2nd note on inflationary risks in China - particularly worrying rise input costs, and clearly colouring his view on export competitiveness, above.

Rice shortages, riots and starvation: Not funny

Call me old fashioned, but I don't find food shortages, riots and starvation as amusing as TheStreet.com appears to.






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THIS on the other hand is a very worthwhile diversion from highly whippy markets in this part of the world!

All this via the mysterious Prince of Wall Street, Paul Kedrosky's Infectious Greed and some dude called Nick.

China inflation numbers bang inline at 8.3% yoy... BUT...

So after all that, the whisper numbers were correct and, along with slightly faster than expected growth in GDP, industrial production and retail sales, March CPI figures came in bang inline. Still above the govt's comfort level of 4.8% (by miles) but comfortably off the 8.7% registered in February.

• 1Q08 Real GDP growth 10.6% vs 4Q07's 11.2% and Consensus 10.4%
• Mar 08 CPI 8.3% vs Feb 07's 8.7% and Consensus 8.2%
• Mar 08 Producer Price Index 8.0% vs Feb 08's 6.6% vs Consensus 6.8%
• Mar 08 Purchasing Price Index 11.0% vs Feb 08's 9.7%
• Mar 08 Retail Sales YoY growth 21.5% vs Feb 08's 19.1% and Consensus 19.8%
• Mar 08 Industrial Production YoY growth 17.8% vs Feb 08's 15.4% and Consensus 16.5%
• Mar 08 Fixed Assets Inv YTD YoY growth 25.9% vs Feb 08's YTD YoY growth of 24.3% and Consensus 24.0%

No panic intra-meeting rate increases, but no letting up of the PBOC's tightness rhetoric either... probably with another increase in RRR to rein in excessive money & credit growth.

More worrying, though I think the markets sold off its modest morning gains more on "sell-on-news" thinking, was the PPI figure, which climbed sharply to 8% vs Street expectations of just 6.8%... as foreshadowed in the input prices of the recent PMI survey.

The recommencement of rate hikes may come in 3Q - until then, expect selective easing and tightening measures (and extrapolating brokers) to whip the market around (again!)

PBoC will stay tight (=>China property names getting caned)

Pretty tough talk from the PBoC chief Zhou Xiaochuan over the weekend, saying again that there's room for rate increases.

That's as you would expect, of course - there's no chance Chinese officials will say they are loosening policy while inflation remains above 8%, though in reality there may be minor moves in regulations and reserve requirements (each way) in the meantime.

Number to watch for is Wednesday's March CPI figure, which is expected to come in at 8.3% ("whisper") from February's 8.7%... but food inflation will be the key.


(Here's Frank Gong's note from last week on China inflation, incidentally, in which he comments on why food inflation is NOT what we should be so worried about.)

China inflation: Bang a Gong

(Get it On.)

JP Morgan's Frank FX Gong (Wharton PhD, ex-NY Fed... and his real initials) wrote in a very good piece last night on what to worry about in China and why we should not panic about food price inflation.

• China's food inflation (the key contributor to China's headline inflation) is very different from the global food inflation;
• The global food inflation has been led mainly by cereal (wheat, corn & rice) while China's food inflation has been mainly led by pork/meat;
• China is a net exporter of cereal (rice, wheat, & corn), while the global meat/pork prices are much cheaper than China's domestic price and China has not been a big importer of meat/pork despite higher domestic meat/pork inflation;
• No need to panic on China's food and headline inflation: if China really wants to kill the food inflation and bring down the headline CPI inflation, they can simply start to import meat/pork from the global market - especially so with a faster appreciating RMB. China absolutely has no need, and would NOT need to kill food inflation by hiking interest rates.

(Chart: JP Morgan)

Risk appears to be to the upside for refiners and IPPs in terms of the possible lifting of price controls if China's CPI figures, due late next week, remain under control. But I can't really understand why China is not ALREADY trying to bring food inflation down - food remains a significant part of rural household expenditure doesn't it? Is it just banking on a base effect kicking in during 2H to lower headline figures? (Peasants can't eat base effects!) Or perhaps the government wants a bit of pain on the cost/ margin front to squeeze out waste and inefficiency??

Slightly different from the Credit Suisse conclusion (from the Purchasing Managers Index input price trends) of widespread inflation kicking in that I mentioned on Monday. Looks like a fine line the PBOC is walking, if you ask me. On balance, I'm sticking to more accommodative policy for the time being.

Annoyingly, I can't figure out how to find his actual note on the MorganMarkets website to give you a document pull link. Maybe it'll come up on his page later in the day. (Even more irritating than Credit Suisse's site, but at least, unlike Merrill's, still works - just about - on Firefox.) AND yes, of course I'll e-mail you a copy if you ask nicely!!

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Earlier piece by Frank's colleague, Jing Ulrich, in which she points out China's shift in concern from inflation to growth. I also mentioned it in an earlier post, but hers is better!