What goods will be most affected by rising inflation in China and Hong Kong? How will the consumer be affected? How should people manage this problem?

PUBLISHED : Monday, 04 July, 2011, 12:00am
UPDATED : Monday, 04 July, 2011, 12:00am


This week's question returns to the issue of inflation, which is holding sway over investments and costs of living. The question focuses on the impact of inflation on consumers.

Jing Ulrich (chairman of global markets, China JP Morgan) highlights the issue of food price inflation. She notes that the mainland's current round of inflation is different from the previous cycle in 2007-08. That cycle was characterised by prolonged real food shortages, arising in particular from an outbreak of blue ear disease that afflicted the nation's pork industry.

Broad money supply growth in the past 24 months has been 22.7 per cent, after a lending surge in 2009. The impact of that credit expansion has caused inflation to accelerate during this cycle.

'The current situation is exacerbated by a drought in central China, deemed the worst in 50 years, followed quickly by serious floods that brought damage to crops,' says Ulrich. 'While the extreme weather has mainly affected planting and the autumn harvest, it has helped stoke inflationary fears.'

She notes that food inflation has reached a high of 11.7 per cent and pork prices are again on the rise, at present 40 per cent above levels seen one year ago.

Although consumer price inflation has picked up to the highest level since July 2008, wage growth has risen even faster, says Ulrich. Minimum wages have risen by more than 20 per cent year on year in 2011, she adds.

The government has taken measures to hold steady the price of electricity and common necessities such as edible oil for households, and Ulrich expects inflation to moderate in the third quarter.

Donna Kwok (Greater China economist, HSBC) says Hong Kong's inflation is fanned by mainland food prices and the spillover from its residential property market.

'These two are the heavyweights of what drives inflation in Hong Kong - about 60 per cent between them,' says Kwok. 'A third factor, wage growth, has also been at play, and tends to receive a warmer welcome as it protects households' buying power.'

The new minimum wage seems to have boosted income levels without slowing job creation in May, says Kwok. Kwok flags the issue of the job market, which has been at or above full capacity for more than a year. Employers can't find enough people to produce enough goods and services to meet the demand, so prices get pushed up, says Kwok. Price rises in the mainland will affect food the most, while wage increases and the wealth effect created by resilient property prices are likely to hit the cost of consumer items and the service industry the most.

'Given such a wide breadth of exposure, there really is no definitive way of hedging yourself against the rising cost of living - except to shop around for the best deal,' says Kwok.

Betty Tsui (deputy CEO for UBS Wealth Management, Hong Kong) advises three basic strategies for rich clients in a high inflation environment. One strategy that will resonate among many in the city is to spend money and incur debt.

'Although it is impossible to buy everything today as prices are going to rise in the future, it makes sense during inflationary times to carry out any foreseeable purchases, particularly with appropriate debt financing,' says Tsui.

She then advises choosing a currency of which the purchasing power is not expected to decline. Tsui notes that some currencies appreciate during periods of high inflation and therefore offer protection.

Finally, she advises investing in asset classes that offset losses in purchasing power. Assets with a fixed par value or cash flow suffer at the hands of inflation, she says.

'However, real assets, for example real estate and commodities, inflation-indexed bonds, and some equities and money market instruments, offer protection against inflation,' says Tsui.