• Last month I visited China talking to local analysts and policy makers. The general impression is that the dynamism and optimism in the Chinese economy remain intact. And as China moves further up the value chain it is difficult to see anything stopping the Chinese boom just yet.
  • We forecast that the Chinese industry will gain speed during spring as the global industry bottom out. With investment growth remaining around 20% y/y and China's industry doing fine we expect the economy will grow at close to 10% y/y in 2007.
  • Moving beyond the outlook for short -term growth the big issues in China are 1) the environment, 2) inequality, and 3) rebalancing the economy. We provide a brief update on the issues.
  • On the fx front big changes are underway. China will create a new investment agency to manage a portion of the foreign exchange reserves. The investment agency will invest in stocks, bonds, equity stakes and probably also energy supplies. On the margin the changes to China’s fx reserve policy are a) USD negative, b) positive for risky assets, e.g. equities and emerging market assets and 3) negative for developed market bonds.
  • We expect the Chinese authorities will allow for more flexibility in the renminbi. A more active use of China’s fx reserves and a more flexible currency will over time diminish the “automatic stabilization” on the global financial markets coming from central bank buying.