Market movements

From "Macro Implications of the Stock Market Correction" by JPMorgan Asia Pacific Chief Economist Frank Gong, March 2, 2007:

In view of this week’s drastic correction in China’s A-share market and downward movements in the global equity markets, global investors have started to worry that the A-share tumble could indicate a weaker Chinese economy … In our view, this kind of reasoning is too stretched. The A-share market is a highly inefficient market, and it has not been a good leading or lagging indicator of the Chinese economy whatsoever … In the future, the predictability of the domestic stock market for the economy is likely to improve. However, at this stage, caution is warranted before drawing any conclusion about the economy based on the stock market performance in China.

From "The Heavy Lifting of Chinese Rebalancing" by Morgan Stanley Chief Economist Stephen Roach, March 5, 2007:

China, lacking in well-developed market-based systems, recently upped the ante in opting for "administrative controls" to cope with its mounting imbalances. The latest such actions – state-directed equity selling and a clampdown of short-term foreign borrowing by domestic Chinese banks – may well have played a key role in sparking February’s worldwide equity market correction. In my view, they were not one-off developments. Administrative actions not only underscore the state-dominated mindset that still pervades the China model, but they are stopgap measures that circumvent more robust market-driven solutions … A successful rebalancing of the Chinese economy is essential to avoid the boom-bust cycles of the past. Yet until the obstacles to rebalancing are removed, China’s overheated investment sector and over-extended exports pose increasingly serious risks to sustainable and stable growth.

From "DB Comment on China Rate Hike" by Deutsche Bank Greater China Chief Economist Jun Ma, March 19, 2007:

The People’s Bank of China announced its first rate hike in 2007 on March 17. After this 27 basis point hike on benchmark deposit and lending rates, the one-year benchmark deposit rate will rise to 2.79%, and the one-year benchmark lending rate will rise to 6.39% … Rising inflationary pressure and M2 money supply growth are the official reasons for the rate hike. Another important motivation for the hike is to contain the A-share market frenzy and excessive property price increases. In this sense, we view this rate hike as an important part of a broader policy package to deflate asset bubbles. As for market implications, we believe this rate hike, together with expectations of other near-term policy measures to deflate the A-share market bubble, should at least impact both A-share and H-share sentiment negatively in the short-term. The most vulnerable sectors during a short-term correction following a rate hike are property, banking and insurance.