Tuesday, August 20, 2013

Are we Revisiting the 1997 Asian Financial Crisis?

I don't know whether you recalled how the last Asian Financial Crisis in 1997-98 affected us all. Our stock market dropped from 1385 to 295 points while our ringgit went down to as low as RM4.80 to the dollar. At the height of the crisis our interest rates went up to as high as 18%. After a break of 15 years are we going to see the same scenario again? I do not know the answer but one thing for sure is that it does have some resemblances such as depreciating currencies and interest rates hike across the region. The last time the Financial Crisis was started in Thailand and this time I reckon it will be in India.

In an attempt to stamp further outflow of funds, India has recently resorted to some limited capital control such as the following.

  1. Reducing the amount of money Indian residents can sent out overseas annually from $200,000 to $75,000

  1. Indian firms can only invest 100% of their net worth down from 400% previously

  1. Total ban on all importation of Gold coins and Medallions from abroad

However such measures are only temporary in halting further outflow of funds as it is counter-productive and slowed the economy. Part of the blame goes to the Multinationals that are allowed to operate in India during the opening of its economy in the 1990s. The Indian government states that instead of contributing to the Indian economy through the transfer of technology and also managerial skills they ended up raping the Indian economy high and dry. And when it is all done they now depart for greener pastures and as a result exacerbated the outflow of funds. India’s economic fundamentals have been deteriorating for the past couple of years. Let’s take a look at some of India’s economic indicators.

India’s Deteriorating Economic conditions

The following is the chart for India’s GDP Growth rate. Its GDP expanded 1.3% in the last quarter of 2012 which average at about 1% for 2012. It slowed since 2009 and the Indian Government has difficulty in achieving the growth set in previous years due to issues like corruption and nepotism.

India recorded a trade deficit of INR 733.33 billion in July 2013. For the past 35 years, India’s trade deficit average about INR 120.83 billion. The following is India's balance of trade chart.

Although India’s Government Debt to GDP decreased from 68.05% to 67.57%    but its external debt increased to USD 345 billion in 2012 from USD 305 billion in 2011. With a depreciating Rupee it means India has to pay more Rupees for its external debt which is quoted in dollars.

The following chart shows India’s Rupee performance for the past three years.

Since the beginning of the year India’s rupee has been on the decline. The latest for the USD/INR is quoted at 63.61 and this represents a record low for the Rupee. Since May this year the Rupee has lost about 20%.  The Reserve Bank of India has the choice of either letting the market to decide on the level of the Rupee or increase its interest rate to stop the outflow of currency. Instead of letting the market forces to determine the exchange rate level, the Reserve Bank of India (RBI) chose to defend it. From the last Asian financial crisis we learnt that none of the affected countries successful in defending their currencies except Hong Kong with the backing of China.  

As have been mentioned earlier in one of my article on the predicament of Central Bank policy makers. They can only choose either to promote internal stability through Monetary Policy or external stability through Exchange Rate Policy but cannot have both at the same time.

If the Reserve Bank of India choose to promote internal stability through Monetary Policy by increasing interest rates then it will cause a deep recession. This is also known as the ‘Volcker effect’ where former Fed Chairman Paul Volcker was credited for ending the stagflation crisis in the late 1970s. In order to end the inflation rate at 13.5% and an unemployment rate of more than 10%, he raised the prime rate to 21.5% in 1981. The end result is a severe recession which lasted until 1982 and after which the U.S economy expanded for the next 8 years.

The second option available to the RBI is the exchange rate policy where it will defend the Rupee through its open market operations by selling its foreign exchange reserves which is denominated dollars. However such a policy will only help deepen the financial crisis because it might start off a chain reaction of currency devaluation.   

The current stand by the RBI to defend the Rupee can be disastrous as evident during the last Asian financial crisis after it spread from Thailand. As a result Malaysia, Indonesia and South Korea are also affected. Moreover this may result in a further hike of the interest rate as already been happening in some Asian countries as of late. Their 10 year bond yields have been soaring across the region in an attempt to fight currency sell off and even Malaysia is not spared. The following is the chart of the Indian Government 10 year bond.

As from May, India’s 10 year bond yield has appreciated close to 200 basis points (2%) with the latest being at 9.12%. Malaysia does not fared any better with its 10 year bond yield rally to about 4.1% from 3.5% in May. The following is the graph of Malaysia’s 10 year bond yield.

Why are 10 year bond yields important?

