China: Despite inflation, it still looks good

15th June 2011

The Chinese government's plans to curb inflation have already impacted on markets, one such example being slowing demand for commodities.

Bloomberg reports that Chinese interest rates may rise "in weeks, if not days," according to an unsigned editorial in the China Daily today.

As reported elsewhere on Mindful Money, Glencore has warned of a slowdown in demand for commodities from China and the US as reported by the Financial Times (paywall).

Simon Ward, chief economist at Henderson Global Investors, believes the Chinese economy is not in danger of overheating because rising inflation data has actually concealed a slowdown in industrial output – which was estimated 5.6% in the six months to May, but down from 7.2% in the prior half-year.

Ward explains: "

'True'  inflation may be near a peak.

"Annual M1 growth topped in January 2010 and its maximum historical lead at highs has been 22 months, suggesting an inflation peak by November 2011 at the latest"

Ward adds that the published CPI numbers may "have been suppressed by price control measures and, possibly, statistical manipulation, so could stay elevated for longer, even as underlying inflationary pressures begin to moderate".

However: "With monetary trends already signalling a bumpy economic landing later in 2011, however, the consensus recommendation of further policy tightening is questio."

Schroders is also calling for a soft landing of the Chinese economy this year.

"We also remain positive on China's GDP growth and likely improvement in the growth quality in the medium term.

"The proposed 12th five-year plan is putting the right emphasis on structural change of China's growth model from investment driven to consumption driven, as well as promotion on environmental protection, clean energy, and service industry development.

"We continue to look for opportunities to build positions in companies we like, including consumption, clean energy, healthcare, capital goods and the service industry.

In his blog Shaun Richards expects inflation in China to head higher as the summer progresses. "Also if we look at the breakdown of inflation we see that food prices rose by 11.7%."

If you are interested in investing in China, don't take our word for it, find an independent financial adviser, who can offer you expert advice.


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