China: Market ‘s Plunge Surprises May 30 2011 - Australasian Investment Review

Forget the US markets and wonder about China's and the very nasty 5%-plus fall in the Shanghai Composite last week, a fall that seems to have gone unnoticed outside the country.

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It was by far the most dramatic drop in any market last week and probably this year (if you exclude markets in bailout basket cases like Ireland, Greece and Portugal and candidates, Spain and Italy).

Attention has focused on the US economy's sluggishness and the eurozone's struggles to avoid a Greek debt default, so China's weakness has been almost invisible.

(These are all part of the Wall Of Worries that we reported on in the Air Weekly on Friday.)

Friday saw the seventh straight daily fall for Chinese shares in Shanghai as continuing worries about inflation and slowing growth again undermined investor sentiment.

The Shanghai Composite was the region's worst performing benchmark index of the day and the week.

It ended at 2,709.95, down 1% from the close on Thursday and 5.2% from its finish last Friday.

The selling and unease started around the time the flash survey of Chinese manufacturing from HSBC was released last week.

That seems to have been a bit of an alarm bell. The final reading of that survey and one from the government, are out tomorrow.

On top of that, Goldman Sachs got a lot of needless publicity for downgrading its estimate of Chinese growth this year to 9.4%, which merely brought it back to the pack.

The OECD, IMF and World Bank all see Chinese growth running around 9% to 9.5% this year, so the Goldman cut wasn't a big deal.

A report on the weekend in the official China Daily said China's inflation will likely be above 5% in May due to rising vegetable prices amid the drought along the Yangtze river.

The paper said that government data show prices of some major vegetables rose more than 10% in the last week, the paper said.

But Central China's worst drought in more than 50 years is drying reservoirs, stalling rice planting, and threatens crippling power shortages as hydroelectric output slows.

But you could argue the sell-off in China is a better reflection of the easing tone to commodity markets, which are down 8.6% this month, according to The Economist magazine's commodity price index.

Seeing China is the biggest consumer of commodities, that's a significant call that traders in these markets see Chinese demand slowing (or has slowed).

Inflation remains a big problem in China and so does drought, with the widening dry spell affecting a reported 35 million people along the Yangtze River Basin.

Even though China is forecasting record grain harvests, some analysts point out that it is too early to be that definite because the drought-impacted areas contain some of the country's major rice growing areas.

The power shortages are a problem, both caused by the drought and the global surge in thermal coal prices that has seen Chinese power companies unable to use as much coal as they can because the government will not allow them to put up electricity prices to pay the higher prices for the coal they buy.

So the power companies have not been able to generate as much electricity, forcing coal companies to either export coal or stockpile it.

This is part of the reason why the country has stopped exports of diesel fuel, forcing refiners to sell it into the domestic market to try and put a lid on prices. Mongolia is now facing a widening shortage of diesel, forcing coal mines in particular to cut reduce their mining and production.

Seeing Mongolia supplies a third of China's coal needs, any slowing of supplies will have an immediate impact on Chinese power production.

There have been reports that coal stocks are low, but a report on Xinhua, the official government newsagency over the week attempted to put that story to rest.

"China's coal production and traffic volume has maintained double-digit growth, and the national coal reserves stood at 200 million tons by the end of April, helping the nation meet the increasing demand for coal," officials said.

"China produced 1.12 billion tons of coal by the end of April, an increase of 11.1 percent year-on-year, according to a report Wednesday by the China National Coal Association (CNCA).

"The association said major domestic power generation companies have 16 days of coal reserves, seven to 10 days more than in 2004, when China experienced a severe power shortage." (which was the whole point of the story, to try and undermine comparisons between now and the blackouts and power shortages in 2004)."

According Beijing reports, the China Electricity Council, the coal-fired power plants of five major power generation groups in China incurred losses of 10.57 billion yuan in the first four months this year, 7.29 billion yuan more than the same period in the previous year, and the main cause of the loss is the rapidly rising price of coal.

Many provinces - including Zhejiang, Guangdong, Hunan, Jiangxi and Guizhou - have been suffering from power shortages since March, and many experts attributed the power shortages principally to the coal prices.

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