From “A China correction revisited” by Jonathan Anderson, UBS economist, 13 November 2007:
Even if China hasn’t spent any faster because of the A-share boom, a market correction could still lead to a sharp retrenchment if households and firms took on unsustainable amounts of debt to speculate on equities. However, there’s no evidence that the market is “heavily” geared … The only way for domestic participants to generate gearing is to borrow on margin. And even here, brokers are formally forbidden to provide margin credit, nor are firms formally allowed to re-route commercial bank loans into the stock market … This doesn’t mean that larger investors can’t find their way around formal restrictions, of course, but this brings us to the second point, which is that we didn’t really see a big upturn in bank credit growth during the 2005-07 A-share bull market run.
From “Turning cautious for the short term” by Lan Xue, head of China research for Citi Investment Research, 12 November 2007:
Hong Kong-listed China shares have gone up too much too fast – the market has rebounded sharply since August 17 in anticipation of QDII liquidity. The H-share index has risen 40% over the past three months and the Red Chip index [has gone up] 42% … Although we are confident of long-term structural flow of Chinese liquidity to the overseas market, we see a short-term setback in QDII development. Individual QDII has been temporarily halted [and] a scale-back in mutual fund QDII’s exposure to the HK market is likely from the current average 80% to below 30% … Another worry is that the domestic A-share market, which has risen rapidly from 5,000 to 6,000, is seeing selling pressure. The deterioration in the quality of new accounts (coming from lower-tier cities) and rising valuations are growing concerns.
From “China credit analysis” by Moody’s Investors Service, November 6, 2007:
China’s A1 foreign currency and local currency government bond ratings are supported by … reforms that have raised national income, propelled China’s exports to the second largest in the world and boosted its official foreign exchange reserves to the largest in the world. However, the recent rise in inflation is proving more stubborn than the last upturn, posing near-term policy challenges. Progress made so far in the restructuring … of state-owned enterprises has reduced underlying public-sector fiscal weaknesses and strengthened the government budget. China’s foreign currency country ceiling for bonds and notes and the local currency bond and deposit ceilings are also A1. Moody’s assesses a relatively high moratorium risk in China, therefore we cannot conceive of an issuer being rated higher than the government. The rating outlook is stable.