<p></p><p>China: Front-loading of CNY appreciation and higher swap rates<br/>&nbsp;<br/>Cheung, Irene&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 07-Jan-2008<br/>&nbsp;<br/>After two years of double-digit GDP growth, China is facing the most serious inflation threats in over a decade. Not only is headline inflation running at an 11-year high of 6.9%, rural inflation (a highly politically sensitive issue) is a full percentage point above urban inflation. There is a risk that inflation is not only supply related but reinforced by strong demand and rising inflation expectation. We do not think that Chinese authorities will take chances here. We expect front-loading of CNY appreciation, coupled with "real" reserve requirement hikes and more focus on deposit rate hikes (as against lending rate hikes). We see better value in selling short-dated USD-CNY than the 1Y. On rates, we also think there is a better chance of more "effective" yuan liquidity tightening than late last year. Pay 5Y NDIRS.<br/><br/></p>