China’s Inflation Is No Big Deal

02/17/2010 12:01 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

There’s been a lot of concern about inflation and central bank tightening in mainland China, but that shouldn’t deter investors from seeking opportunities, writes Yiannis G. Mostrous in The Silk Road Investor.

Our portfolio holdings have incurred some damage in the recent correction; insurance, real estate, and technology—three of our biggest allocations—usually take the biggest hit when liquidity decreases.

That being said, investors should stay the course; this correction is a profit-taking exercise catalyzed by nervousness about central banks reining in their formerly accommodative policies.

Though legitimate, these concerns may prove premature: Generally speaking, Asian markets have responded favorably during the early stages of a tightening cycle.

What has been important for China’s inflation outlook, even during the food scares of 2004 and 2007, was the increase in wages. During the latter incident, wages increased roughly 12%—about the current rate—while in 2007 wages increased at a rate of 20%.

Even in an industry-heavy economy like China, inflationary pressures remain contained. This will remain the case for some time, as the economy is still in the process of absorbing around 15 million so-called migrant workers, and six million graduates are expected to enter the job market over the next two years. The most likely outcome will be inflation of 3% to 4%—not very threatening for an economy that is trying to limit expansion to 10%.

Hong Kong-based Sun Hung Kai Properties (Hong Kong: 0016, OTC: SUHJY) sells and rents properties in Hong Kong and China and boasts the largest Hong Kong property portfolio among listed companies in the Special Administrative Region.

The firm has been expanding on the mainland and recently commenced construction on a new project in the Jiangsu province, which is centrally located on China’s east coast. The province is rapidly becoming one of the new high-tech regions in the country, and income levels are on the rise. The project calls for new office buildings, a shopping center, and luxury apartments that will span over 22,331 square meters. Buy Sun Hung Kai Properties under HKD130. [Shares closed at HKD$103.10 in Hong Kong Wednesday—Editor]

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