Despite upbeat news on consumer inflation, investor wariness over continued price pressure helps drive the Shanghai index down to a 52-week low
With the Shanghai stock index tumbling 60% since last October, Chinese investors are desperate to find a silver lining. The U.S. economic slump, combined with Chinese government measures aimed at popping an equities bubble and containing runaway growth, have taken their toll on many of China's most prominent blue chips. For instance, the share price of Citic Securities, the Beijing-based brokerage, has dropped 60% this year. Also trading at 52-week lows are China Merchants Bank, down 58%, and Baoshan Iron & Steel, off 59%.
On Aug. 12, even as the Shanghai market tumbled to another 52-week low, investors got what might turn out to be a much-needed dose of good news. The latest inflation numbers show Chinese consumer prices rose 6.3% last month, the third straight month with inflation slowing. The July result was also the lowest monthly inflation figure in almost a year. Stephen Green, an economist in Shanghai with Standard Chartered, notes in an e-mail that an improvement in the inflation picture "was driven by a sharp year-on-year deceleration in food prices." Food inflation early this year was approaching 25%; in July, it was a much more tolerable 14.4%.
Beijing's progress in curbing inflation should give it more flexibility as it tries to keep the economy from suffering the strain of the global slump and avoid a post-Olympics hangover (BusinessWeek.com, 8/7/08), say some China-watchers. Already, government measures to help exporters have led to some improvement in the country's trade figures: Exports grew 27% last month, the government reported on Aug. 10, after a slump in June prompted Beijing to offer some tax relief to garment exporters.
Investors Remain Cautious
Falling inflation "will both reduce investor fears of the possibility of policy missteps, and increase the chances of a shift to targeted pro-growth policies in the second half of the year," JPMorgan Chase's (JPM) chairman of China equities, Jing Ulrich, wrote in an e-mail after the release of the figures. "Policies such as a loosening of restrictions on bank lending, support for the export sector, and a fiscal boost to infrastructure spending could start to positively impact growth going forward," she wrote. "The introduction of targeted pro-growth policies would create a more supportive environment for corporates and could underpin a recovery of investor confidence."
The good news on consumer prices comes just a day after gloomy figures on producer price inflation. In July, PPI rose 10%, the most in a dozen years. That figure helped send shares in Shanghai plunging 5.2% on Aug. 11. And the surprisingly high PPI number continued to weigh on trading. Despite Aug. 12's upbeat CPI news, investors were in no mood to put aside their caution, pushing the Shanghai index down to a 52-week low. That means the index has lost 53% since the start of the year.
Signs of Strain
There's good reason for continued investor wariness. Food prices are calming down, writes Standard Chartered's Green, but nonfood inflation is rising, largely because of increased fuel costs, which have jumped 22% year-on-year. "Given the fact that coal prices have doubled in the previous year, and households were underpaying by at least some 30% for their electricity even before that, core CPI pressure in the second half of the year remain[s] as energy begins to be priced more at market levels," he writes. "We continue to look for 6.5% CPI on average this year, 5% for next."
The inflation figures come at a time when the Chinese economy is showing other signs of strain. Recent statistics on manufacturing show an export slowdown is affecting Chinese factories: Last month the government's Purchasing Managers Index fell to 48.4. It was the first time since the government started the PMI three years ago that the number has dropped below 50.
The pressure on manufacturers is contributing to jitters in China's equity markets, and the government may take steps to shore up investor confidence in the Shanghai and Shenzhen stock markets. According to JPMorgan's Ulrich, "widely discussed policy measures" include reform of the 0.1% stamp duty, required for all transactions, and the establishment of a "stabilization fund" to prop up local shares.
Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .
On Aug. 12, even as the Shanghai market tumbled to another 52-week low, investors got what might turn out to be a much-needed dose of good news. The latest inflation numbers show Chinese consumer prices rose 6.3% last month, the third straight month with inflation slowing. The July result was also the lowest monthly inflation figure in almost a year. Stephen Green, an economist in Shanghai with Standard Chartered, notes in an e-mail that an improvement in the inflation picture "was driven by a sharp year-on-year deceleration in food prices." Food inflation early this year was approaching 25%; in July, it was a much more tolerable 14.4%.
Beijing's progress in curbing inflation should give it more flexibility as it tries to keep the economy from suffering the strain of the global slump and avoid a post-Olympics hangover (BusinessWeek.com, 8/7/08), say some China-watchers. Already, government measures to help exporters have led to some improvement in the country's trade figures: Exports grew 27% last month, the government reported on Aug. 10, after a slump in June prompted Beijing to offer some tax relief to garment exporters.
Investors Remain Cautious
Falling inflation "will both reduce investor fears of the possibility of policy missteps, and increase the chances of a shift to targeted pro-growth policies in the second half of the year," JPMorgan Chase's (JPM) chairman of China equities, Jing Ulrich, wrote in an e-mail after the release of the figures. "Policies such as a loosening of restrictions on bank lending, support for the export sector, and a fiscal boost to infrastructure spending could start to positively impact growth going forward," she wrote. "The introduction of targeted pro-growth policies would create a more supportive environment for corporates and could underpin a recovery of investor confidence."
The good news on consumer prices comes just a day after gloomy figures on producer price inflation. In July, PPI rose 10%, the most in a dozen years. That figure helped send shares in Shanghai plunging 5.2% on Aug. 11. And the surprisingly high PPI number continued to weigh on trading. Despite Aug. 12's upbeat CPI news, investors were in no mood to put aside their caution, pushing the Shanghai index down to a 52-week low. That means the index has lost 53% since the start of the year.
Signs of Strain
There's good reason for continued investor wariness. Food prices are calming down, writes Standard Chartered's Green, but nonfood inflation is rising, largely because of increased fuel costs, which have jumped 22% year-on-year. "Given the fact that coal prices have doubled in the previous year, and households were underpaying by at least some 30% for their electricity even before that, core CPI pressure in the second half of the year remain[s] as energy begins to be priced more at market levels," he writes. "We continue to look for 6.5% CPI on average this year, 5% for next."
The inflation figures come at a time when the Chinese economy is showing other signs of strain. Recent statistics on manufacturing show an export slowdown is affecting Chinese factories: Last month the government's Purchasing Managers Index fell to 48.4. It was the first time since the government started the PMI three years ago that the number has dropped below 50.
The pressure on manufacturers is contributing to jitters in China's equity markets, and the government may take steps to shore up investor confidence in the Shanghai and Shenzhen stock markets. According to JPMorgan's Ulrich, "widely discussed policy measures" include reform of the 0.1% stamp duty, required for all transactions, and the establishment of a "stabilization fund" to prop up local shares.
Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .
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