Meanwhile back in China…
The Shanghai Composite Index fell another 1.9% on May 11 putting Chinese stocks in bear market territory. The index is now down 21% from its November 23 high. The index is now down 19% for 2010 making it the worst performing market in the world—next to Greece.
The catalyst was news that consumer prices rose at the fastest rate in 18 months and that property prices in 70 cities rose by a 12.8% in April.
Inflation and speculation have so far not just resisted government policy designed to slow the rise in prices, but they’re actually accelerating. That has raised fears that the People’s Bank of China will finally have to raise its benchmark interest rate and put the brakes on growth across the entire economy.
Consumer prices—good old’ inflation—climbed 2.8% in April from a year earlier. That was up from the 2.4% rate of increase in March. The increase in consumer prices in March had been below February’s rate of increase raising hopes that the central bank was winning its battle against inflation. A survey of 30 economists by Bloomberg News showed a median expectation for a 2.7% gain in April consumer prices.
The real bad news is actually in the bad news behind these numbers.
The People’s Bank and government bank regulators have tried every trick in their books—short of an actual increase in the benchmark interest rate—to rein in bank lending. It’s easy money from bank loans that has fueled the real estate boom and the binge of investment in fixed assets that has kept the economy running too hot. (Growth hit 11.9% in the first quarter of 2010.) The surge in bank loans in 2009 has raised fears, extremely well founded in my opinion, that many of these loans are to unqualified but well connected individuals or companies and that they will result in a dangerous increase in bad loans on bank balance sheets.
The bad news—nothing the central banks or regulators have done is slowing the flood of loan money to a rate that economists think is acceptable. New lending in April of 774 renminbi—or about $110 billion—was above the consensus forecasts of 24 economists surveyed by Bloomberg News.
At 2.8% inflation is getting very close to the government’s target of a 3% inflation rate for the entire year. I doubt that the People’s Bank or bank regulators will sit on their hands until inflation reaches that benchmark.
Falling stock prices in Shanghai indicate that investors there are expecting action too.
t2much,
I agree with you about Chinese stocks, and I’ve already been looking at several potential stocks to get into at the right moment. But I don’t mind letting them come down a little more before I buy. 😉
Many good Chinese stocks are being dragged down despite attractive earnings opportunities. NFEC.ob is my favorite of the moment and they report earnings later this week.
Here’s a good article about Chinese AND Asian exposure to the EU markets:
http://www.thestreet.com/story/10753410/1/weak-euro-leaves-central-banks-cautious.html
sigli,
It could definitely hurt China’s export-driven economy. Fewer exports to the EU could actually be a good thing as far as Chinese inflation is concerned, but a bad thing for their export numbers. At the least, it should help to limit Chinese growth. The worst case scenario of a complete EU collapse (not likely in the short term) would probably damage the Chinese economy to the point of deflation being a concern.
So the best guess is probably inflation neutral, or close to it.
My technical indicators showed the Chinese market turning down in August 09. Still showing down. Hard to imagine that our markets can move the other way.
Good point. EU doesn’t send much to China, but gets a much from. Lower EU imports would probably cancel out my increased US imports idea. So inflation neutral?
sigli,
Excellent points! I agree, although keep in mind the EU is the largest trading partner of China.
Frankly, the easiest thing for China to do is to let their currency appreciate, although that won’t happen until they decide to move from an export-driven economy.
@Ed,
I’m not sure that would work because of the peg. Strengthening USD would help Chinese exports, which could create internal inflation pressure as supply becomes constrained further. That sounds like a continuation of the last couple decades’ practice of US exporting inflation to China, arguably at their expense.
They’d have to weaken the currencies of their major import partners–Japan and S. Korea (both float)–to do much of anything. Euro is plunging to Yen just like it is to USD. KRW has been on a tear for a while. Saudi, Brazillian, and Australian imports (commodities) are under $100 billion, or 2.5% of economy.
I have to remind myself often that economies are mostly internally driven.
waiting for a good entry point to ctrp
Jim,
I read somewhere that China does keep a reserve of euros. Is it possible that China is (or will be) dumping their euro reserves, possibly for dollars or gold? If China could strengthen their currency, that might help with the inflation issue, as well as reduce their exposure to the problems in Europe.