Letter From the Editor

All eyes are on China once again after its successful expedition into space last week. It's a timely reminder of the amazing growth in China's economy and indeed of its rapidly improving technical skills. The economy is still growing at a good 9% clip - if you believe the official statistics, that is - and this looks set to continue. At the same time, imports are soaring. But where are the imports coming from? Not, for the most part, from here or the US, but from the rest of Asia.

According to Stephen Roach of Morgan Stanley, Chinese demand accounts for a good 90% of Taiwan's export growth and more than 80% of Japan's. Indeed, Japan, as it emerges from a decade of recession, is fast becoming a huge play on China, which can't get enough of its consumer goods, steel, cars and construction machinery. Just one more good reason, then, to consider selling your overpriced Western shares and pouring some money into the continuing rally in the Japanese and Asian markets.

Another part of your portfolio you might consider rolling over into a good Asian fund is last year's bond fund. We now know that four out of nine members of the Bank of England's Monetary Policy Committee voted to raise interest rates earlier this month, so if there was ever any doubt that the next move in rates was going to be up, that's now gone. And the next move won't be far off. We are, as www.Breakingviews.com puts it, "staring into the jaws of a bear market for bonds."

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That can only be bad news for Gordon Brown. His government's spending is up 10% already this year and is expected to end 2003 a good 30-40% over his own predictions, while tax revenues - despite his best efforts to tax every move we make - have risen only 5.9%. So this year may well produce the UK's highest-ever issuance of gilts, whether there is much in the way of demand for them or not. The rising deficit also means new taxes, something that is obviously stretching the creativity of Brown's staff to the limit. After all, what's left to tax? Their rather desperate answer, it seems, is any capital gains you might make on your house. In fact, this is very unlikely to happen, given its probable unpopularity. In a recent survey by the Association of British Insurers, one third of those surveyed said they are relying on property to fund their retirement. I can't see them handing over a quarter of the cash they hope their house will deliver without a fuss. But it's just one more reason to think twice before diving into the UK's overheated property market.