China's Inflation Hits 11-Year High, Trade Surplus Widens

The latest data from China show November inflation reached an 11-year high at 6.9% (vs. 6.5% in Oct.), topping expectations of a rise of around 6.5%, as the nation's trade surplus from the same month climbed 14.6% to $26.3 billion -- now at a record $238B year-to-date. Food prices, which make up a third of CPI, continued a shortage-induced double-digit rise, climbing 18.2%. Further monetary tightening is all but guaranteed. Societe Generale's Hong Kong-based chief Asia economist says, "Liquidity from the trade surplus will continue to cause the economy to overheat in 2008." He predicts the "yuan will need to appreciate at a firmer pace, interest rates will rise and the reserve requirement for banks will go to 17% by the end of next year." The yuan rose intra-day to its highest level against the dollar (7.3770), since the end of its peg in July 2005. Meanwhile, China's Nov. trade surplus was its third-highest ever and its surplus with the U.S. increased $15.2B to $149.2B YTD. Exports climbed 22.8% and imports rose 25.3%. Separately, in Japan consumer confidence fell to a four-year low in November, with subindices surveying overall livelihood and willingness to buy durable goods falling to 6-year and decade lows, respectively.

Stocks closed higher across Asia including in Shanghai and Tokyo (see market summary). ETFs FXI, GXC and PGJ, as well as closed-end fund CAF, all offer U.S. investors broad exposure to Chinese equities. ETF EWJ and closed-end fund JOF are the most actively traded Japan funds, offering large-cap exposure in the former and featuring smaller-caps in the latter.

Sources: Bloomberg, Reuters, MarketWatch
Additional Reading: Talk of China 'Overheating' Continues to Be Wrong • China Triples Foreign Investment Cap; Bumps Up Reserve Ratio • Chinese Investors' Casino Mentality May Make Sense Given the Alternatives

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