China/Hong Kong market update

Mainland Chinese stocks rebounded in February, with investor confidence restored by the regulator's approval of two equity mutual funds. Conversely, fears of a US recession and the weaker dollar weighed on Hong Kong's stock market.

Chinese premier Wen Jiabao kicked off the annual National People's Congress (NPC) on a cautious note, amid growing concern over rising inflation.

China to focus on fighting price pressures
Chinese inflation accelerated to an 11-year high in January, as massive snowstorms created transport chaos and pushed up food prices. In his address to the NPC, the Chinese premier promised to implement tighter measures to curb increasing price pressures and prevent domestic economic growth from overheating. Meanwhile, money supply and loan growth picked up, despite stricter lending rules.

Steady growth in HK; Budget aimed at boosting consumer spending
Hong Kong's economy grew 6.3% in 2007, but the government warned that weaker US export demand would constrain growth this year. In view of the strong economic performance last year, the government announced a generous Budget, which aimed to support consumption through tax cuts, rebates and handouts. Good employment prospects, rising wages and wealth would also help boost domestic demand. Hong Kong retail sales registered another month of double-digit rise in January, aided in part by holiday spending, and partly by a healthy labour market.

Encouraging corporate results
Results of our holdings were generally strong, in particular the property companies. Hang Lung Properties and Hang Lung Group reported healthy interim results on the back of robust property sales, and Yanlord's full-year earnings were driven by robust sales in Shanghai. Standard Chartered Bank recorded a rise in profits due to robust growth in its wholesale banking business in Hong Kong and India. However, the bank withdrew its proposed bailout of Whistlejacket after the structured investment vehicle went into receivership. ASM Pacific's net gains increased as strong equipment sales offset the softness in the semiconductor market. CLP posted higher earnings and plans to invest HK$2bn to build the world's largest solar power project in Australia in 2008.

We hold all the companies highlighted.

Portfolio News
We sold out of Beijing Capital International Airport, after a strong run-up in the share price. Against this, we increased our holding in Yanlord Land.

Aberdeen Asset Management Asia Ltd