China's August CPI Hits Decade High, Surplus Widens; Stocks Drop

A jump in inflation to its highest level in more than a decade and an ever-widening trade surplus pushed Chinese stocks broadly lower Tuesday, on concerns the People's Bank of China will be forced to further tighten monetary policy. China's August CPI reading of +6.5% exceeded economists' average estimate of 6.0% and was once again food-driven with prices up 18.2% y/y and 2.8% m/m (due primarily to pork shortages from a disease outbreak and vegetable shortages from flooding). Year-to-date CPI (through August) of +3.9% is nearly a full percentage point above the central bank's target. Analysts at Goldman Sachs told clients they "expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest-rate hikes to the benchmark lending and deposit rates by the end of this year." China's August trade surplus climbed 33% to $24.97 billion, as exports increased 22.7% to $111.36B and imports expanded 20.1% to $86.38B, but both were sequential declines of 11.5% and 6.8%, respectively. The Shanghai Composite dropped 4.5% to 5,113.97. A-shares fell 4.5% in Shanghai and 5.3% in Shenzhen, while B-shares were off 3.4% in the former and 3.6% in the latter. H-shares fared better, losing only 0.5%. The yuan was mostly unchanged from Monday's record close (post July 2005 peg removal) of 7.5214 against the US dollar.

Sources: Bloomberg, Wall Street Journal
Commentary: China Raises Its Reserve Requirements — So What? • People's Bank of China Hikes Again on Inflation Concerns • The 'Made in China' Sale is Over: Ways To Profit
Stocks/ETFs to watch: CAF, FXI, PGJ

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