Key points of this paper:
- Further tightening in China is likely in order to ensure that inflation expectations remain under control, and to mop up capital inflows flooding in from US quantitative easing and Chinese resistance to a stronger Renminbi (RMB).
- However, with activity indicators having calmed down after last year's growth rebound and non-food inflation under control, further tightening should be seen as fine tuning rather than a move to crunch the economy. Policies to boost consumer spending and inland growth are likely to remain in place and growth is likely to remain around 9-10% per annum.
- Chinese shares are likely to have more solid upside, underpinned by reasonable valuations, solid economic growth, foreign capital inflows and a switch by Chinese investors from property to shares. Further monetary tightening is unlikely to have much impact.
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