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Latest M&SA China Update

China’s stocks rose the most in a week as official data showing inflation slowing more than forecasted, spurring speculation that the government will further ease monetary policy to boost the world’s second-biggest economy.

The overnight repurchase rate on the Shanghai Stock Exchange surged to the highest level since Dec. 2007 on cash demand for new share offerings. The Shanghai Composite Index climbed 1.5% to 3,141.59 at the close. Consumer prices rose at the slowest pace in more than five years in January and factory-gate deflation deepened, the statistics bureau said. The data add to the concern that demand is weakening and puts pressure on the central bank to lower borrowing costs to sustain economic growth.

The Shanghai index has gained 51% over the past year, the second-best performer among 93 global benchmarks tracked by Bloomberg, spurred by an exchange link with Hong Kong and growth in margin trading. As of today’s close, foreign investors bought a combined 99 billion yuan ($15.9 billion) of mainland stocks through the link since the Nov. 17 debut.

The consumer-price index rose 0.8% in January, compared with the projection for a 1% increase, while the slide in factory gate prices deepened to 4.3%, extending a stretch of declines to 35 months. Other data for January showed imports falling by the most in more than five years, manufacturing gauges signaling a contraction and services expanding at the weakest pace in six months. Weak domestic demand and falling commodities prices are pushing inflation lower, raising real interest rates in the economy. The central bank followed up its November interest rate cut by lowering reserve requirement ratios for banks this month.

Trading volumes in the Shanghai Composite were 44% below the 30-day average. Turnover is slumping before the Chinese New Year holiday, which starts Feb. 18 and lasts for a week. The gauge is valued at 11.7 times 12-month projected earnings, compared with the five-year average of 10.3, according to data compiled by Bloomberg.

The Shanghai gauge has fallen 7.1% from a five-year high set on Jan. 26 amid signs of a cooling economy and after regulators tightened rules on margin trading. Yesterday margin traders increased holdings of shares purchased with borrowed money by the most since Jan. 22, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising 0.9% to a record 786.7 billion yuan.

Asian stocks slid as China trade figures showed signs of weakness in the region’s biggest economy.  The MSCI Asia Pacific Index declined 0.2% to 141.04 as of 4:05 p.m. in Hong Kong. China’s imports plunged by the most in more than five years and exports unexpectedly fell, a report over the weekend showed.

The yen gave up some of its drop today, gaining 0.2% to 118.86 per dollar. The greenback surged Friday as odds of a Federal Reserve interest-rate increase as early as June rose on the jobs report, which showed payroll gains in January capped the biggest three-month increase in 17 years.

Hong Kong’s Hang Seng Index slid 0.6%.

Shipments from Asia’s biggest economy slid 3.3% in January, after rising 9.7% in December, data from the customs administration in Beijing showed on February 8. Economists had projected a 5.9% increase. China cut the required reserve ratio for banks last week as it seeks to stoke growth and head off a domestic downturn.

Local reports say that 6,000 Chinese entities are interested in exploring for
mineral resources in south Tanzania, with a focus on iron ore. Tanzania received $4.6 billion from China in the decade through 2011. China is Tanzania's biggest trading partner, and in 2012 accounted for 15% of the country's trade.

According to the country's National Development Corporation (NDC), there is a plan to produce 1.1 million tons of iron ore annually, and it is commissioning a rail line in the Mtwara development corridor, with spurs to the mineral-rich Liganga-Mchuchuma region. The iron-ore project will be the foundation for an iron and steel metallurgical complex, which will create hundreds of jobs. The NDC is working on five major projects, including a coal mine, iron ore mining and the generation of 600megawatts (MW). It also is involved in the construction of a steel complex and the installation of a transmission line from Mchuchuma to Liganga. A study reports that more than 364 million tons of coal and 219 million tons of iron ore reserves have been confirmed.

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