Wednesday, July 13, 2005


Playing With Fire?
We will turn that question around and ask you to put yourself in the shoes of a Chinese policy maker. This is the situation you are facing today: a) you have the world's worst performing stock market which is hitting 8 year lows), b) you have the world's best performing bond market (Chinese 10 years have moved from 5.25% to 3.7% in the past ten weeks), c) you have industrial production rolling over (weak oil consumption, weak iron ore imports, weak Baltic, weak steel prices, weaker industrial production numbers...), d) you have real estate activity rolling over (our friend Simon Hunt reports that an "indicator of the real slowdown in real estate is that a major supplier of chiller tubes (chiller units are the central air conditioning units for all apartment and office blocks, hotels etc.) reports a 25% fall in 2nd quarter orders with no visibility for the 2nd half of the year. After talking with his customers, he was told that other suppliers are faring even worse...", e) inflation has fallen from +5.3% to 1.8% in ten months, f) M1 growth has fallen from +20% to +10% in the past year... In other words, nothing in China's economic data, or market performance points to the need for a RMB revaluation.