Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.
Well, never mind.
Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.
Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.
Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.
China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%
Investors can expect a torrent of economic data from China over the next week. Read more
What’s the matter with China?
While U.S. stock indexes have hit all-time high after all-time high, China’s markets have been in retreat. After peaking on January 30, Hong Kong’s Hang Seng index had fallen by 5.4% as of March 15. The Shanghai Stock Exchange Composite index peaked on February 6. It was down 6.4% from that peak to the close on March 15. The Shanghai index was still up considerably—16.2%–from its December 3 low through the March close, but that was a retreat from the 24.2% gain the market had recorded from the December 3 low through the February 6 high.
To understand the drop in Chinese stocks even as U.S. stocks soar, it’s important to understand the two groups of investors and traders that—in the short to medium term–drive the prices of Chinese stocks. The two groups don’t have a lot in common nor do they look for the same things from China’s economy and stock markets. But both have been disappointed that trends they thought they saw in place in December and January are either in jeopardy or else were never actually there to begin with. And that has left China’s stock markets without the support of the two groups that usually lead China’s stock prices higher.
Where China’s stock markets go from here—in the short-term—rests on whether the disappointment of these groups increases or reverses. Certainly with turmoil in the EuroZone pushing global markets toward risk off positions, it’s hard to see Chinese stocks getting a boost from macro trends outside of China.
First, China’s domestic investors and traders. Read more
The Shanghai Food and Drug Administration concluded its investigation into chicken sold by Yum! Brands KFC stores in China on January 25, the company said in today’s, February 4, fourth quarter earnings release. The Chinese agency did not fine the company or decide to bring a legal or regulatory case for higher than permitted levels of antibiotics in chicken sold by KFC from supplier Liuhe Group.
That doesn’t mean that investors, though, have cleared the company. The stock fell 1.99% today before the earnings report and then another 5.38% in after-hours trading post for a total loss on the day of 8.2%.
The problem wasn’t fourth quarter earnings—the company actually beat expectations by a penny—or revenue—at $4.15 billion slightly ahead of the $4.12 consensus. Read more
When China’s leaders introduced the country’s 12th five-year plan in March 2011, it included the wildly ambitious goals of rebalancing the economy away from exports and toward domestic consumption, of closing some of the huge gap between rich and poor by raising the minimum wage by at least 13% a year on average, and of reducing rural poverty by extending programs such as pensions across the county. All while keeping the country’s economy growing by 7% a year with stable prices.
You don’t suppose they actually meant it?
Recent data says, absolutely. In 2012 rural incomes rose faster than urban incomes—that’s three years running. Rural income from benefits payments rose 21.9%, twice the rate in urban areas, as the government increased its spending on healthcare subsidies by 36%. And since poor families tend to consume a higher portion of their income than the wealthy, the growth in rural incomes should help with the goal of rebalancing the Chinese economy toward consumption.
What does this mean for investing in China? Read more
On January 16 Japan’s Nikkei 225 index fell by 2.6%. That was doubly surprising. First, because the Tokyo stock market has been on such a roll—up 25.6% from November 14 to January 15 and 9.4% from December 21 to January 15. And second because the “cause” of the drop was a series of absolutely innocuous remarks by a member of the Japanese Parliament (who pointed out that a weaker yen wasn’t great for Japanese consumers) and two members of the Abe cabinet (who noted that a weaker yen wasn’t good for all Japanese companies.)
That was enough to send Japanese stocks down 2.6% on the day?
Welcome to the wonderful world of hot money, 2013-style. So far in 2013 we’re looking at a market that doesn’t have any confidence that the trend of this moment will be the trend of the next moment. And that is, therefore, constantly sloshing toward the opportunity of the minute or away from the possibility that a trend has peaked. I think these sloshes will make emerging markets—with their smaller market capitalizations than the United States, Europe, or Japan—especially volatile. Which, since these are the markets that look poised to do best in 2013, makes for some very tricky footing for investors in the year ahead.
Let’s take a slightly more detailed look at what happened in Japan and then see how these dynamics apply to the rest of the global stock market. Read more