China Inflation Jump Won’t Derail Stocks Rally, BofA Says
July 11, 2011, 3:50 AM EDTBy Bloomberg News
(Adds outlook for food prices in 10th paragraph.)
July 11 (Bloomberg) -- The jump in Chinese inflation last month is unlikely to derail a three-week rally in the nation’s equities, according to Shenyin & Wanguo Securities Co. and Bank of America-Merrill Lynch.
China’s consumer prices climbed to a three-year high of 6.4 percent in June, the statistics bureau said on July 9. That exceeded the previous month’s 5.5 percent and the government’s full-year target of 4 percent.
The benchmark Shanghai Composite Index advanced for a third week last week on speculation the government will refrain from further monetary tightening as the economy slows after boosting interest rates for the third time this year. The measure rose 0.2 percent to 2,802.69 by the 3 p.m. close today, compared with the MSCI Asia Pacific Index’s 1.2 percent drop. China’s gauges were the only key indexes to post advances in Asia today.
“The June inflation number had already been widely expected by the market and its impact will be minor,” Ling Peng, chief strategist at Shenyin & Wanguo, said in an interview from Shanghai. “Inflation may have already peaked.”
Shenyin & Wanguo, ranked China’s most influential research provider by New Fortune magazine last year, predicted China’s inflation rate would rise to 6.5 percent in June, according to a June 30 report. That’s more than the 6.2 percent estimate in a Bloomberg News survey of 19 economists.
China’s central bank governor Zhou Xiaochuan said July 8 the nation can’t adopt inflation as its only monetary policy target. The People’s Bank of China needs to consider other goals including economic growth, employment, the exchange rate and balance of payments, Zhou said at a forum in Beijing.
‘Fall Steadily’
Signs that the economy is cooling include a slide in the Purchasing Managers’ Index, a gauge of manufacturing, to a 28- month low in June, the China Federation of Logistics and Purchasing reported on July 1.
“The higher-than-expected CPI inflation in June could be market-positive,” said Ting Lu, Hong Kong-based economist at Bank of America-Merrill Lynch. “The higher the reading in June, the better chance for it to peak.”
Lu predicts China’s inflation will “fall steadily” after June to around 4 percent to 4.5 percent by the end of the year and stay at that level for a “couple of years.”
China’s pork prices may fall beginning in July and August as more maturing pigs boost supply, Xinhua News Agency reported today, citing Wang Zhicai, director of animal husbandry at the Ministry of Agriculture. Consumer prices in June were mostly pushed up by rising food and pork costs, which will become less of a problem in the second half of the year, Caijing reported July 9, citing Li Daokui, an adviser to the central bank.
Further Gains
The Shanghai Composite has rebounded 6.9 percent since June 20. Gains accelerated after Premier Wen Jiabao said in an opinion piece in the Financial Times newspaper on June 24 that efforts to control inflation have worked.
China’s stocks may be poised for further advances, said Shen Yang, a Shanghai-based fund manager at Lombarda China Fund Management Co., a venture with Italy’s fourth-biggest bank.
“Policy tightening may ease with inflation peaking soon, and economic growth may pick up again,” he said. “That’s positive for the stock market.”
--Zhang Shidong, Allen Wan. With assistance from Sophie Leung. Editors: Allen Wan, Darren Boey
To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net
