Shift in Chinese Economics

With a sharp slowdown in global growth projected by the International Monetary Fund (IMF) for 2009 and 2010, the chinese economy is undergoing a fundamental shift in design. No longer is it expecting the export driven growth to support its economy, but evidence is showing that China is now looking inwards to drive the country's huge capacity that was once known as "the world's factory floor".

The world's most populous country is leveraging its internal demand to propel it's economy. Indicators showing year on year increases in domestically bound cargo is driving corporates to make a rush to capture the spending power of inland consumers in sectors. Retail sales number have held up and property transactions are surging across the country. China's plan to implement a healthcare reform of $125bn will raise disposable income and reduce need for high saving levels.

If China suceeds in unlocking their domestic demand and coupled with a Rmb4tn fiscal stimulus, it is increasing positive that they have seen the worst of the financial crisis.

Eric Tan, London

Pound falls off the cliff. Markets for the week ending 14-Aug-08

Story of the week: Pound falls off the cliff
- BOE delivered gloomy assessment of the economy paving possibility of rate cuts?
- UK Unemployment rose 60k in Q2 from 13k in Q1
- Jul UK CPI jumped 0.6% to 4.4% and may remain elevated and rising to 5% in coming months - resulting in soaring prices destabilsing the UK economy
- Prospect of 'near term' rate cut unlikely
- UK home sales dropped to 30 year lows
- Dollar may have reached bottom levels and is at the start of long-term uptrend


European GDP contractions
German economy, Europe's largest, contracted 0.5 percent from the first quarter
French economy contracted 0.3 percent from the first quarter
- slump in construction
- stronger euro and slower global growth have damped demand for exports
- exports declined and companies cut spending
- faster inflation erodes domestic spending power.


Bank de-risking. Or are they ?
Qn: Does a bank's practice of lending a large proportion of the finance for the purchase of their assets at a discount factor a cause for concern ?
A) RBS - disposal of $8bn of loans outstanding to private equity
B) Merrill Lynch provided 75% financing of it's $30bn CDO sale to lone star

In the above situations, the banks argue that the finance has been cleverly structured to make it extremely unlikely that the exposure would materialise
But the toxic assets remains a residual exposure if they fell below the equity buffer invested by the private equity firms

Eric Tan, London