Readings: China inflows, Grain boom, Corporate earnings
- Economist: Capital inflows to China - Hot and bothered
China’s foreign-exchange reserves jumped by $115 billion during April and May, to $1.8 trillion. In the five months to May, reported reserves swelled by $269 billion, 20% more than in the same period of last year. But even this understates the true rate at which the People’s Bank of China (PBOC) has been piling up foreign exchange.
Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year.
The stockmarket, which continues to plunge (see article), is no home for hot money. Some has gone into property. The lion’s share is in bog-standard bank deposits. An interest rate of just over 4% on yuan deposits compared with 2% on dollars, combined with an expected appreciation in the yuan, offers a seemingly risk-free profit for those who can get money into China.
Yuan carry trade?
- Zeal: Soft Commodities: Grains
- Morgan Stanley: Global Cross-Asset Strategy: The New Inflation Regime
India Equity Strategy: Downside Risk to Earnings Not Yet Priced In - The consensus has still not plugged in the risks. Narrow market earnings estimates are still rising, with strong expectations in financials, industrials and materials.
We see six reasons to be worried about earnings: 1) reflexivity between earnings and share prices; 2) high share of financial income in net earnings; 3) potential off-balance-sheet losses; 4) slowing macro-economy with negative implications for revenue growth; 5) dependence on margins that are close to record levels to sustain growth, and 6) a high base effect - earnings appear well above trend.
Bottom line: 4000 on the Nifty & 14000 on the Sensex start looking quite pricey!
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