Up to 2004 growth was driven by fixed investments and exports (the catalyst which propelled the fast growth of the coastal provinces). From 2004, the central government undertook a conscious political policy to lift rural income to address widening income disparity (the rural sector having lagged in growth for over 10 prior years). Rural wages have surged double-digit p.a. compounded since. While that policy has raised the feel-good factor for hundreds of millions of rural folks, productivity gains have lagged and that sowed the seeds for the nationwide cost-push inflation China is now facing. The era of double-digit gains in income should be due for a pause, the limitation being productivity gains.

An adjustment period will come because inflation is likely to stay high (the result of the above factors) and that, coupled with politics from the changeover of new teams of economic managers from the central down to the local levels, will eventually drive a meaningful slowdown in credit creation. That process has probably started.

Eoin Treacy's view China is continuing to allow the Renminbi to appreciate against the US Dollar at a modest pace. Over 5% in the last year might not be fast enough for many US policy makers but is not insignificant and demonstrates China's policy of measured appreciation to suit its own agenda.
Renminbi deposits are now also more widely available internationally and China is conducting more business in its own currency. All of these developments point towards China's ambition to carve out a dominant position for its currency in the global economy.

A stronger currency and the contraction of the spread between the 10yr and 2yr government bond yields is symptomatic of tighter monetary policy which is in line with GSI's commentary above.

The Shanghai A-Share Index has pulled back to test the yearlong progression of high major reaction lows but will need to sustain a move back above 3000 to indicate demand is regaining the upper hand beyond the short term.

The Shanghai B-Share Index continues to pause in the region of the 200-day MA. A sustained move above 300 would confirm more than short-term support in this area.