China's GDP grew 7.8% in Q2 after an 8.1% in Q1. Exports have been slowing down in recent months and are likely to record negative growth rates in Q3. But domestic demand (both in consumption and in investment) accelerated and is likely to remain strong. In the face of a global slowdown, the government is planning to increase fiscal spending on infrastructure investment. We continue to expect growth to stay at around 8% for the full year.

Olympics 2008

Now that Beijing has got Olympic 2008, investment in infrastructure and in facilities amounting to US$ 20 bn will be spent in the capital city, to be implemented in the coming 7 years. This amount is the equivalent of 65% of Beijing's GDP. Assuming that such investments would not crowd out other investments, the direct impact will add 7 percentage points to Beijing's GDP growth in the coming years, or an additional 0.3 percentage points to the nation's annual GDP growth in the coming years. They will also be "multiplier" effects which lead to further growth opportunities for different sectors.

Aside from the direct economic growth impact, the Olympics would create more incentives for China to accelerate the process of reform, not only in the economic arena, but also in other aspects such as press freedom, corruption, piracy, human rights, rule of law, etc. Cross-Strait relations are also likely to be less problematic in the coming years.

Stock market

Managing the risks of the stock markets, and allowing more state assets to be unloaded through the stock market so that money could be raised for social security funds, remain key priorities for the Chinese authorities. How best to liberalize the stock market gradually is also a major challenge. More details to be given in a separate report being prepared by Qun Liao.

The recent "China share fever" in Hong Kong is over. A major correction has taken place. But it is important to distinguish between the good companies which are doing well and have good prospects, from the small-cap, speculative ones which rose drastically in the past few months purely due to hot money. The fundamentals for the better companies have not changed much.

China's private enterprises

China's private enterprises have grown rapidly in the past few years. The state-owned enterprises (SOEs) still dominate in the strategic and capital intensive sectors. But in other sectors, non-state enterprises have taken over. Measured by industrial output, SOEs now account for only 20% of the national total. While a lot of attention is still put on the problems of the SOEs, the future of China's economy depend more on the performance of these non-state, many of them private, enterprises. The government is also gradually introducing various measures to facilitate the growth of these private enterprises. But a lot more needs to be done to remove the obstacles to the growth of the private sector, which is still in its infancy.

More details will be given in a separate report.