weekly option strategy

Emerging Markets: Chinese Stock Markets Rocket Higher Despite Central Bank Rate Increase

Friday, 03 August 2007 19:25:25 GMT  |  Richard Lee, Currency Strategist

Recap Of The Week’s Top Stories…

Chinese Yuan Appreciates Following Paulson Visit
Rising against the US dollar, Euro and the British Pound the Chinese yuan gained on recent developments following US Treasury Secretary Henry Paulson’s visit to China.  As expected, the US Treasury Secretary pushed for further appreciation in the underlying Chinese yuan.  “I make the case that they and the whole entire world would be better off and they would have better financial security and stability, if they would pick up the pace of appreciation”, stated Paulson to reporters following a meeting with President Hu Jintao.  However, as always Chinese officials protested against such a move, once again reiterating the fact that gradual appreciation will be the chosen path for the underlying currency at the current moment.  The only concession it seems that Paulson was able to make were reaffirmations in decisions for the domestic financial services sector as stated in earlier meetings this year.  Officials noted this time around that reform in financial joint ventures will be forthcoming earlier than expected, in the “early fall”.  The decision would reverse previous decision that banned international investment in banking institutions in China and open up a potential for growth in the sector.

Manufacturing Activity Slows in China
Manufacturing activity in the world’s fastest growing economy slowed for the month attributed to higher interest rates and reduced tax rebates on domestic exports.  According to the government index for manufacturing, activity declined to 53.3 from 54.5 in the month of June.  The lowest reading in five months, the report suggests that sector activity may be contracting and lend to a lower than expected growth figure for the quarter.  Results weren’t that much different for the CLSA Hong Kong based index, which fell to 53.2 from the 27-month high of 55 in June.  Ultimately, with tightening measures in place, it seems that overheating growth may be beginning to show signs of curbing.  However, further confirmation will be needed before market sentiment sets on the idea.

Chinese Stock Markets Close On Fresh High
Despite recent increases in the reserve requirement by the Chinese government, equity shares continued higher and closed at a fresh high in the overnight session.  Supported by bids for commodity stocks, the benchmark Shanghai Composite index ended up 30.26 points to close at 4,471.03.  Guangzhou Development Industry Holdings vaulted to the 10 percent daily limit as first half profits skyrocketed higher by 68 percent from a year ago.  Laiwu steel also gained, up 3.8 percent, as Chinese demand is expected to continue well into next year.  Comparatively, however, banking sector stocks declined as the higher reserve requirement will likely curb lending practices temporarily.  In Hong Kong, the benchmark Hang Seng Index rose higher in tandem with the Straits Times Index as HSBC shares announced stronger than expected first half results.  Ultimately, Hong Kong stocks closed higher by 445.04 points at 23,184.94 as the Straits Times Index ended up 21.37 points at 3,547.66

China Raises Reserve Ratio 50 Basis Points, Spurs Chinese Yuan Higher
In order to curb lending practices and looser monetary liquidity, China’s government has increased the reserve requirement for banks by 50 basis points this weekend.  As a result of the increase from 11.5 percent, lenders must now place aside 12 percent in funds as reserves.  Coupled with three rate increases in the past four months, the expected decision comes amid further concerns that the Chinese economy continues to overheat, raising inflationary pressures.  Incidentally, the decision comes but a day or two before US Secretary Paulson is scheduled to meet with high profile Chinese officials.  As a result, speculation has taken the Chinese yuan higher to trade at 7.5673 in the overnight against the US dollar and 10.3398 against the Euro with expectations of a further move by officials later in the third and fourth quarters.

 

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