Welcome, Guest | Register or Login
Jim on Facebook Jim on Twitter Jim's YouTube Channel Jim on Google+

Important Stuff


Stuff Jim Reads

The cooking oil indicator says inflation has peaked in China

posted on August 5, 2011 at 3:28 pm
Print This Post

I’m getting a ton of email yesterday and today from readers asking whether to buy, when to buy, and what to buy. Being down 500 points on the Dow Jones Industrial Average does raise those kinds of questions.

I do have one concrete suggestion in answer to all that—and it’s based on a bit of good news yesterday out of China.

The government in Beijing has lifted its ban on price increases in cooking oil.

Don’t laugh. This is huge. And I think it’s a signal that you can start to ease your way into (or deeper into) Chinese stocks.

Here’s my thinking.

China’s leadership is incredibly sensitive to the political effects of inflation. The Communist Party’s interpretation of its victory over the Kuomintang attributes a big part of the drop in support for the Kuomintang to that government’s inability to control inflation. The Communist Party’s interpretation of the unrest that led to the Tiananmen Square massacre gives inflation a central role too.

So it shouldn’t be surprising that besides fighting inflation with all the tools of developed economy central banks—raising benchmark interest rates and increasing reserve requirements, for example—China’s leaders have aggressively sought to make sure that the average Chinese family didn’t feel the full force of inflation. Hence efforts like government stores selling key foodstuffs at below market prices, and the release of pork from the country’s strategic pork reserve.

And a ban on increases in the price of cooking oil. Prices for cooking oil have been unofficially frozen since November.

But then this week the biggest trading company in China’s edible oil market, Wilmar International, received permission, after submitting what the company calls an “informal request,” to raise cooking oil prices by an average of 5%.

That to my mind says that China’s leaders are feeling confident that they finally have inflation, which ran at a 6.4% annual rate in June, under control. That conforms with projections from economists that inflation is likely to peak this summer at 6.4%. The government releases inflation figures for July next week and there’s a good chance the inflation rate will hold steady at 6.4%.

If it does, it wouldn’t mean an immediate end to interest rate increases from the People’s Bank or other efforts to fight inflation. At 6.4% inflation needs to come down two percentage points or more to meet the government’s target. But this would be the beginning of the inflation end game.

And it would produce a huge sigh of relief in China’s stock markets.

Buying here would make you early. But I don’t think you’d be “too early.”

I’d buy slowly and carefully but I think you can buy. A good place to start is with Internet sector leaders such as Baidu (BIDU) and Tencent Holdings (700.HK). I’d also take a look at financials such as Ping An (PNGAY or 2318.HK) and China Life (LFC or 2628.HK.)

Full disclosure: I don’t own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own shares of any stock mentioned in this post. The fund did own shares of Baidu, Ping An, and Tencent Holdings as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


Related Posts

No related posts.


  • TheGemSaloon on 6 August 2011

    Interesting to see what happens on Sunday night prior to Monday’s open. For those of us heavily invested in tax deffered “age 59 1/2″ type accts, with two decades to go, do you recommend a move out of quality funds/stocks? I wouldn’t pull my JUBAX, however it would be nice to dump all else at 11,400 and buy back lower. I’m an optimist but nothing feels like this is the bottom.


  • CallOfDutyFan on 9 August 2011

    Just saw on MarketWatch that inflation went up to 6.5%

Post a comment

You need to login in order to post a comment.

Comments that include profanity, or personal attacks, or antisocial behavior such as "spamming" or "trolling," or other inappropriate comments or material will be removed from the site. We will take steps to block users who violate any of our terms of use. You are fully responsible for the content that you post.

Jubak in your Inbox

Get Email Alerts

Sign up now and download Jim's latest Special Report

Get the RSS feed

Quick Quote

Quotes provided by Yahoo! Finance and are delayed up to 20 minutes.