When the yield on the 10 year bond goes up it indicates that the long term interest rates is going up. When interest rates goes up it will affect a lot of investments in the economy. It will affect the stock market, the housing market, credit card, personal loans and so on. Due to the increased cost of borrowing it will affect investments in the stock market because the margin rate will also increase. It will affect the housing market because less people are willing to commit on new housing and as a result prices will have to come down. For those who have bought they will also be affected due to increased mortgage payments. Hence it will affect the overall economic activity.

In wrapping up, I reckon that India’s weak economic fundamentals and its structural problems will present itself as a target for currency speculators. With the foreign exchange reserves of only INR 15102 billion or about USD 238 billion it is not a large sum when you are under attack by currency speculators. This is because the foreign exchange market trades more than USD 5 trillion a day. So the threat of further weakening of the already record low Rupee is clear and present. Any attempt by the speculators to unstable the Rupee might be contagious and will destabilize the already tensed situation in Asia.  

Thursday, August 15, 2013

Nicholas Kaldor’s Theory of Speculation: An Overview

Kaldor’s Theory of Speculation: An Overview

July 20, 2013 by pilkingtonphil

I’ve been reading up a lot on economic theories of speculation as this is precisely what my dissertation is on and so far as I can tell the only real attempt to deal with speculative dynamics from a properly macroeconomic point-of-view is Nicholas Kaldor’s 1939 paper Speculation and Economic Stability. Sure, people will point to Minsky’s theories but they do not really contain a theory of speculation. The closest is really Keynes’ own A Treatise on Money but the discussion there is rather primitive. In what follows I will lay out a critical overview of Kaldor’s paper.

Kaldor sees the functioning of markets for financial assets and other things that resemble financial assets (such as commodities) as Keynes does in the General Theory; that is, he sees them as being subject to the famous ‘beauty contest‘ dynamic. This means that for Kaldor, as for Keynes, financial asset markets are based mainly on expectations and to some degree these expectations are not dependent on fundamentals and are instead subject to self-reinforcing dynamics of their own.

I totally agree with this view and for those who don’t I would suggest reading some of the latest literature being read by financial market participants which clearly states that the best way to profit is to follow (and thus help generate) trends.  For example, in Kirkpatrick and Dahlquist’s Technical Analysis: The Complete Resource for Financial Market Technicians they write:

Technical analysis is based on one major assumption — trend. Markets trend. Traders and investors hope to buy a security at the beginning of an uptrend at a low price, ride the trend, and sell the security when the trend ends at a high price. (Pp9)

If that doesn’t sound like a recipe for speculation, I don’t know what does. And this view will be confirmed by speaking with market participants or watching their television programs. These people simply do not care about fundamentals in the manner which would lead them to make so-called ‘rational’ decisions in the market. (It seems to me that any trader with a Porsche and a mansion who follows trends is not engaged in any ‘irrational’ activity at all; indeed, if their goal is to be rich and their means of successfully achieving that the following of market trends then to call them ‘irrational’ is simply a perversion of the English language).

But back to Kaldor. There are many points that I agree with Kaldor on. He measures the degree to which speculation may affect a market in two ways. First of all, there is what he calls the ‘elasticity of speculative stocks’; that is, the amount of potential purchasing power there is to absorb an asset. Secondly there is the ‘elasticity of expectations’; that is, the amount to which prices will change purely in response to expectations. (He borrows this concept from John Hicks and as we shall see in a moment, this is very important).

As the elasticity of speculative stocks reaches infinity the amount to which the price will rely on expectations becomes absolute, while as it reaches 0 the amount to which the prices will rely on expectations becomes nil. This is simply because the amount of speculative stocks in existence will determine the ability of speculators to speculate. Once we have a given amount for the elasticity of speculative stocks we then just have to turn to the elasticity of expectations to understand how speculation will affect the price. Again, a higher degree of elasticity of expectations will mean that excited speculators will move their money into the market in great degrees — expanding and contracting the speculative stocks — while a lower degree of elasticity of expectations will mean that timid speculators will be less inclined to move their money into the market.

In my dissertation I will be approaching the problem using a similar framework. However, I disagree with Kaldor on distinguishing between so-called fundamentals and speculation in these markets. If we are talking purely about price formation I do not think that we need to distinguish between the two sources of demand. It seems to me to just lead to messiness and confusion in what follows. The question of fundamentals only really comes in when we are concerned what might happen when speculation leaves a market — i.e. when a bubble bursts.

