It is time to turn cautiously bullish on China's economy (2)

No rate cuts

That explains why the market shall unlikely see more reserve requirement ratio and interest rate cuts. Interest rate outlook is thus at best neutral without any upward or downward bias at this juncture. It looks like the forthcoming rebound will come geographically from the middle/western parts of China as the export-oriented provinces will continue to suffer from the volatility of external trade. It is unclear whether the collective strength of the inner provinces can drive growth in a sustainable manner.

In my opinion, the answer is probably not. But it definitely buys the new leadership some time to come up with concrete reform initiatives that must be executable in practice.

In short, it is time to turn cautiously bullish on China.

Smart money will likely keep pouring into Hong Kong and the Chinese mainland. Both Hong Kong dollar and the Chinese yuan will continue to be well buttressed by capital inflow in the near term. Should economic fundamentals in the fourth quarter and thereafter subsequently confirm the earlier bets by such smart money, monetary authorities in Hong Kong and the mainland will have a hard time dealing with the inflow.

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