Forex Investment and Currency Trading

1Q08 GDP growth was stronger than expected, but at 10.6% yoy was a slowdown from the 11.2% performance in 4Q07. The moderation was attributed to continued macro-tightening policy and emerging signs of weaker global demand. Understandably, net exports declined significantly due to weaker external demand, faster CNY appreciation and robust import growth. Having said that, economic momentum remained strong, supported by the brisk fixed asset investment growth at 24.6% yoy and steady domestic
consumption performance at 12.5% yoy. In addition, March industrial production rebounded to 17.8% yoy from 15.4% in February, though there are signs that this could be peaking in view of rising input prices adversely impacting industrial profits. March M2 growth slowed to 16.3% from 17.5% in February, but remained above the central bank’s target at 16%. GDP growth forecast for 2008 is revised to 9.8% from 9.5%. Meanwhile, ample liquidity, as well as supply shortages, has pushed CPI gains above 8% in 1Q08, with the firm trend also driven by higher food prices and rising labor costs. In addition, price rises may be exacerbated by higher producer prices, with PPI growth accelerating to 8% in March from 6.6% in February. Even if price pressures abate in 2H08, headline inflation is expected to overshoot significantly the official forecast for 2008 of 4.8%, and inflation is expected to average 6% this year. The PBoC continued to prioritize
inflation fighting but stopped short of hiking interest rates in view of the widening interest rate gap between China and the US. Instead, the central bank hiked the reserve requirement ratio (for the third time this year) by 50bp to 16%, effective April 25, which also suggests increasing preference to rely on quantitative policy
measures rather than price mechanism controls.

In fact, the Chinese authorities have started to acknowledge a rising risk of a drastic growth slowdown amid high inflation and this could portend greater reluctance to allow the CNY to appreciate at a fast pace in 2H08; Greater volatility is expected in CNY movements and sustained, but gradual, CNY appreciation to 6.8
by end 2Q08.