Also the question of fundamentals is largely meaningless in actual asset markets like the stock market. It seems to me, in contrast to what Kaldor thought at the time (which we shall discuss momentarily), that “fundamentals” in markets like the stock market are entirely open to interpretation and rely heavily on investor expectations. To believe otherwise is to believe some sort of watered down version of the EMH, such as that expounded by Fischer Black in his awful paper Noise.

Tuesday, August 13, 2013

What is top down and bottom-up Investing?

In investing whether knowingly or not I am sure many of us do not have a professional approach. A lot of us have been through the ‘wild catting’ stage whereby the term is derived from the oil industry. In search of oil geologists will have to drill holes all over a prospective area because they do not know exactly where the oil lies. In stock market investing we all have done the same when we first started i.e throwing darts aimlessly at the dart board hoping to hit the bulls eye. We buy stocks on rumors, tips, recommendations from brokers and gurus or on whatever information we can get hold on. Of course we ended up getting our fingers burnt. We can’t blame ourselves because investing is not a game that can be mastered in a short period of time.
As we progress we learn a few tricks here and there and of course we became wiser. We do not chase stocks anymore, listen to rumors, bet the farm on a certain tips and we do not do things that had earlier get us into trouble. And yet we still cannot manage to make enough profits to maintain our lifestyles. In other words we cannot leave our full time job to become full time stock market investors. We still have to depend on our full time job to put food on the table.

To be frank in order to be a successful investor you have to go through a lot of challenges and obstacles. There are many aspects of trading we need to master like psychology, money management, stock picking, investing style whether be a passive or active investor and so on. But from my experience before we even start to dabble in the market the first thing we need to do is to understand what sort of personality we have. Basically there are four types of human personalities and they are sanguine, phlegmatic, choleric and melancholy. Understanding your own personality helps you understand your temperament and also of others.

Know your personality

Basically, I am a choleric and people like us are money-minded people. We are always looking for money making opportunities and we are very aggressive in our behavior. We are not the type of investors that will buy and hold for long period of time. Hence passive trading is not for me so I know that I am more incline towards active investing. So I reckoned that before you start investing again it is better for you to find out what personality you inherit. Then select the investing style that suits your personality.       

Passive or Active Investing

After knowing our personality then our next move is to determine whether we are suited for either passive or active investing. Passive investors are those who will select some stocks based on some strong fundamentals and then hold on to it till for a long period of time. These types of people are suitable for the top down approach to investing. Active investors on the other hand tend to rebalance their portfolio every now and then. In short they are short term investors and stock picking and timing the market is their strategy. In actuality most of us are bottom-up investor because we tend to spend most of our time stock pick our portfolio.  

Top down and bottom up approach

Whatever approach we apply in our investment strategy it falls back to either the top down or bottom up investing. In the top down approach we are basically looking at the macro side of investing. To build a top down portfolio you must first look into the country specific if you are not a global investor. By this I mean you pick your own country as your investment destination. The next thing you need to do is to identify the Sector/Group rotation. This is important because the benchmark index for any country in particular say in Malaysia the FBMKLCI is the total combination of different benchmark group indexes. FBMKLCI is the total of all the individual indexes from Trading and Services, Hotel, Plantation and so on.

After we have identified a particular Group that is moving in line with the Composite Index then we will look into the different Sectors within the Group. Although the movement of the Group correlates with the Composite Index it does not mean that all Sectors within the Group are also moving in the same direction. If you look closely into the different Sectors within a Group, you are bound to find out that there are some that move in different directions. This can be summarize by the following diagram

Thus our objective is to locate those Sectors that are moving in tandem with the Group. Having identified those Sectors then our next objective is to identify those individual stocks that are moving in line with the Sectors. After that you apply your fundamental screens to your stock picking process. This may include the following.

  1. Liquidity. This refers to the volume of the stock trades every day. The bigger the volume the more liquid the stock. This is an important consideration when you intend to make a big investment that will have a ready market when you want to exit one day.

  1. Market Capitalization. Again this also corresponds to the strategy above where we need to screen the size of the company we invest in.

  1. Strategic or special attribute such as brand name, strong management, cost effective producer or maybe innovative that differentiates this company from others.

  1. Good valuation. The performance metrics of a company need to be taken into consideration such as price to earnings, price to book ratios, debt equity ratios cash flows and etc.

