China Swift to Restore Confidence in Economy

It was an eventful week for the Chinese economy, starting with a rare move from the central bank to cut the benchmark one-year lending rate and the bank reserve ratio at the same time. The lending rate was lowered by 27 basis points to 7.2%, the first rate cut in six years. The ratio of bank reserve (the amount of cash that banks are required to hold), came down by 100 basis points to 16.5%.

We think both moves are aimed at loosening monetary supply and increasing liquidity to the market, as the government is shifting its focus to growth stimulation. However, the lower reserve ratio does not apply to China's five largest commercial banks, Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, and China Agricultural Bank, indicating that inflation concerns remain.

On Friday, China further announced plans to buy back shares in Bank of China, Industrial and Commercial Bank of China, and China Construction Bank, and announced a decision to remove tax on stock purchases. Now only sellers of stocks need to pay the 0.1% stamp tax. We think these moves should help shore up investor confidence and attract more participants in the market.

Market Recap
Chinese investors have been on a roller-coaster this week. The stock market fell for three consecutive days (a nearly 9% drop), rattled by the upheavals in the U.S. financial industry as well as by concerns of lower income for China's commercial banks after the rate cut. After a relatively quiet Thursday, however, the stock market rallied 9.5% on news of bank share buybacks and the removal of the stamp tax on stock purchases.

For the whole week, the Shanghai Composite Index was roughly flat at 2075, although it touched the low point of 1802 mid-week. The Shenzhen stock market rose by 3.1% to 7154. Trading volume soared on Friday after the stamp tax announcement.

Financials
The Bank of China has agreed to buy 20% of French bank La Compagnie Financiere Edmond de Rothschild. The deal is valued at around 240 million euros and makes BoC the second-largest shareholder of LCFR. This is the first strategic investment of a leading Chinese bank in a Eurozone bank. The two banks expect to cooperate in areas of private banking and asset management.

Industrial
China's homemade regional aircraft is ready for trial flight. The ARJ 21-700, the first regional aircraft independently developed by China, is scheduled for test flight in late September. The plane has 80-90 seats and can cover the distance for 98% of the domestic direct flight routes.

Technology
Shareholders have approved  China Unicom's  CDMA disposal plan and merger with  China Netcom . As a result of China's massive telecom industry overhaul announced earlier this year, the new China Unicom will officially start operation on Oct. 15, 2008. The new company will provide both wireless GSM and fixed-line services.

Thanks for contributions from Lun Lu, Iris Tan, Peter Liu and Feliz Li