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China Inflation May Be Tougher Than Expected

The dust has settled from release of the latest round of Chinese economic statistics, and the landscape looks much the same, but not exactly the same. Inflation is still thought to be near its

The dust has settled from release of the latest round of Chinese economic statistics, and the landscape looks much the same, but not exactly the same. Inflation is still thought to be near its peak, with a nice rally coming in the latter half of the year as China eases economic tightening policies.

But the mountain of inflation looks a little steeper than it did before release of the statistics. Before the release, growing market expectation that inflation would peak in June and China would have only one more rise in interest rates sparked a week-long rally. The rally continued even after China boosted interest rates last Wednesday. Many analysts expected that would be the last hike this year.

But a slightly higher rise in the CPI than predicted and continued increases in early July food prices seems to be chipping away at that market expectation.

As I mentioned Monday, after release of inflation figures Saturday BOCOM International thinks inflation will peak in July, climbing to about 6.6% from June’s 6.4%. Benny Wong, BOCOM’s head of research, now tells Equities he expects one or two more interest rate hikes in 2011.

He notes in an email “the rate hike may not be aim(ed) at controlling inflation because it will take 6 months for the effect to filter into the real economy.” Rather, any increase might be designed to reduce China’s current negative interest rate.

As for inflation, he said, “We expect CPI will peak sometime in 2H and retreat slightly but remain at high level, may be 4-5% in 2012.”

Stubbornly high inflation will benefit gold and other natural resource stocks, Wong said.

A somewhat less talked about figure released last Saturday puts the spotlight on a couple of other sectors. China’s trade surplus rose faster than expected, which raises the possibility of appreciation of China’s currency.

Wong said a higher RMB would boost airlines because they have a lot of debt in foreign currency, and oil companies like PetroChina (857 in Hong Kong) and Sinopec (386) because they import large quantities of crude oil.  End

DAILY FIX —  A Shares’ Rise Rescues Hong Kong

Hong Kong Blue Chips: +13, +0.06%, to 21,940, 07-14-11, Hang Seng Index

Chinese Stocks in Hong Kong: +34, +0.3% to 12,327, 07-14-11, HSCE Index

Shanghai Stocks: +0.5%, 2,810, 07-14-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +0.7 to 434.2, 07-13-11, Bank of New York Mellon, ADR Index-China

Insight: Gains in the U.S. did not boost Hong Kong, which opened marginally higher. Blue chips then fell as much as 180 points before edging back into positive territory on the back of a rise in A shares on the Mainland. Chinese gold producers gained with the rise in gold prices: Lingbao Gold (3330) +6.2%. KGI Research

Quotable: “(T)he selling pressure was quite high (Monday and Tuesday) and market needed time to absorb the profit-taking sell order. We expected HSI would range bounce from 21,800 to 22,150 in the near term.” COre Pacific Yamaichi. 7-14-2011

Chinese Company to Watch: “I.T Limited (999), a leading retailer of fashion wears and accessories in Hong Kong and Mainland China, registered strong earnings growth of 48% yoy … for the year ended 28 February 2011. EPS grew 45% yoy….” Guoco Capital. 7-14-2011

Brokerages and analysts cited have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to

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