EM News: Chinas Inflation Near Peak, Investors Eye Earnings Growth


By Gordon Platt

China’s monetary policy-tightening is advanced relative to other economies, and domestic inflation, which is centered in food prices, may be near a peak, analysts say.

“As inflationary pressures gradually ease and markets become less fixated on policy moves, we believe earnings growth will once again become the principal driver of Chinese equities,” says Agnes Deng, head of Hong Kong China equities at Baring Asset Management (Asia) and portfolio manager of the Greater China Fund.

In this environment, companies with good growth prospects and strong balance sheets should benefit from rising consumer and infrastructure spending—rewarding investors over the remainder of 2011, Deng says.

Nonfood inflation is relatively benign, and prices should begin to stabilize with the arrival of the next harvest, she notes. “Our core view is that China is a dynamic economy experiencing rapid growth,” Deng says. “We are encouraged that retail sales and manufacturing output remain strong, and we expect growth to continue at a relatively high level.”

China’s trade growth slowed modestly in the first half of 2011, reflecting external headwinds, rising commodity prices and domestic stock reductions, according to a report by Bank of America Merrill Lynch. Fast-rising import prices were one of the main reasons behind the trade deficit in the first quarter of this year, which was the first in seven years. With the soft patch in developed economies, China’s trade growth could slow further in the second half, it adds.