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September 2007

From “China allows individuals to invest in stocks” by Deutsche Bank Greater China Chief Economist Jun Ma, August 21, 2007:

In terms of impact on actual fund flows to Hong Kong, we think the new individual investment scheme will certainly be an additional positive beyond the Chinese investments via the existing Qualified Domestic Institutional Investor (QDII) channels (via banks, brokers, and asset management companies)... Our best guess is that total fund flows from China to HK equities via the QDII program and this new channel between July 2007 and June 2008 may reach US$40 billion, compared with our previous expectation of about US$20 billion via the QDII program only. We believe the most obvious beneficiaries of this new policy will still be those dual listed H-share companies that are trading at significant discounts to A-share counterparts. We think the policy could also be a net positive for banks which are getting this new FX business at the expense of potentially slower-than-expected QDII flows via local brokers and asset management companies due to the substitution effect. Finally, the policy will also slow the A-share rally, albeit the actual impact may be limited.

From “Slowing the beast” by High Frequency Economics Chief Economist Carl B. Weinberg, July 30, 2007:

Fiscal policies are therefore needed to slow economic growth, if that is what is desired. The value-added tax credit cut is a good example of a fiscal policy that also affects trade balance. If exporters can pass the increase in costs on to importers, then the full incidence of the tax hike will fall on foreign purchasers. More likely, the big monopsonists who dominate the export markets will tell producers in China to eat some of the cost increase. This will surely lead to cutbacks in employment and investment by restraining net returns to investment. We estimate this tax policy change might trim as much as 1% off GDP growth, a step in the right direction, but hardly a home run in braking China’s nearly 12% growth rate.

From “The end of cheap labor” by UBS Chief Asia Economist Jonathan Anderson, August 9, 2007:

The issue is not whether the economy is running short on labor, but rather whether it is running short of cheap labor - and this is a different matter altogether. The “one-child” policy means that China is now running short of rural workers in the 18-28 year old bracket. Where do we come out? In our view, China is clearly turning into a more inflationary force on the manufacturing side, driven both by a strengthening currency and by domestic wage pressures. And the historic shift in the labor supply function for rural migrant workers implies that this is a long-term structural change for the mainland economy. But this doesn’t necessarily mean that China has become a source of overall global inflation. For that, we have to take into account China’s impact on commodity and resource prices, as well as heavy industrial pricing power... [among other things].

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