Values Are Beginning to Show in the Chinese Market Too..

China's equities have hit their lowest level in nearly 33 months with gold and property companies leading the decline. This reflects both global and domestic concerns. At the global level, sentiment has been undermined by the escalating sovereign debt crisis in the Eurozone. In China, fears about inflation, rising interest rates, an overblown property market and non-performing loans in the banking sector have hit confidence.

The benchmark Shanghai Composite Index, which tracks both A and B shares touches 2206.52 briefly, its lowest level since it closed at 2223.73 on March 18, 2009, before trading at 2223.13 now. Most analysts expect the stock market to keep falling in the short term and to end this year near 2200.

We see that consumption growth is still the main driver in China with higher wages leading to more spending power. Consumer demand will become an increasingly important factor in the Chinese economy as the country moves away from a growth model based on exports. On a technical perspective, the index is poised for a rebound if it can close above 2200 level. Investors who want exposure to China can either buy H-shares, ETFs or unit trusts.

A Chinese Story: How China Plays Its Part in the European Crisis

Any hope that China will come as a white knight to the rescue of the European countries is dashed when Fu Ying, its Vice Foreign Minister, said that "China cannot use its US$3.2 trillion in foreign exchange reserves to save other countries". This is Beijing’s strongest rebuttal yet to the talk that they will bail out the European countries.

However, this crisis has provided a golden opportunity for the Chinese government to buy into any European quality names which is too good to miss. We believe that any bailout will come in the form of investment rather than purchase of bonds.

Despite the latest cut of its Required Reserve Requirement (RRR) by 50bps since 2008, the Chinese government reiterated that it is not their intention to loosen the property control but rather to help ease the liquidity problem in the economy. This signifies that China is still battling with its own set of problems, with high inflation and slowing economy their utmost concerns.

Bearing these in mind, Investors are therefore advised not to get carried away by the RRR rally and forget that the big global macro overhang remains, with the European crisis far from over.