China: Market Overview 1st Quarter 2010 Fisher Capital Management Korea

Fisher Capital Management Seoul Korea - April is going to set the tone for the world economy depending on how China is labeled by the US and China’s reaction to it. Our gut feeling is that apart from the rhetoric — which is in the air with respect to the Yuan-dollar rates, China’s current account surplus and internet independence — neither of them will rock the boat.

Already five prominent members of the G20 — South Korea, Canada, France, the US and the UK — have sent a coded warning to China against reneging on economic agreements. Perception of China and the US in international relations is far apart.

According to China, the main issues are Taiwan and the sale of arms to Tibet and

for the US the issues are the Yuan-dollar rate, trade surplus and Internet freedom.

China: Market Overview 1st Quarter 2010 Fisher Capital Management Seoul Korea - Under the Omnibus Trade and Competitiveness Act of 1988, the U.S. government

is to decide whether to label China a “currency manipulator.” This has not been

done since 1994, but if China is named, it will give the US Congress new ammunition

to press for concrete action. China is asserting itself in international relations.

Beijing has emerged from the global recession with a fresh confidence about its

state-led economy, which has delivered stimulus projects from high-speed railways

to highways and bridges with remarkable efficiency. And it is in no mood to be

lectured by Washington about how to support the world economy or to operate her

own economy.

China’s economic growth will be around 10% in 2010 following strong industrial

output growth in coming months. Inflation may rise to 3.5–4% in 2010. The government’s target of inflation is 3%. But, China has hidden debt risk among Chinese local government investment companies. Official estimates of the total outstanding loan balance for such investment entities exceed Rmb 6,000bn — or roughly 20% of GDP — a figure that may be an underestimate.

China: Market Overview 1st Quarter 2010 Fisher Capital Management Korea - Undervaluation of the Yuan is taken for granted and is estimated to be in the range of 30–40%. The US administration believes that the Yuan’s appreciation will not only solve the trade deficit problem between the US and China but also the US unemployment.

Beijing’s position is that China’s currency policy isn’t the cause of the U.S.’s economic problems, and that China wouldn’t adjust its currency rate under outside pressure. “The Chinese government will only make the decision according to the national condition and the country’s development level,” according the Chinese President Wen. China believes that a surge in the Yuan could destabilize the global economy, hitting developing nations especially hard and even perhaps causing the value of the dollar to plunge.

The World Bank forecasts that China’s current-account surplus, the broadest measure

of its trade position, will rise this year to $304 billion, after dropping to $284.1 billion

in 2009 from a record $426.1 billion in 2008.

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