Dear Friends

The stock exchange excitement in Shanghai seems to link directly to the opening of the HK- Shanghai corridor. This was/is part of opening Chinese and global stock markets. If you read the graphs, it seems to have led directly to a ramping up of the Shanghai market through the announcement in November 2014, through to the big sell of June 2015.

There are no fundamentals to justify these rises, as the Shanghai market was trading well beyond global markets. The sells were also speculative based, it would appear. The Chinese government would have seen all this coming as a “Soros” attempt repeated from the Asian financial crisis of 1998. There is no evidence of Soros being involved but the main role of hedge funds is clearly evident.

Around this time, a little later, under pressure from the IMF, the Chinese liberalised their exchange rate. Not surprisingly it led to a downward adjustment of about 3-4pc. Not surprisingly as many nations had devalued – the Euro by about 15pc, due to the expected rise of USA interest rates. Also the global trade stats did not look good with a relative stagnation settling in. So the RMB rate looks, if anything, a little underdone.

But this is the explanation for a global sell off and mini tremors. If that is the case then the neo cons who want to contain China better be careful as this was a picnic compared to what would happen if they seriously tried a Ukraine or sanctions on China. Unfortunately we are in the Presidential election season and President Xi is going to do his bi-annual visit to Washington this month.

The USA candidates might try to score China points and the President and his Government might feel the need to show their toughness…. Imagine the effect of a USA warship going through the South China Sea this year….

This could be a tough period for global markets who clearly do not like uncertainty in the centre of Asia.

The announcement that China sold $100billion of Treasury bonds, presumably to hold the RMB rate where it is, is going to worry the USA who now have q.e. in reverse. Having to buy in their own bonds sold by China was not on their agenda when they contemplated raising interest rates. I wonder if Mark carney would operate independent of Washington – if he does here comes the 1.75 pound again….

I don’t see any great concerns in the Chinese economy whose transition I forecast 5 years ago from 2015-17. Transition means just that. It does not mean going from 10pc growth to 7pc growth in a straight line. I would not be surprised if it dropped towards 3 or 4 pc on its journey, but the year should average towards 7pc. The opening up of the Silk Roads is just the opportunity China needs to construct infrastructure, energy and communication into South, South East and Central Asia. But the opening up of Chinese capital markets will be marked by speculators attempts to exploit change.

It will take time for China to go through transition and the new 5 year plan to be issued in October, will reflect that. It would be a great pity if hedge funds and/or currency speculators or minor nations tried adventurist pops at China. The likely end sufferers would be us in the West if the last three weeks is anything to go by. We live in a globalised world. China’s leaders are ready for change and reaction. They are also ready for those internally who try to play games with change.

The USA changes Presidents in 2017 and China changes its Standing Committee later that year. Let’s hope President Obama stays focused on economic stability and cooperation with China and leaves “tilts” to cyclists. Tilt originally meant to be unsteady. The world needs steadiness now.


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