  1. Management assessment. Assess whether the management is focused and committed to their goals. If the management is known to be cost effective and innovative but it is not reflected in their profit and loss accounts and also if there is no product launch for the past year then this is a warning sign that the management is not doing its job.  Also, watch out for any insider disposal of stocks. If the directors are selling their shares then this is a red flag.

  1. Peer to Peer analysis. This is to compare the profitability and cost effectiveness of the company as compared to its peer within the same sector. Compare their profit and cost ratios. Some companies may be low priced but some of their hidden value is not reflected in their share price like a newly acquired contract or subsidiary.   


As you can see when we practice bottom-up investing we tend not to see the forest but only the tree. In bottom-up investing we are always trying to time and stock pick without giving much consideration into the Sector/Group rotation. When a Sector moves up the individual stocks within the Group that you bought might not move up. So to be a better investor we need to look into the forest instead of individual trees.

Thursday, August 1, 2013

Is our Monetary Policy dictated by The People's Bank Of China?

The current credit crunch in China is due to PBOC’s (People's Bank Of China) or China's Central Bank refusal to act as the lender of last resort to help banks to get out of their own financial mess. It also demonstrates that Central bank is willing to allow market forces to play a bigger role. This is to mean that banks will have to be on their own since PBOC has indicated that it will not be bailing them out this round. As a result banks have no choice but to be more conservative in their lending policies. What PBOC hope to achieve out of this?

Problem with Shadow Banking System

One reason for not intervening is to punish China’s shadow banking system which according to Fitch Ratings is equivalent to 60% of China’s GDP. Due to the strict lending practices or rather priority of bank loans given to SOEs (State Own Enterprises) there are not much funds left for the private sector. As a result they turned to the illegal or underground money lenders (our Ah Long equivalent) for their borrowings.
Due to the nature of the loans which are short on maturity and expensive in yield, it can present grave problem to China’s economy. Since the Shadow Banking System is out of its jurisdiction they are unable to estimate the extent of the loan exposures and also the portfolio of their customers. It is estimated that many small to medium size developers are getting their finances from them and hence if the economy were to reverse, the authorities afraid they will start liquidating their housing stock to stay afloat. Once the selling begins and when selling begets selling, they afraid the real estate prices will start to collapse.  

Cracking Down on Fake Invoices

Another reason for PBOC’s tightening is to get rid of the bulk of the fake invoices coming in from Hong Kong and Taiwan. Fake invoices have always been a thorn in the flesh for the Chinese authorities. It not only reduces the Government tax collection but also helps to inflate the export figures and hence resulted in distorted trade statistics. Due to its control over the Yuan, The State Administration of Foreign Exchange (SAFE) which governs the country’s foreign exchange activities will make it very difficult for foreigners to bring money into China. The reason behind is to be able to control their movement. Say if I would like to buy an apartment in China for the price of $5 million and if I were to go through the normal channel then there will be a long wait and also has to pay a very unfavourable exchange rate.

Hence, to bypass this procedure there is an alternative method whereby the developer can arrange for an exporter to issue me an invoice on something say car tires which I never received. Then I will send them the $5 million plus some extras for their work (commission) in money laundering. Hence I can then purchase my condominium without much hassle but my invoice will be added to the balance of trade and finally the current account in the country’s balance of payments figure. As a result it will help inflate the trade statistics. The following is China’s GDP growth since 2004.

As can be seen China’s GDP has been growing at the rate of about 8% per annum for the past 20 years. However as they found out recently some of the increased has been inflated due to fake invoices.

Should we follow PBOCs Monetary Policy?

In recent years, China has been become increasingly more important to Malaysia in term of trade. It is Malaysia’s largest importer and second largest exporter. The following charts show Malaysia’s trading activity with its partners.

Malaysia Total Imports 2012

Import ($Bil)
% Share

Malaysia Total Exports 2012

Export ($Bil)
% Share

Total Trade (Imports + Exports)

Imp+Exp ($Bil)






The above table clearly shows that as of 2012, China is our biggest trading partner and hence we are increasingly dependent on China. The question is should we re-orient our monetary policy towards China’s policy direction. The fact is that we not only have to follow China’s domestic monetary policy but also their external exchange rate policy very closely. Since the Yuan is pegged to the US$ and any downturn in the dollar will also cause the Yuan to depreciate. If our exchange rate policy does not respond to the depreciation of the Yuan then it will automatically affect our exports due to our expensive Ringgit.

