China's foreign currency reserves reached US$1.8 trillion at the end of May 2008. In May the increase was US$40.3 billion but this was slow compared to an increase of US$75 billion in April. In China, the government exchanges RMB for foreign currencies earned by Chinese companies and citizens. This creates enormous inflationary pressures as RMB are created to soak up the foreign currencies.
The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.
The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.
Saturday, June 28, 2008
Thursday, June 12, 2008
Retesting the 22,000 Support
I think we should look at the macro environment first.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
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