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Fears of a double-dip have been reawakened as fiscal stimulus failed to create a sustained recovery in the U.S. The growth rate of the world's largest economy was a feeble 1.7% in the second quarter and the anemic growth has left unemployment mired near 10%. At the same time, inflation in the U.S. further dropped with core Consumer Price Index increase declining to 0.9% in the third quarter.
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Still, the fear that the U.S. economy is about to slip back into recession seems to be misplaced, while the U.S. financial sector gradually stabilized. Nevertheless, amid weak recovery, the U.S. policymakers and the Federal Reserve (Fed) both consider necessary to launch new measures to stimulate the economy. In particular, the U.S. policymakers have announced four major areas of measures. Apart from extending most of the tax reduction arrangements of the former administration, the measures mainly focus on promoting investment, including infrastructures. These are notably long-term measures.
The recently held Federal Open Market Committee (FOMC) meeting has already expressed the tendency to launch additional measures, particularly emphasizing the low inflation rate does not fit the Fed's mandate. Fed Chairman Ben Bernanke has further mentioned that high unemployment would hinder the recovery progress and deflation risk has loomed. He favoured further acquisition of assets, though the scale and pace of purchase are still under consideration. Hence, despite some FOMC members still voicing diverse comments, it is generally expected that the Fed would launch a new round of quantitative easing measures.
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Further data, e.g. China's Purchasing Managers' Index, confirmed that China's economy has stabilized. On the other hand, despite mild moderation of average property price increase in 70 major cities, media reported reactivation of property transactions in some cities of China. The Chinese policymakers launched further measures to cool down the property market in September, further to the measures introduced in April. Furthermore, deposit reserve ratio for some major banks has also been raised by 0.5 percentage point. This may help contain credit growth to fit the annual target of 7.5 trillion.
As China's economy stabilizes, the proposal for the 12th Five-Year plan has been announced, suggesting to accelerate the transformation of growth model, emphasizing sustainable development and increase of residents' income.
Source: National Bureau of Statistics of China, BOCHK
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As the market generally expects the U.S. to launch a new round of quantitative easing measures, global stock markets have gradually gone upward. Inflow of capital is particularly notable in Asia. In Hong Kong, the gradual strengthening of the HK dollar since the third quarter has further indicated the inflow of funds. The Hong Kong Hang Seng Index has broken above the 23,000 level with significant increase in turnover. The loose monetary environment would continue support the stock market.
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Source: Economic Research Division, Bank of China (Hong Kong) Limited
Information provided on 19 October 2010
Risk disclosure:
The above information is for reference only and is not intended to provide investment advice and should not be relied upon as such. The above information is prepared on the basis of materials obtained from sources believed to be reliable but Bank of China (Hong Kong) Limited ("BOCHK") accepts no liability in relation to the use of the above information for any purposes. BOCHK does not make any representation or warranty and accepts no responsibility or liability as to the accuracy, completeness or correctness of the above information. The above information does not constitute an offer or solicitation to enter into any investment arrangement. Investment involves risk. Although investment may bring about profit opportunities, each type of investment product or service comes with its own risks. Due to the fluctuating nature of the markets, the prices of products may rise or fall beyond customers' expectations dramatically and may become valueless and customers' investment funds may increase or decrease in value as a result of selling or purchasing investment products. It is likely that losses will be incurred rather than profits made as a result of buying and selling investment products. Loss may equal or exceed the amount of the initial investment. Income yields may also fluctuate. Due to market conditions, some investments may not be readily realizable. Before making any investment decision, customers should assess their own financial position, investment objectives and experience, willingness and ability to bear risks and understand the nature and risk of the relevant product. For details of the nature of a particular product and the risk involved, please refer to the relevant offering documents. Customers should seek advice from an independent financial adviser.
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