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04 May 2011

Following his recent trip to China, Guido Stiel, co-fund manager of Allianz RCM BRIC Stars fund, reflects on inflation in China: “The local companies that I met in China are not concerned about inflation, and we share their view. Inflation is mostly coming from food inflation which is still around 30%* of the whole inflation basket. Also, inflation rates are likely to come down next month. There are two reasons for this, weather conditions are easing and the base effect (CPI in May 2010 was already above 3%)”. “Wage increases in China are about 10-15%*, however if we look to the past, this is a relatively normal growth rate. Most of the companies that I visited apportion 10%* or less of their total cost to wages, therefore I am not concerned about wage increases. Growth in wage increases of about 10-15% each year is positive for consumption in China. “Although we expect inflation to come down, if the Chinese government were to decide to tackle inflation they would do it in the same way that they have done in the past. Recently they increased the reserve-rate requirements to absorb money from the system so that loan growth would not be as large as it was, especially after the crisis. They would also look to increase interest rates, however, they are still very cautious about this as raising interest rates would not have an effect on food inflation which stems from a bad harvest. “Finally, the Chinese government may tighten the property market by making it more difficult for speculators and investors to buy multiple flats. Further, talk of whether or not there is a so-called ‘property bubble’ is interesting. For a first-time buyer, a 40%* down payment is required, for a second property 60%* and 100%* for a third property. Speaking to the chief financial officer of Shui On Land, a high-end property developer, during my trip, he highlighted that normally a bubble coincides with huge indebtedness, which is not the case in China as large sums of money are required upfront.” *Source: RCM 14.04.2011 - Ends -

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