We are living in a globalized world and China has many trading partners that supplying almost the same goods and services. Comparative advantage is almost non-existent hence price will be the main determinant for the demand and supply of the goods and services. For example in the electronics sector, Malaysia’s Carsem and Unisem are not the only Semiconductor and Test Services (SATS) players around. There are bigger and more cost-effective players like ASE and Powertech Technology from Taiwan. If the Taiwanese Government responds to China’s Yuan depreciation by doing the same to its NT dollar then products from Taiwan will certainly have a price advantage over us. Thus we have no other choice but to follow.

The reason to follow China’s Yuan’s direction is due to the fact that there is a limitation by central banks to promote both the monetary and exchange rate policy at the same time.
Monetary policy deals with the domestic issues such as price stability, full employment and sustainable economic development.
Exchange rate policy on the other hand deals with the external sector such as sustainable balance of payment, favorable exchange rate regime and also a sustainable foreign reserve position.
Due to the inter connectivity of our globalized world the implementation of policy objective of both monetary and exchange has somehow been converge. For example monetary policy implementation has increasingly dependent on techniques that affect the money supply in the banking system. In trying to achieve monetary targets, central bank will either expand or contract the money supply either through open market operations or interest rate.
As for the exchange rate policy central banks are also increasingly depending on currency intervention. Intervention is a situation where central banks use open market operations to buy and sell foreign currency so as to influence its domestic currency. However such operation will also influence the foreign reserves in the country. This is because when the central bank buys foreign exchange it will need to sell its own currency and similarly when it sells foreign exchange then it is buying its own currency.
The interrelationship between the exchange rate and monetary policy is very complex. To simplify matter we present you the following example. Say for example Bank Negara wishes to promote a tight monetary policy so as to take some heat off the economy. The basic monetary policy tools available are the following.

  1. Open Market Operations (OMO). By this we mean the Central Bank will sell securities to financial institutions to mop up the excess liquidity from the market.
  2. Interest rate hike. When interest rate is hike then the cost of borrowing will increased and hence the demand for money will decrease.

In this case if the hike in interest rate is a policy of choice then naturally it will attract an inflow of capital from international investors which at the same time appreciates the Ringgit and increase our foreign reserves. On the other hand the open market operations of the exchange rate policy which tends to increase or decrease the foreign reserves through the buying and selling of foreign currency. When our Ringgit appreciates then our exports will be more expensive and our imports will be cheaper. Hence this will further deteriorate our exports but at the same time increases our consumption due to the cheaper imports.

Hence exchange rate policy targeting depends on the size of our domestic money market. If our daily currency intervention is large relative to the size of our domestic money market then it is feasible to use it as a domestic monetary policy tool. However such operation can only be performed in an environment called unsterilized foreign exchange intervention due to the size of netting.

Malaysia’s Exchange Rate Targeting

Since China’s Yuan is pegged to the US$ PBOC does not need to intervened too much in its daily exchange rate setting, it can concentrate in its domestic monetary policy. Hence PBOC can now concentrate on its monetary policy to promote internal stability.

Malaysia on the other hand has to target its exchange rate through its managed or dirty float regime and monetary policy. It is very difficult to target both unless Malaysia is willing to ‘free to float’ the Ringgit or lose some sovereignty over it. This means that Malaysia will lose control over the Ringgit and its level will be determined by market forces in the short term. But we doubt Malaysia is willing to do that as with other countries such as Turkey and Brazil as they consider it is too dangerous to let the market decide the exchange rate.   
The question is whether Malaysia’s Monetary Policy is increasingly determined by China? That is to mean that whenever China embarked on a either a loose or tight monetary policy then our Bank Negara will have to follow just because China is our largest trading partner. On top of that what will the effects of the current credit crunch in China on Malaysia?  

Declining prices in Most Commodities

Malaysia’s Credit Squeeze is a direct result of China’s monetary tightening. Malaysia’s monetary policy is closely tied to China’s due to the large extend of its trade with China. When our exports are dependent on China then naturally our domestic monetary policy will have to readjust according to the monetary conditions in China. Due to the credit crunch in China, Malaysia’s exports to China will likely to be reduced in the coming months and hence this will put pressure into commodity prices as we saw back in the financial crisis in 2008. Commodity prices declined on the average of 40-50% then.

Cost Push Inflation

Our domestic inflation rate should be heading higher in the coming months due to the increase in prices that is caused by the increase in import prices. A lot of our manufactured products have high content of imported components and hence any increase in the import prices will have effects on the prices of the final products.

