My worries about inflation are deepening. New figures from the National Bureau of Statistics have outlined how “unusual” (as Andrew Batson of the Wall Street Journal puts it) the composition of China’s economic growth was last year.
In the aftermath of the financial crisis, China’s exports tumbled heavily, knocking 3.9 percentage points off overall economic activity.
However, since the final GDP figure was 8.7%, that means the domestic part of the Chinese economy expanded at 12.6%, its fastest rate in 16 years. Back in 1993, of course, China’s economy was much smaller and more volatile.
As my father-in-law pointed out to me the other day, there is “no way” that a country can grow at over 10% a year without some serious inflation going on.
Last year, there was allegedly overall deflation, but I suspect some gerrymandering of the figures. Certainly the general public is highly suspicious when they see the price of everything they buy rising quickly.
Each week, economists are marking up their inflation projections. Morgan Stanley now reckons that it will be 3.2% this year, which is a far too cautious assessment in my opinion (although in line with my general theory that you should accept the predictions that the government makes, since the government will also make sure they come true).
According to the investment bank, higher inflation will lead to tighter monetary policy and then to the appreciation of the yuan.
How to take advantage? They suggest buying oil stocks, such as CNOOC, to take advantage of higher oil prices. The telecom, media and internet sectors also perform well, since they have no energy costs and are under no margin pressures, but benefit from stronger pricing.
To take advantage of higher interest rates, buy insurance firms rather than banks, since insurers have short term fixed-income assets duration and can quickly reinvest into higher yield products. And finally, buy airline stock to take advantage of a stronger renminbi. Airlines have heavy costs in foreign currencies (such as fuel) and will have these reduced if the yuan strengthens.
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