China’s economy grew 8.7% last year, beating the government’s 8% target, while 4Q2009 GDP rose 10.7%, the fastest growth rate in two years. The country’s central bank has raised the interest rate on its treasury bills to curb lending. Reports also say that some banks have been told to rein in lending because they failed to meet regulatory requirements while others have been asked to halt lending for the rest of January. The government is also expected to hike bank reserve ratios, for the second time this month, by another 50 basis points, before the Lunar New Year.

 

Compounding the fears, US President Barack Obama chose last week to announce a proposal to overhaul US banks in order to prevent future financial crises. The plan aims to limit the size and activities of large financial institutions.

 

However, DBS Vickers continues to believe China’s monetary policy will remain relatively accommodative, though some gradual normalisation and fine-tuning measures can be expected. Given the number of loans made in the first two weeks of January, and the growing risk of inflation, it sees recent policy moves as reasonable.

 

While it would continue to avoid China property plays such as Yanlord Land Group and Pan Hong Property Group in anticipation of government moves to cool the property market, the brokerage is much more positive on domestic consumption plays like Wilmar International, Pacific Andes Resources Development, Hong Leong Asia, Midas Holdings and China Animal Healthcare.

 

But HSBC’s global head of strategy Garry Evans feels that the tightening spells a tough time for stocks. “It reminds me of 2004 — when you had a big cyclical pickup in 2003. And, in 2004, central banks started tightening and Asian markets went up [just] 14% in 2004. It was in the spring when China tightened, and you saw quite a sharp correction,” Evans says. All the more worrying, he adds, is that much of the good news to come this year is probably already priced into the market.

 

Taiwan is the only Asian market in which he sees value, and considers a play on the recovery of developed markets like the US, as it is tech-focused and could see some upside potential from greater exports.

 

As the earnings season gathers steam, expect trading to revolve around companies releasing results. Last week, telco MobileOne surged to a 52-week high on the back of a steady set of numbers. Big names releasing results this week include Keppel Corp and SMRT Corp.

 

Attention will also be focused on the Federal Open Market Committee policy meeting this week. Interest rates are expected to be held near zero due to spare capacity, low inflation and stable inflationary expectations, says Shane Oliver, chief economist at AMP Capital Investors.