China Stocks May Wait Months for Good Inflation News

Gene Linn  |

Tuesday was a big day for China’s inflation and economic news. But Wednesday was much of the same old thing for China stocks. Genuinely good news that pushes the market up might be months away.

Eagerly awaited Chinese consumer price inflation rose about as much as expected. And economic growth figures, combined with statistics from Monday, show a moderate slow-down. Tuesday afternoon China tightened monetary policy by raising banks’ required reserve ratio for the ninth time since last November.

After all that commotion, on Wednesday China stocks continued their weeks’ long slide in slow turnover. Hong Kong blue chips and the Hong Kong index of Chinese companies both sank 0.7% despite a big rally overnight on Wall Street.

There will be no relief this month, many analysts say, as inflation peaks at about 6% in June and China takes further steps to tighten the economy.

But there is a feeling among some that soon after June investors will anticipate falling inflation by starting a rally. If investors wait for the first concrete sign of falling inflation, that could be in August with the expected release of July’s lower consumer price index number.

However, one of the main reasons inflation spooks the stock market is that it signals tightening of the economy. And even a drop in inflation may not put a quick end to China’s interest rate hikes and increases in banks’ reserve ratios.

One reason Chinese inflation will likely fall in the second half of this year is that it will be measured from a higher base in 2010, Haitong Securities pointed out in a research piece Wednesday. “While the CPI may show improvement statistically, consumers would not really feel an easing of price pressure,” Haitong stated.

The brokerage doesn’t bring out this point explicitly, but discontent among the masses of consumers is a major political concern for China’s leaders. They will probably try to reduce inflation to levels that ordinary citizens can live with. That means China stocks investors will have to endure further economic tightening.

Haitong Securities stated: “Judging from the present economic situation and the latest statistical data, the government will continue to tighten money supply and hike benchmark interest rates, as well as issue additional RRR measures in the coming months. We expect the government to relax its policy of monetary control only when the CPI dips below 4%.”  End


Hong Kong Blue Chips: -152, -0.7%, to 22,344, 06-15-11, Hang Seng Index

Chinese Stocks in Hong Kong: -91, -0.7% to 12,344, 06-15-11, HSCE Index

Shanghai Stocks: -0.9%, 2,705, 06-15-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -0.4 to 416.7, 06-15-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong stocks fell as China's increase in banks' reserve ratios counteracted big gains on Wall Street. KGI Research

Quotable: "Judging from the present economic situation and the latest statistical data, the government will continue to tighten money supply and hike benchmark interest rates, as well as issue additional RRR measures in the coming months." Haitong Securities. 6-15-11

Chinese Company to Watch: "PCD STORES (00331). High end department store in the mainland which will benefit from consumption increase. Prospective P/E of 15x which is below its peers." KGI Asia. 6-15-2011

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

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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