China's unexpected move to tighten its monetary policy has focused attention on the Chinese economy and whether further moves would threaten the world status quo.

The big news over the last week was that China decisively moved to start winding back the stimulus it provided to combat the global financial crisis by raising the required level of reserves that banks must set aside by 0.5 per cent (taking it to 16 per cent for large banks). With the Chinese economy growing strongly, and worries that imbalances will build, further tightening is likely. However, while this will likely cause bouts of volatility in Chinese shares and global financial markets, China is a long way from undertaking a draconian tightening designed to crunch growth. We continue to expect Chinese GDP growth of around 10 per cent this year. As a result, Chinese tightening is unlikely to threaten the rising trend in shares this year, albeit it will, along with tightening elsewhere, result in a more volatile ride.

The dispute between Google and China is also worth keeping an eye on to the extent that it could potentially have a broader corrosive effect on bilateral relations between the US and China if it is allowed to get out of hand.


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