Thursday 12 June 2008


CHINA IS NOWHERE CLOSE TO VICTORY ON INFLATION

Andy Mukherjee

Bloomberg, June 12, 2008

The 8.1 percent, one-day slump in China's key stock index this week shows investors are shifting their gaze away from food prices -- which are stabilizing -- to other sources of inflation simmering below the surface.

The biggest drop in the equity market in 16 months came just as information leaked that a government report to be released today will show a bigger slowdown in the pace of consumer-price gains than expected by all but three of the 19 economists surveyed by Bloomberg News.

An annual inflation rate of 7.7 percent in May, 100 basis points lower than the 12-year high recorded in February, is “certainly good news,” says Michael Pettis, a Peking University finance professor. Yet, “it shouldn't give too much comfort to the pro-growth camp in China,” Pettis says. The good news on the inflation front was drowned by the hawkish monetary tightening that was announced over the weekend when the People's Bank of China ordered banks to set aside a further 1 percent of their deposits as reserves, seeking to limit a liquidity buildup, one of the biggest sources of future inflation in the world's fourth-largest economy.

“The liquidity threat remains copious,” says Dwyfor Evans, a macro strategist at State Street Global Markets in Hong Kong.

According to media reports, the People's Bank of China added $75 billion to its foreign-exchange reserves in April, creating local money in the process. Some of those funds may get exported out of the economy by China Investment Corp., the sovereign wealth fund.

(...) [artículo aquí]

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