Bad news on inflation from China last night could give global stock markets the jitters today, March 11.
Higher than expected consumer price inflation in February at an annual rate of 2.7% is likely to revive fears that Beijing will try to slow the speed of economic growth. Economists had expected an increase in inflation of 2.5%, according to a Bloomberg survey. Inflation had dropped in January to an annual 1.5% rate from 1.7% in December.
 Chinese stocks fell on the inflation news. The Shanghai Composite Index was down 0.7% as of noon Shanghai time. The index is down 7.6% in 2010.
 The jump in the inflation rate to 2.7% is bad news for Chinese officials who have said they aim to hold inflation to 3% or less in 2010. On the current trend inflation will be running above that target by April.
Inflation momentum is also building at the producer price or wholesale level where wholesale prices climbed at an annual 5.4% in February from a 4.3% annual rate in January. Higher prices at the wholesale level almost always lead to higher inflation in consumer prices.
 So far government steps to slow bank lending and the growth rate of the money supply have had less effect than projected.
Bank lending in February did drop to $103 billion in new loans from $204 billion in January but the February total was still 14% above economist expectations. M2, the most widely followed measure of the money supply, rose by 25.5% in February. That was only a slight dip from January’s 26% growth rate and well above the government’s target of 17% growth in M2 for 2010.
 China’s central bank, the People’s Bank of China, has already raised reserve requirements for banks twice in 2010 in an effort to slow lending and the economy. Looks like more drastic measures—perhaps China’s first increase in benchmark interest rates since December 2007—are in store for the Chinese economy.
Anyone got a good tech stock with good dividend besides TSM?
At the moment, my emerging markets exposure is weighted 75-25 in favor of Brazil over China. For the record, my total emerging markets exposure doesn’t even equal my cash reserves at the moment, although I do have significantly more in emerging markets than in U.S. stocks (big goose egg for now).
That said, I will invest in Chinese companies IF they meet my expectations.
georic, Ed:
I have been watching China for long time too. I too think China has the greatest potential in 21st century, however buying Chinese stocks or bonds is another matter. Because of the state ownership and still lack of transparency in accounting and corp. govern. I feel outside investors can be easily screwed. At this moment, I like Jim’s strategy, invest in western companies that do business in China.
regarding Chinese real estate bubble, keep in mind that the average mortgage has 30% to 50% equity. Whatever way the bubble unwinds will likely be far different the what we in US have experienced. (much more orderly, manageable)
georic,
I agree, IF you think HSBC is a good buy for the reasons Jim stated previously. Personally, I don’t like banks ATM.
Ed, that’s old history.
I think it was especially bad for Switzerland, as a financial heaven.
I bought HSBC afterwards, because I believe in their future in China, for one thing, not to mention India +, as explained by Jim.
Bad news for Jubak pick HSBC:
http://apnews.myway.com/article/20100311/D9ECDQ181.html
While it’s not the end of the world, data theft is black PR mark on any bank.
georic,
My interest in China started with Warren Buffett’s quote about the 21st century belonging to China. You are right about being cautious with Chinese stocks. They take a bit more research than your typical American stock, due to their rather clever financial shenanigans. China is an investment minefield, but it can also pay off handsomely if you know what you’re looking for (and know the traps to avoid).
Thanks for everyones input.
M&A of interest
“BP to pay Devon $7 billion for oil fields”
http://www.reuters.com/article/idUSTRE6295AL20100311
Ed, you seem to be fascinated with China. I am too, to the point of having recently spent 5 years studying Chinese: fantastic history, philosophy, arts, but so different.
They know that most companies are desperate to get some share of their market, whatever the cost, and should interests be at odds,Chinese will come first, even in courts from what I hear.
I therefore refuse to invest in Chinese companies, because I will never be able to know and understand what I am buying.
But I buy shares of large international companies which are also present in China: less potential rewards from that market, but so much more peace of mind.
CWT334, First you need to define what kind of inflation you’re referring to. There’s is monetary inflation, which is an increase in the money supply that, in theory, leads to higher prices. Then, there is price inflation, which could be due to a number of factors, including monetary inflation.
The general belief is higher price inflation, as defined by the CPI, leads to higher stock prices. All things being equal, that might be true, but there could be numerous other factors that would push stock prices the other way. Same thing with housing. Until the housing crash, home prices tracked the CPI fairly closely. However, the trivial amount of inflation we’re getting now, is being overwhelmed by a credit bubble bursting.
There’s a massive residential and commercial real estate bubble in China. When that blows, it’s going to have massive consequences on economies throughout the world. It could keep building for several more years though, so it’s not imminent.
Unfortunately, when talking about inflation, there’s nothing basic about it.
Thanks that was my understanding also. I owned FXI but sold it a while back and watched it as it came down a little. I have been looking for another entry point.
cwt334,
Higher inflation COULD lead to higher stock prices, but not necessarily.
As for housing, it’s not a bubble in the same sense as the U.S. just experienced with housing. You have to remember that the requirements for a mortgage in China are stricter than they were in the U.S. prior to our real estate collapse. Mind you, that doesn’t mean there isn’t a real estate bubble in China, just that it will probably play out differently than our bubble did.
Help me with something basic. Does higher inflation generally mean higher stock prices? What about housing prices? I read that housing is out of control in China and there is a bubble there.
Here’s an interesting opinion piece on diplomatic relations with China:
http://www.weeklystandard.com/articles/friends-these
One thing it doesn’t touch elaborate on, but should, is how this applies to trade relations. If threatened with a trade war, would China back down, especially if they thought it wasn’t in their best interests? I’m not saying they would, but I have to wonder if that might not be a good idea for U.S. diplomats to use as an added incentive for a greater de-pegging of the RMB.
Jim,
Once China takes whatever action they decide on, and the markets lower Chinese stocks correspondingly, could this present a buying opportunity in Chinese stocks? Especially companies which will see little or no effect from the government’s action?
Frankly, the way I see it, the Chinese consumer is far better off than he/she ever was, as jobs are paying better than before (due to China’s perverse “too many jobs, not enough workers” problem). They can afford the price inflation, and companies can afford to charge more.
Assuming the government doesn’t take the “elephant gun to kill an ant” approach to the inflation problem, this could present a buying opportunity. What say you?