Aggressive tightening looms for the Chinese economy

Following stronger than expected growth in Q1 of this year the Chinese economy could be subject to more aggressive tightening measures but Mark Williams, manager of the F&C Pacific Growth Fund continues to see opportunities in the domestic economy.

"Growth has beaten expectations with an 11.1 per cent increase in the first quarter compared to the same period last year. This was ahead of Bloomberg's estimate of consensus at 10.4 per cent and looking ahead the country could be in for more aggressive tightening measures."

Williams said investors were anxiously awaiting an announcement from the Bank of China on interest rates, expected over the next 10 days, and that a further two more rate hikes were not out of the question.

"The central bank has already raised rates to dampen the investment boom, the question of further rate rises is no longer a matter of if but by how much and a 54 basis point rise, rather than the usual 27 basis points, is looking more likely," said Williams.

Williams said that in an effort to dampen growth, the government was likely to increase the bank's reserve requirement and warned investors could expect to see a more aggressive rise in the rate of Renminbi appreciation.

"More importantly, the likelihood of renewed administrative measures is growing. The biggest problem is the unpredictability of such measures and their impact on stock markets, as witnessed earlier this year with the stricter enforcement of the Land Appreciation Tax which lead to widespread underperformance in the property market.

"For investors the domestic equity market appears over-valued, the Shanghai equity market has risen 30 per cent year to date, and it could face tougher times in the year ahead particularly in light of further tightening measures.

"However, while there are immediate concerns over these factors, they indicate that China's booming growth is set to continue even if at hopefully dampened levels. Strong retail sales in the fourth quarter of 2006 and the first quarter of this year are evidence of the broadening economy and Asia's increasing independence from the US economy can only be positive news at a time when forecasts for US growth are being pared back," concluded Williams.