Our increase in the inflation rate is not due to the increase in our aggregate demand as normally the case. This time it was due to the increase in our import prices because our Ringgit has depreciated quite a fair bit since last December. On our USD/MYR chart below you can see that our ringgit was trading within the range of 2.98 to 3.06 to the dollar. As of this writing (31/07/2013), the Ringgit is trading at 3.25 to the dollar. This represents a depreciation of about 6% to the dollar. Below is USD/MYR chart since 2011.

Import prices has been on the rise since and reached the new high of 131.20 index points in April 2013, from 129.40 index points from March 2013. This can be shown by the following graph.

Interest Rate Hike and Economy Slowdown

Another side effect from the decrease in the money availability is that it will help push the short term interest rate up. We do not expect to see any credit easing from the government anytime soon as they are serious in reigning in the excessive credit expansion from the past. Due to the past policy on credit easing it resulted in an explosion of household debt which is one of the highest in the region standing at 83% to GDP. The following chart shows Malaysia Loans to Private Sector from July 2011 to May 2013.

As you can see the month of May 2013 tops the chart with the total of MYR 1244470.60 billion loan out to the private which includes the household and business. Hence our Government has no choice but to put a hold on further credit easing and as a result there is less money available for loans.

The decrease in money available in the economy leads to a decrease in investment and spending as the availability of capital becomes more expensive to obtain. Banks which have obligations such as to make available funds for the redemption of Wealth Management products will have no choice but to borrow from the interbank market or KLIBOR (Kuala Lumpur Interbank Offer Rates) which is more expensive or through the issuance of new products. Hence with the difficulty in obtaining finances through the interbank market this will help push the interbank rate higher in the short run. This limiting of access to capital also slows down economic growth as investment decreases.


As China is marching ahead to become the largest economy in the world by 2025, we reckoned that before that the Yuan will have to be made fully convertible by then. As can be seen without the concerted efforts of its trade partners even the mighty U.S is not able to muscle through its exchange rate policy over the domestic policy objectives during the Carter Administration in the 1970s.

China’s ability to maintain the stability of the Yuan depends on the future monetary policy direction of its trading partners. China is now promoting what is called the ‘Policy Coordination’ whereby it hoped that to achieve overall policy objectives with participating central banks. By this they will try to make major policy announcement or interventions at about the same time so as to tell the market that they are synchronizing their efforts. As of late there is evidence that China and its trading partners are synchronizing their efforts in the latest round of credit crunch.

According to the Institute of International Finance shows that the credit crunch in China is hitting harder than it is thought. It seems that not only the rest of Asia is suffering but also Latin America. The credit index which shows whether credit is easing or tightening with the 50 point level being in equilibrium. China’s current standing is 45.7 points while the rest of Asia scored 45.2 points and both are in the lowest since 2011.    

Another evidence of policy coordination is the performance of the Brazilian economy which is closely following the Chinese economy.

Source : The Monetarist

As can be seen from above, PBOCs influence on the Money Supply M1 has profound effects on the Brazilian NGDP. It looks like the Brazilian NGDP follows closely with the movement of the Chinese Money Supply M1. A growth in the M1 will be followed by growth in the Brazilian NGDP. The relationship is fairly obvious because China is Brazil’s largest trading partner. Hence any monetary policy adjustment from China will have profound effect on Brazilian exports (mostly commodities as in Malaysia). Hence with the current credit crunch in China it will also have profound effect on its consumption of commodities. China being the largest consumer of certain commodities a decline in consumption will certainly have negative effect on its prices. Hence we shall see a downturn in Brazilian exports and also an increase credit in Brazil.

Nevertheless we estimate that the current downturn in the Chinese economy will be short term as its primary objective of the credit crunch is to get rid of the fake invoice scandal and reduce the importance of the Shadow Banking System. Once these issues are settled we should see an upturn in the Chinese economy as soon as the last quarter of 2013. Moreover as many Western analysts have predicted the implosion of the Chinese economy since 2008 we have a different view. As of the indication of where the Chinese economy is heading we present you the following chart which shows China’s Gross fixed capital formation.


As you can see China’s gross fixed capital formation has been increasing from about 51,000 CNY in 2003 to 243151.90 in 2012. So in other words there has been an almost fivefold increase in the last 9 years. Since a nation’s economic growth depends much on its fixed capital formation we are confident that the Chinese economy will be able to grow at least 7.5% per annum for the next 10-15 years.