Inflation and Higher Rates

The economy in China continues to sizzle. The trend of high GDP growth has been quite impressive. In the second quarter, the country’s economy accelerated at a staggering clip of 11.3%. It was the highest reading in a decade and concerns are rising about inflation.

 The reality is the astounding growth for China is seen as successful by the government as it helps to build the country and bring it in line with the western countries.

 Yet, the growth could also prove to be a double-edged sword because of its impact on inflation, which while still benign at 1.30% in the January to June period, needs to be watched. The Chinese monetary authorities will need to consider increasing interest rates should inflation rise. China already increased interest rates in the first quarter in order to try to control the growth, but as we saw, the economy continues to lunge forward and this is a concern.

 As we saw with the current correction in Chinese wireless stocks, which had been flying high, fortunes in China can change rapidly and catch investors easily off guard.

 If you invest in China, you need to be extra cautious. The country is booming on all fronts. Demand for products and services continues to be there, but if interest rates continue to rise, this can lead to a decline in spending and could negatively impact the extraordinary construction sector. If the construction sector falls out, we could see a mad selling frenzy in real estate.

 The Chinese government is saying things are all right, but there are clearly issues that must be addressed. Watch for inflation and potential higher interest rates around the corner. There is also lots of financial risk in the country with the banking system.

 I’m not saying it is a bubble waiting to burst, but if Chinese authorities are not careful, it could happen and it would impact investments in Chinese stocks. Watch this.