IS there fire with this smoke? China Everbright Holdings chairman Zhu Xiaohua appears to have become 'persona non grata' literally overnight and in the process helped portfolio member China Everbright nearly fall off the edge mid-week. Mr Zhu has a fine pedigree - he was deputy governor of the People's Bank and also served as a senior official in the mainland's Foreign Exchange Bureau. In addition, he is well known to work closely with his namesake Premier Zhu Rongji. Besides taking some dollars out of our pocket this week the fall of Mr Zhu from grace could herald another period of red-chip house cleaning. For investors this could mean a volatile ride in trying to decide who is on the 'In' list and who is on the 'Out' list. Longer term, a clean up of the sector will do us no harm. In fact we added China Everbright to our portfolio some weeks ago as mainland stock markets started to boom given its interest in mainland securities trading. The mainland government is well aware that the economy is still mired in a deflationary spiral and they are keen to try and pump things up. This includes encouraging rallies in domestic share markets. While a nice idea, the actual number of investors in mainland share markets is only a few million and we cannot imagine them having too much impact on the domestic economy. Other stimulatory measures being considered by Beijing include increasing civil service wages (not in Hong Kong though), introducing a possible tax on bank deposits (that will make the mattresses fill up) and increasing tax returns to exporters. Once these measures fail to arrest the mainland's deflationary slide we expect a yuan devaluation, most likely in the first quarter of next year. Despite the Everbright development the red chips have taken the news without falling too hard. Sino-American relations look better now that Congress has approved MFN and WTO talks look set to restart. In fact the Clinton administration's handling of the recent Taiwan issue may have been the one of the first positive things they have done for a long time in their mainland policy. Corporate results season is here and with HSBC and small brother Hang Seng due to report tomorrow the market is holding its breath. We found Bank of East Asia's results interesting. They seem to be moderately bullish on the Hong Kong economy and expect to see a turnaround by the end of the year. Approaching on the results front will be China Pharmaceutical the mainland vitamin C and antibiotic producer. The vitamin C market has stabilised after years of decline and their plant is fully booked until year end. While margins for this item are down, cost cutting and raw material price falls have finally made their sales profitable. This share is worth following more closely. Finally our magic holding Giordano came up with the goods and is making us look good, up near 400 per cent since we bought it (and there is no .com in the name). Their results were excellent, even better than the most bullish expectations. No reason for us to sell yet despite having grown a bit nervous as it broke through the $5 barrier. The share is still looking sexy as management is very focused. Lastly, interest rates worries are making headlines again. Our best guess - expect the Federal Reserve Board to go back to a tightening basis in its next meeting and raise rates 25 points in its early October meeting.