China Inflation is a Red Flag for ETFs

The deflationary impact of China on world markets is now turning into an inflationary red flag with important implications for China ETFs like iShares MSCI China (FXI).

Wages have started rising rapidly, energy prices remain high and food demand is exploding. Fresh evidence emerged in February as China’s National Bureau of Statistics said that inflation jumped to 7.1% percent from 6.5% in December. The Chinese stock market today took a hard fall today of -4.11% and on concern about U.S. demand after last Friday's weak US payroll report.

The Chinese stock market is also nervous about tomorrow's Chinese February CPI report which is expected to rise to a 11-year high of +7.9% from +7.1% in January and possibly spark another rate hike from the Chinese central bank. China’s consumer price index reached an 11-year high in January of 7.1% year-on-year

Rising inflation is forcing Chinese manufacturers to try to defend their slim operating margins by raising prices for exported components which, in turn, will compress multinational margins since it is difficult in a weak economy to pass on higher input prices (such as energy, components and raw materials) to consumers in markets like Japan, America and Europe.