Inflation inflection

- Inflation trending up in China "The consumer price index (CPI) in China has been positive from Nov 2009, and has been trending up since. More recently, in July 2010 it was 3.3%, accelerating from 2.9% in June. We believe the recent surge in agricultural products and pig prices following the most severe flooding in China in the past decade may have pushed up the index. China previously had experienced high inflation in 2003-04 and 2007-08. The July 2010 CPI of 3.3% is still lower compared to previous peak CPI of 5.3% in April 2004 and 8.7% in Feb 2008. Our economic team forecasts China CPI to hit 3.5% in 3Q10, before slowing down to 3.2% in 4Q10. After that, Nomura forecasts CPI will pick up again from 1Q11, and will reach 3.8% by 4Q11."
- Inflation impacts consumers, producers and investors "The increased goods and services (food, pork, shoes, wages, etc) prices and decrease in cash value during inflation could result in higher holding cost for cash, and hence investors’ higher required return for their investments. Sales of goods that are able to preserve value (property, luxury items, wine, money market products, arts etc) tend to be strong, while retail sales of those whose value depreciates quickly (automobile, time deposit, mobile handset, PC, etc) may slow down."
- Policy reaction could have further market consequences "Prolonged high inflation will also likely cause policy makers to eventually react with tightening measures, causing equity market to perform negatively. China’s equity market plunged 75% over one and half years ending mid-1994 as the CPI surged to 24% (July 2009) from 11% at beginning of 1993. Despite high July CPI data, according to our Economic team, other July economic numbers released show the economy is slowing, but entering a stage of more sustainable and solid expansion. We believe as a result policy outlook in the near term will be mixed."

Nomura Strategy China 20100813

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