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Research Edge Portfolio Position: Long CAF

The NBSC Q2 GDP release registered at 7.9% year-over-year growth for a total of CNY 7.4 trillion (based on current price, production approach).

FULL STEAM - barber345

This headline growth data was accompanied by slew of other positive data points: Industrial Output increased by 10.7% Y/Y in June, Fixed Investment rose to 33.6% (cumulative) and Retail Sales register a 15% increase for the month.  On the heels of this data, the Shanghai composite rose by 1.4%, lifting the total capitalization of Chinese public equities above Japanese stocks to retake the status of second largest global equity marketplace.

On the heels of yesterday's blockbuster M2 and Reserve figures the rearview mirror for Q2 supports the bullish thesis we were espousing at the time: that the enormous amount of money being put to work by the central government would shock the system back into motion through sheer force while tax incentives and subsidies would encourage increased internal consumer demand.  Now that the stimulus is baked into the equation and our Q1/Q2 thesis has played out, we face a diverging path ahead.

As I commented yesterday, the massive infusion of credit has created real systemic risk and consumer demand -though resilient, will not be able to broaden to the extent necessary to offset the decline in external demand in the near future.  As we move forward, our focus will be on identifying specific sectors and industries in the Chinese market and we will be proactively managing risk as the likelihood of a short term correction has increased significantly in our opinion.

Andrew Barber

Director