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There are four developments in China to note.

First, in what seems a bit like "buy the rumor sell the fact" type of activity, the Shanghai Composite slipped 1.9% today to a three week low. Reports suggest profit taking is on issues that were bid up on the announcement that a free-trade zone was going to be established in Shanghai.

Second, the local government reports that the free-trade zone will commence Sunday. There have been conflicting reports whether as part of the conditions it will include some liberalization of Internet access, especially the social media such as Facebook and Twitter. There have also been reports of easier access to international newspapers websites, such as the NY Times.

Third, the new Chinese government had ordered a overall audit of debt from all levels of government. This audit is nearly complete and will provide the basis of new initiatives from the Communist Party meeting in November. There is some speculation that the national government may allow some local governments to default on some of their debt, as early as next year. Ironically, default is part of the liberalization process.

Fourth, Chinese markets will be closed from October 1 through October 7, for the public celebration of the National Day. The PRC was founded on October 1, 1949. Hong Kong and Macau will also participate in the celebrations. The holiday, plus the month-end and quarter-end settlement of financial contracts, including wealth management products, could exert upward pressure on money market rates. The PBOC injected funds twice this week, including a CNY80 bln injection today. The yuan itself remains firm. Its modest 1.8% gain thus far this year places it among the strongest currencies against the dollar this year and the only Asian currency to have gained against the greenback.

Source: Brief China Update