China’s growth not overheated -- Still a good investment

August 16, 2006

Several reports released last week show that China’s 10.9% GDP growth for the first half of the year should slow moderately in the second half. The World Bank forecast China’s growth for 2006 to slow to 10.3%. The UK House of Commons predicted that China will be the world’s largest exporter in four years and will overtake Japan to be the world’s second largest economy in ten years. It also warned against protectionist trade sentiments in the U.S. Congress and Europe.

The People’s Bank of China supported taking the following steps to prevent overheating:

• Allow the yuan to rise against the dollar.
• Raise the benchmark one-year loan interest rate currently at 5.85%.
• Increase bank reserve deposit ratios to 8.5% .
• Limit real estate investment.
• Discourage savings and increase domestic spending.
• Reduce the current account surplus.

What It Means:
China’s steps to prevent overheating, and the UK’s stance against protectionism, reduces the potential for economic instability in the Southeast Asian region.

Action Steps:
China’s strength reduces the risk in investment in traditional emerging markets funds. Emerging markets, such as South Korea, Singapore, Malaysia, Brazil and India are large exporters to China. Investing in these funds is safer than trying to find a good Chinese mutual fund, since the Chinese stock market is still largely unregulated and opaque.

Source: “China Monetary Policy Report”, People’s Bank of China; “East Asia Report”, Foreign Affairs Committee, House of Commons, United Kingdom; “World Bank China Quarterly Update”, World Bank, 8/15/06; China People’s Daily online, 8/15/06