Quick China Update

The PBoC has returned to more timely release of monetary data. The broad measure of money,
M-2, continues to experience decelerating growth, with the yr/yr rate of change down to 15.1%
through May (This compares to 30%+ yr/yr readings in late 2009 when the giant stimulus program
had been rolled out).

On a very simple macro basis, 15% money growth equates to 9.5% real growth and 5.5% consumer
inflation. Since inflation in China is still accelerating, the authorities will likely keep M-2 on a
slow growth path until it drops down inside of 15% yr/yr. A curtailmet of M-2 growth inside of
10% yr/yr would invite further downward pressure on real growth and  the gov. may not want to push
this hard on the brake at this point.

The huge surge of money and credit growth from 10/08 well into 2010 fueled a boom in capital
and investment spending and a speculative surge in the real estate markets which has created vast
tensions within the country over property development. Land grabs and higher inflation have
stoked consumer discontent, and China will need to address these concerns with a far more
conservative and balance monetary and fiscal policy going forward or risk destabilizing its
economy. The rise of inflation pressure has raised the ROI% bar on the stock market which has
led to a persistent decline of the market's p/e ratio. The speculative zeal for real estate has
also curtailed interest in the equities market.

On the plus side, China is well on its way toward bringing better monetary balance and it will
also benefit from the recent sharp slowdown of the progress of commodities prices in general
and the petrol complex in particular in the months ahead. But the key here will continue to be
creation of a more sensible longer term monetary policy.

My view continues to be that the stock market should have a decent shot at recovery over the
second half of the year and into 2012.