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China Must Think It Has Inflation Cooked
08/05/2011 4:25 pm EST
I’m getting a ton of e-mail from readers asking whether to buy, when to buy, and what to buy. Being down 500 points on the Dow Jones Industrial Average does raise those kinds of questions.
I do have one concrete suggestion in answer to all that—and it’s based on a bit of good news yesterday out of China.
The government in Beijing has lifted its ban on price increases in cooking oil.
Don’t laugh. This is huge. And I think it’s a signal that you can start to ease your way into (or deeper into) Chinese stocks.
Here’s my thinking…
China’s leadership is incredibly sensitive to the political effects of inflation. The Communist Party’s interpretation of its victory over the Kuomintang attributes a big part of the drop in support for the Kuomintang to that government’s inability to control inflation. The Communist Party’s interpretation of the unrest that led to the Tiananmen Square massacre gives inflation a central role too.
So it shouldn’t be surprising that besides fighting inflation with all the tools of developed-economy central banks—raising benchmark interest rates and increasing reserve requirements, for example—China’s leaders have aggressively sought to make sure that the average Chinese family didn’t feel the full force of inflation.
Hence, efforts like government stores selling key foodstuffs at below market prices. And the release of pork from the country’s strategic pork reserve.
And a ban on increases in the price of cooking oil. Prices for cooking oil have been unofficially frozen since November.
But then this week, the biggest trading company in China’s edible oil market, Wilmar International, received permission—after submitting what the company calls an “informal request”—to raise cooking oil prices by an average of 5%.
That, to my mind, says that China’s leaders are feeling confident that they finally have inflation, which ran at a 6.4% annual rate in June, under control. That conforms with projections from economists that inflation is likely to peak this summer at 6.4%.
The government releases inflation figures for July next week, and there’s a good chance the inflation rate will hold steady at 6.4%.
If it does, it wouldn’t mean an immediate end to interest-rate increases from the People’s Bank or other efforts to fight inflation. At 6.4%, inflation needs to come down two percentage points or more to meet the government’s target. But this would be the beginning of the inflation end game.
And it would produce a huge sigh of relief in China’s stock markets.
Buying here would make you early. But I don’t think you’d be “too early.” I’d buy slowly and carefully, but I think you can buy.
A good place to start is with Internet sector leaders, such as Baidu (BIDU) and Tencent Holdings (700.HK). I’d also take a look at financials such as Ping An (PNGAY or 2318.HK) and China Life (LFC or 2628.HK).
Full disclosure: I don’t own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own shares of any stock mentioned in this post. The fund did own shares of Baidu, Ping An, and Tencent Holdings as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio here
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