China has raised its reserve requirements. So what?

Friday’s Hong Kong headlines were ablaze with the news that the People’s Bank of China, China’s central bank, had raised the banks' reserve requirements by a sweltering 0.5%. What should the investor make of this? Sell - or buy? We just have updated The Economic Clock™ http://www.enziosclock.com/money/thoughts/2007/09/06_0 for China, complete with sector recommendations: why not visit the Clock?

For a long time we have propagated the wisdom that "we don't see things as they are, but as we are". Thus, Westerners with little experience in China will take such news as "tightening" talk - and exit China shares.

Subscribers have been given a different view by me. One of my mainstays is to always look at the assumption of the argument before examining the argument itself. The assumptions made by people who fear that China is "tightening" have to be inter alia that

  • China has a functioning economy in which interest rates provide the right signals,

  • China has banks that are independent of politics

  • Beijing is in charge of China.

These would be assumptions made by people not dealing with China close-up. This is the bit about seeing things as "we" (Westerners") are.

But these assumptions do not apply to China:

  • We know that her capitalist economy is young, probably akin to that of Dickensian England;

  • China's banks are driven by politics, and

  • China's provinces and townships dictate local events.

Thus, we remain China bulls. Read our latest update of The Economic Clock™ for China to find out how to make money off our view.