By Rupert Watson, head of Asset Allocation, Skandia Investment Group (SIG)
With all the market’s attention focused on Greece one very positive development has perhaps not received the attention it deserves. In an article in the Financial Times (24.6.11), Chinese premier Wen Jiabao explained how China was winning the fight against inflation. He wrote ‘There is concern as to whether China can rein in inflation and sustain its rapid development. My answer is an emphatic yes…China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily.’
His comments suggest that China is near the end of its monetary tightening campaign. This should boost Chinese equities which have underperformed over the last year on fears that tighter monetary policy will cause a sharp economic slowdown. Although there may be one or two more elevated inflation readings we expect Chinese inflation to fall in the second half of the year. Whilst Chinese manufacturing may weaken further in the short run, we expect China to avoid a hard landing and pick up later in the year. Falling inflation and strong economic growth could cause Chinese equities to outperform other markets in the second half of the year, perhaps substantially.