The Temperature of Chinese Porridge

I don’t know what the Chinese translation of Goldilocks is but certainly she appears to be much sought after by them. The search for an economy which is neither too hot nor too cold has always been the most Herculean of tasks for any financial authority. The recent Chinese stimulus packages and loose credit facilities have certainly been having their effect to invigorate their economy, and such actions have often caused many of the ripples of reaction around the globe. For example the amount of investment in infrastructure projects has provided a much needed fillip for such overseas suppliers such as Siemens in Germany and Caterpillar in the US.

Now however, there have been some serious concerns raised internally (as opposed to those previously expressed externally) about the possibilities of the Chinese economy potentially overheating. The concerns particularly surround the recent credit binge as illustrated by the growth in lending more than doubling from Rmb 4,200bn ($615bn) in 2008 to Rmb 9,000bn ($1,318 bn) in 2009. The direct result has been for the People’s Bank of China to raise the reserve requirements that local banks must keep aside by 0.5% to 15% of their deposits, and also to raise rates on one year notes.

This can really be seen as a warning to banks to rein in their lending which in a command and control economy should be lot easier than in respect of our reckless bankers of the last decade. The question now though is whether this action is enough to be a gentle application of the brake, or if rather something more direct may be necessary - once we can assess what effect this might have, then we might have a better idea whether we are dealing with a controlled and co-ordinated slow down or something more unpleasant such as an asset bubble bursting. As any child can confirm, letting air out of a balloon gently is extremely difficult.

This of course is not just an issue for the Chinese but for the rest of the world as well. Any sharp change will have a consequent reaction and of course that will most certainly include us - and particularly the FTSE 100 Index which is so heavily weighted towards the mining companies that are so strongly correlated to Chinese economic demand.

As President Nixon’s Treasury Secretary, John Connelly, so famously declared about their management of the US Dollar: "It’s our currency, and your problem." Perhaps soon we might hear a Chinese official say “It’s our economy, and your problem”. You have been warned.

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From shivering to damp trench foot in the space of just three days - I am sure we have all
suffered from the astonishing unpredictability of the UK’s weather. This is a perfect example of where investors can see a clear line of logic between an event and its effect. With the chilling cold so the demand from our power utilities shot up not just here in the UK but across the Northern Hemisphere. Economic dislocations from the freeze have rippled across the economy providing some potentially interesting investment alternatives - just follow the snow line.

In days gone by it would have been necessary to try and stock pick risky individual power
companies to try and see if you could benefit from the meteorological misfortune. Now though there are easier vehicles to use such as the iShares DJ STOXX 600 Utilities (SX6PEX GY) which is the most obvious as it gives exposure to a broad array of European utilities, including power generation. This is another example where Exchange Traded Funds can provide cost effective access to the breadth of a sector that would otherwise have easily been hidden.

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And finally... A South Carolina man has been sentenced to 10 years in prison for stealing an $80 slab of meat. The Times and Democrat of Orangeburg reported on Thursday that 51-yearold Mark Zachary of Orangeburg received the maximum sentence after jurors found him guilty on Wednesday of shoplifting. Prosecutors said the sentence was justified because the 26 August theft from Reid's grocery store in Orangeburg was his ninth offence.

Authorities said when a store manager approached Zachary about the missing New York strip of beef and the somewhat bulbous bulk under his shirt, he fled right into the arms of an off-duty police officer.

Assistant Solicitor Glenn Justis asked jurors "Where's the beef?" in his opening argument.

Zachary testified he was just ‘massaging’ the meat, not stealing it.

PS Oh and one mutter from the gutter - second hand quote... ”Mr Mandelson why didn’t the coup against the Prime Minister succeed last week?” The answer came back “because I wasn’t running it”. Well it sounds credible!

Have a good week.

Justin A Urquart Stewart
Director
Seven Investment Management Limited

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This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.