China stock market

China’s stocks and bonds take a pounding amid fears of slowing growth, rising inflation

Stock investors have been skittish as they question whether the economy’s growth rate can be sustained even as Beijing pledged more infrastructure investment and asked banks to extend more credit.

PUBLISHED : Monday, 20 August, 2018, 4:58pm
UPDATED : Monday, 20 August, 2018, 8:56pm

China’s stocks and bonds have been taking a beating this month amid concerns that Beijing’s move to boost investment will stoke inflation while doing little to boost growth.

The Shanghai Composite Index is down 6.2 per cent so far in August and 18 per cent in 2018, cementing Shanghai as the world’s worst-performing major stock market of the year. Meanwhile, an eight-month gain on the nation’s 10-year sovereign bond also seems to have lost momentum, with its yield rising by 16 basis points since the start of the month.

Stock investors have been skittish as they question whether the economy’s growth rate can be sustained even as Beijing pledged more investment in infrastructure projects and asked banks to extend more credit to support an economy grappling with trade tensions with the US.

Bondholders have also been quick to cash out following a jump in the price of commodities from steel to coal that points to a possible rise in inflation. A weakening yuan has sparked worries that rising costs of imports will lead to higher domestic prices.

Stagflation – when the economic growth rate of a country slows while inflation is high – could be coming, analysts say.

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“By using infrastructure investment to spur growth, it will usually bring a side effect of inflation,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “So there’s a reason for investors to be concerned about stagflation, and they are finding it difficult to decide where to put their money. The best choice now is to hold cash.”

Inflation may already be brewing in industrial products. Futures contracts on rebars – a type of steel used in construction – rose on Monday to their highest level in six years on the Shanghai Futures Exchange, and prices of coking coal – used to make steel – climbed to a record high last week on the Dalian Commodity Exchange. Shenwan Hongyuan Group said consumer inflation is also facing upside pressure, because of rising pork prices and home rents.

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China’s economic growth stabilised at 6.7 per cent in the second quarter, but the pace of expansion will probably slow to 6.6 per cent over the next two months and 6.5 per cent in the month after that, according to Bloomberg data.

China’s latest lesson of investment-induced inflation was during the global financial crisis in 2008, when the government launched an unprecedented 4 trillion yuan (US$538.7 billion) stimulus programme. Consumer prices accelerated as much as 6.5 per cent and producer prices rose as much as 7.5 per cent, prompting the central bank to raise interest rates five times to control prices from 2010 to 2011.

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China needs to be extremely cautious about stepping up infrastructure investment, said Jiang Chao, a bond analyst at Haitong Securities in Shanghai. “Instead, it should cut taxes significantly, reducing the burdens of individuals and corporations and increasing their consumption power and research and development capability, to create real growth.”