Would More Policies to Curb Inflation in China Hurt the Equity Market?
Inflation as measured by the Consumer Price Index (or CPI) in China has rebounded to a 10-year high of 6.5% year-on-year in October 2007, after dropping slightly to 6.2% year-on-year in September 2007. Excluding the food component, the core inflation was relatively flat at 1.1% year-on-year in September and October 2007. Core inflation levels in China are still low in comparison to international standards. So far, the Chinese government has been vigilant to curb broad inflationary pressures through the raising of benchmark rates and the increasing of reserve requirements. Instead of simply hiking rates to counter inflation, we think that the Chinese government may have to take on a more active and concentrated approach to increase food supplies to alleviate fears that food prices would continue to soar. Generally, we think that measures that target food inflation are unlikely to have negative effects on the broader equity market. And in fact, a more contained inflation figure would giv
