China’s Inflation Worries Build

James | Jul 28, 2009 | Comments 7

Is China’s market still rallying or is it coming to a halt? Does anyone really want to be against China and miss out on the gains. I have been part of the rally taking gains from YGE and PTR yet can we continue to expect it to rise at such a rate? If you are invested in Chinese Stock consider taking profits especially from YGE which I believe to have peaked at $16 and this is why. In 2009, the Chinese Stock Market is up 85% as a result of help from the banks loose lending and favorable foreign speculators. This has given the economy an enormous amount of cash and skyrocketed stocks over economic reality. Can it continue to support this? We have seen recent attempts by the China Securities Regulatory Commission and other government regulators to coo down the trading by tightening regulation yet do they want to disrupt China’s economic recovery? Any moves right now won’t stop China, as the Bulls will run wild. However come fourth quarter could the Chinese government have to shift its monetary policy to stop rising inflation? If so that could send a downfall in their economy and crash the markets. Many say any form of regulation such as raising requirements or interest rates is unlikely to happen because they fear it could hurt the recovery however what if inflation becomes a raging problem? How do they react? We will know when any form of monetary policy change is coming as in past experience usually the stock market reacts before the policy even has been enforced. Analysts expect that if the government were to step in, it could sent the Shanghai Composite Index down as much as 20%. It’s tough how to read this situation. Some are celebrating the recovery and the 8% growth rate. Others think quite the opposite as unregulated credit expansion contains the seeds of future financial problems. Should this pace of credit expansion continue for the rest of the year, China may be faced with a difficult road ahead. The economy won’t be the problem, as most of the debt is owed to investors and debtors. On the contrary, if inflation were to spike next year, the central government would have to choose between shutting off the credit line, which will cause and showcase a massive nonperforming loan problem or they could have an enormous inflation problem. China is in need for a leader, someone to step up and handle this growing problem. To me the danger of this situation is China could potentially create another stock bubble similar to 2006 and 2007. However during those times China’s growth in its economy was peaking and corporate earnings were at an all-time high. This time round the economy is just getting the wheels churning again and they expect another downturn and overall loss in corporate earnings for 2009 so it could be a whole lot worse. Personally I still think China has some Bulls left in it and if a leader steps up this situation could be all handled without a downfall in the markets. Though it is still something to watch out for so you don’t become a causality in the downfall.