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雷达卡
Contents
I. Inflation and growth outlook
Our 2008 and 2009 inflation forecast stands at 6.8% and 3.0%, respectively, and the growth- Page 3
inflation trade off will likely to be much worse in 2008 compared with 2007.
We expect two 27bp interest hikes in 2008, frequent reserve requirement hikes, and 10% CNY
appreciation in 12 months’ time, in a gradual fashion.
II. Changing tides in corporate earnings
Corporate earnings may grow slower than nominal GDP growth in 2008 for the first time since Page 13
2001, which implies a significantly slowdown in profit growth in 2008-2009.
Furthermore, various government price controls have distorted sectoral profit distributions,
favoring banks and non-state-owned-enterprises in the non-financial sector at the expense of state-
owned-enterprises in downstream industries.
III. How fast is money supply really growing?
We find that the M3 growth rate has been much faster than that of M2 since 2Q2006, likely Page 17
reflecting the fast accumulation of capital-market-related financial assets, such as mutual funds and
bonds held by non-depository institutions.
We believe M3 growth is a more comprehensive indicator for monetary expansion, and a better
leading indicator for activity growth and inflation for most mature economies.
IV. Renminbi: An unbearable straitjacket for the central bank
The imbalance in China is not with robust domestic investment, but with excessive current account Page 19
surplus, fueled by a significantly undervalued currency.
This external imbalance has led to periodic domestic inflation, particularly asset inflation,
pressures. Hefty inflow of FX assets has also been increasingly crowding out the domestic credits.
V. What drives China’s trade surplus and what will it take to narrow it?
Increasingly, China’s exports are composed of higher value-added investment goods, and are going Page 31
to markets outside of the US.
The trade surplus tends to rise when domestic investment demand slows, and will narrow if the
CNY effective exchange rate appreciates.
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