Impending US rate cut moves China and Asian markets

It’s amazing the interconnectivity of the global stock markets and the thoughts that are held in various countries. This is especially true of China, and it’s stock market.

As noted earlier on this blog, China has ended a long Bull market and entered a Bear recently. The 20% drop has elicited calls of caution from noted investor Warren Buffett, and debate amonst brokerage house. Yet the outlook for 2008 is not quite that dreary.

With the chance that U.S. markets will be receiving another rate cut by the Federal Reseve, Hong Kong rallied and took much of the Asia markets with it. Even the Chinese banks, which are expected to raise the reserve ratio to a high of 17%, gained with expectation

“Hong Kong Monetary Authority generally follows interest rate adjustments by the Fed because of the local dollar's peg to the U.S. dollar. Local and Chinese banks gained on expectations that a rate cut would fuel their mortgage businesses.”

In addition there is the thought that China will be a big part of growth in South Korea. Shipbuilding and steel are the favorite sectors for some analysts like Cho Yong-jun of Shinyoung Securities. Others feel that China is one of the critical keys to the emerging markets, like Yoon Ji-ho of Hanwha Securities.

“China is the growth engine of the global stock market. The rise would continue unless China and other emerging markets slow down.”

Yet this news all comes as an expected tightening of the monetary policy is being implemented. Which is seen as a positive in that

“Yuan appreciation has actually been helping the stock market by attracting inflows of foreign funds and encouraging Chinese investors to keep their money in domestic markets.”

So given all this, what conclusions can we draw?

It’s likely that any rate cuts in the United States will rally all the Asian markets and while the Chinese monetary policy will probably increase the Yuan to the Dollar, growth is foreseen in the emerging markets. How this growth interacts with the continuing questions in the U.S. economy and the increased demand in Asia is unknown. Mr. Buffett has made his statements, which must be respected. At the same time Asian brokerages are indicating they have no fear.

I would suggest, though this is no recommendation, that any potential investors remember that bears hibernate, as do the market trend that is named after them. Often the worst of a bear market is not seen in the first bite. But in any non-bull market there is always an area of productivity. And at some point even the worst performers are worth buying for the long-term.