China: Claims It Is Overheating Grossly Exaggerated

Includes: FXI, PGJ
by: Enzio von Pfeil

The popular press makes the allegation that China is 'overheating' vociferously - but it is true? How do you make money of this intellectual arbitrage?


• That is an over-used word.
• How can China be overheating if it is exporting deflation - the very thing that America's vote-hungry politicians are beating up on her for?
• Two components of China's inflation have been racing in opposite directions:

o Food inflation has swollen from deflation to strong inflation, while
o non food inflation has skidded from strong inflation into deflation: by last month, non-food Deflation was an annual 4%!

• Besides, with industrial production barreling along, surely the supply of goods is increased - so how can non-food prices rise if the supp

Government Policy

• You may find the Central Bank trying to reign in money supply growth. It looks like an interest rate increase is on the cards this week end.

o It also could increase the deposit rates at banks in order to make interest-bearing deposits more attractive - i.e. as an alternative to the stock market

• Perhaps more capital outflows will be allowed?
• But, at the end of the day: the far more important domestic issue is the 17th Party Congress this Autumn: growth must continue in order to quell social unrest

How to Make Money Off This Idea

1. Keep buying into market weakness.
2. In particular, focus on agricultural shares: with food price inflation rocketing, so are margins.
3. Also, banks are worth examining in that an excess demand for goods implies ever stronger lending, so up go bank profits.
4. Finally, stick with infrastructure plays: in all of this "overheating" talk someone forgot to remember next year's Olympics...