JP Morgan's Full disclaimer ->
https://mm.jpmorgan.com/legal/research_disclaimer.html

China policy debate/insights: FX reserve management, price reforms after Olympics, fiscal stimulus and monetary easing

• There has been heated debate on how China should be more effectively manage its US$1.8trn FX reserves. There has been lots of nervousness on China's holding of Fannie and Freddie debts. While the debt default risks could be low, lots of Chinese think-tankers have been urging the authority to get out of US$ debts. Indeed, China may have already intensified selling some of US$ assets. The question is where the money would go. Given that EUR, JPY, and commodities currencies such as AUD, CAD may have already seen its cycle peak this time (in some of the Chinese policy makers' view), it is unlikely that the money coming out of US$ will go into EUR, JPY and other currencies in a big way. Suggestions put in front of policy makers are:

A) Repatriate the money home, and spend on infrastructure investments and set up necessary social infrastructure to boost consumption. There is also suggestion to use some of the money to set up a market stabilization fund for the A-shares (for example to absorb the unlocked tradable shares);

B) Invest the money in US$ block markets such as Hong Kong and other Asian markets (the biggest question however for Asian and EM markets is liquidity). China still wants a strong US$ and would want to keep the money in US$ assets, if not in Fannie and Freddie debts. There has been suggestion that China should buy HK$ assets directly using the FX reserves, or more effectively use HK as one of the FX reserve management destination.

• The authority is moving ahead with the expected gasoline/diesel prices reform and electricity price hikes soon after Olympics. The head of the Energy Bureau said publicly yesterday that "after Olympics, prices for refined oil, electricity and coal in China" will depend on "global energy prices" and "demand-supply conditions in China". That is, most of the prices will be liberalized/normalized after Olympics.

• The top leadership is carefully considering a economic stimulus package of at least RMB 200-400bn (or 1-1.5% of the GDP). This is in addition to the cost of rebuilding Sichuan earthquake zone (with the budget of RmB 500-600bn). This will include tax cuts and measures to "stabilize domestic capital markets" and support "healthy development of the housing market".

• Given the US$ is strengthening, hot money inflow into China is fading. China's trade surplus will also narrow when exports are slowing down. China's FX reserve growth in US$ terms would slow (when EUR and JPY and other currencies in the FX reserves are weakening). Inflation will continue to trend downward. The backdrop will provide good macro environment for the PBoC to cut the RRR (reserve requirement ratio) and ease monetary policy later in the year.

龚方雄详解“千亿刺激”报告 官方尚无回应

 海外投行忽悠中国股市真牛    咳。。。。