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28 September 2011

Consumer prices in China rose 6.2% year-on-year in August after hitting a new three year high in July. As in previous months, food prices were the driving force behind the increased cost of living. However, there are indications that inflation in China will peak soon. Fears that the global economy could slip into a recession are growing worldwide, with concerns persisting about the debt crisis in Europe and the US. In a fundamental sense, China, with its fast growing economy should be relatively unaffected by all this. Instead, the Chinese economy faces a different concern �V inflation. Guido Stiel, co-manager of the Allianz RCM BRIC Stars fund, comments: ��The Chinese government has given the battle against inflation top priority, not least out of fear of possible social tensions in the country. With inflation at 6.2% year-on-year in August and at 6.5% year-on-year in July, this is significantly above the 4% tolerance limit set by the government. We have seen a sharp rise in the cost of living in recent months primarily due to food prices, which are responsible for about 70% of the overall increase. Food prices most recently rose 13.4% over the previous year and meat prices were up by roughly 30% in August 2011 year-on-year. These price increases hit the Chinese squarely in the wallet, as more and more are consuming foods higher in protein, such as meat. Inflation could peak in the coming months: ��The growth rate of the M2 money supply* has fallen by half over the last two years, from nearly 30% to less than 15% versus the prior year. This is an indication that the Chinese central bank��s more restrictive monetary policy is having an effect. The recent drop in commodity prices, particularly the sharp decline in the oil price in the wake of a global economic slowdown, is expected to help reduce imported inflation. China could be a particular beneficiary of this trend, as the country is responsible for a large share of the global consumption of oil as well as many other industrial commodities. In addition, industrial production weakened somewhat of late, a further indication that the economy is experiencing a slight cooling. ��In order to shift China��s economic growth from a purely export-orientated basis to a sustainable, consumer-driven growth, the central bank is permitting the currency to appreciate slightly. The central bank is thus likely to steadily increase the range in which the Renminbi is traded. Combined with the country��s economic growth, in the long term this could lead to steady appreciation and the free convertibility of the Renminbi, which would aid China in its campaign against the influx of speculative money and inflation. Since the beginning of the year, the Chinese currency has appreciated by 3% against the US Dollar and it fell below the 6.4 per US Dollar mark for the first time in 17 years. The impact of inflation peaking ��Even strong growth in inflation should not be viewed as critical for the country because the Chinese economy is likely to continue growth at a high rate. If inflation in China peaking soon, the result could be more than just a positive impact on the country��s economy through a boost to consumer sentiment �V it could also herald the end of the cycle of interest rate increases. China��s monetary policy could then become more accommodating and take account of the global economic downturn. This would in turn have a positive impact on the Chinese equity market.�� Fact file: Allianz RCM BRIC Stars Fund Investment remit The Fund��s aim is to achieve long-term capital growth by investing mainly in the equity markets of Brazil, Russia, India and China. Up to one third of the Fund��s assets may be invested outside the BRIC countries including developed countries and/or other emerging markets. �XLaunch date: 24th February 2006 �XManaged by: Michael Konstantinov and Guido Stiel, RCM (since launch) �XBenchmark: 25% MSCI Brazil, 25% MSCI Russia, 25% MSCI India, 25% MSCI China, Total return net rebased annually �XStructure: UK-registered OEIC *Cash in circulation plus demand, time and savings deposits

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