Evidently Everybody Fears China Inflation Except For China Stock Market

Last night, China reported inflation numbers for March that were slightly hotter then expected at 5.4% and at a 32 month high. Naturally the market tanked. Or wait, the Shanghai Stock Market was up slightly yesterday after initially falling. On top that, the market is up at breakout levels after having recently broken above a double top at 3,000.

So why didn't the market tank overnight? Partially because China has been busy fighting inflation by raising interest rates and reserve requirements for banks. Mainly though because most analysts view inflation closer to peaking. The monetary restrictions combined with a weak market in 2010 leaves China an ideal place to invest in 2011.

One of the biggest issues with inflation hawks is that they tend to not let interest rate/reserve changes work their way through the economy. It takes up to 9 months for rate increases to work through the system yet hawks will jump all over this hot inflation number as a reason for more immediate moves. If we've learned anything from the boom, bust cycle in the US during the 2000s is that drastic changes in interest rates have little immediate impact, but eventually it contributes to a dramatic change in economic course.

The US is now benefitting from extremely low rates, but watch out a few years from now after the FED raises rates by 300-400 basis points if not more. Eventually they'll raise rates one too many times and the economy will come to a halt.

  • Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.
  • Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.


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