Tags: hans | parisis | greece

Greece Isn’t Only Global Hot Spot: Keep Eye on China

Thursday, 30 June 2011 10:31 AM Current | Bio | Archive

Greece seems to do exactly what the European Union has vehemently insisted it do, which is to show the world its good intentions of doing the impossible and holding off the “inevitable,” at least for the time being.

Keep in mind that the road to hell still is paved with good intentions. No doubt this approach is doomed to fail as “sound” confidence is completely lacking.

Besides, Greece won’t be able to refinance itself and start growing again under the newly imposed measures for a very long to come.

I personally have no doubt at all that Greece will default and its negative contagion effects will probably surprise the vast majority of policy makers and investors all over the world, regardless of what’s said now.

Turning to inflation threats in the emerging economies, the Chinese State Information Center, which is a Chinese government policy-making think tank that sponsors the China Economic Information Network, says year-on-year inflation will average 5.3 percent in H1 and 4.9 percent for the whole of 2011, which is well above the 4 percent CPI target the Chinese central government set for this year.

It also says that the government should put greater emphasis on price tools such as interest rates and exchange rates as a way to gradually lift real Chinese interest rates out of negative territory and its currency should be allowed to rise against the dollar by 5 percent in 2011 also as part of the fight against inflation.

Meanwhile, the Brazilian central bank just raised in its “June quarterly inflation report” of CPI expectations to 5.8 percent from 5.6 percent for 2011 and to 4.8 percent from 4.6 percent for 2012 while the central bank reiterates its strategy of a prolonged “tightening” cycle to bring inflation back to its target of 4.5 percent in 2012.

Interestingly, in the central bank's “market scenario,” which plugs the market consensus forecast for the selic (which is Brazil's overnight lending rate and similar to the fed-funds rate in the U.S.) and currency into its models (selic at 12.50 percent in both years, and the real staying at 1.60 this year and falling to 1.70 in 2012), the models predict 5.8 percent inflation this year and 4.9 percent in 2012.

Investors with interest in Brazil should take notice that a 25 basis point hike in the selic will make no difference this year, and will not be enough to prevent a potentially weaker currency from worsening inflation in 2012.

In the context of all the above it could be of interest to look somewhat closer into Latin America’s two largest markets, which are Brazil and Mexico, and more specifically at their benchmark equity indices.

For both countries, we see steady and pronounced losses since their highs back in April.

Notwithstanding and despite this, and in what’s been fairly commonplace across emerging markets, foreign investors have displayed an impressive degree of stoicism through much of the period.

However, despite the boost to stock prices this week from the “yes” vote in the Greek parliament, I have my serious doubts that foreign investors will necessarily rush back into these markets after having trimmed their positions. The recent selling doesn’t come entirely down to the uncertainty surrounding the euro zone debt crisis.

No doubt, it’s an undeniable fact that the euro zone crisis has indeed sapped confidence, but it’s also a fact that the post-April slide in global equity prices has coincided with growing signs of cracks in the commodity price boom, whose key event was, arguably, the collapse in silver prices in the first week of May.

The CRB commodity index has since fallen about 9 percent in what we could see as reflecting doubts about the vitality of the global economy in a world that will have to live without fresh liquidity from the Federal Reserve, now that QE2 is over.

Consequently, there are no more solid grounds for optimism right now than there were at the end of April while stubborn inflation rates have, in conjunction with fiscal austerity measures across much of the industrialized world, begun to bite deep into household incomes, and that threatens a “feedback mechanism” into commodity prices themselves.

Looking forward, I nevertheless must say that China is perhaps one of the biggest areas of concern. Although Premier Wen has been fairly optimistic about inflation, the fact remains that interest rates probably still need to go higher given that the PBOC’s full-year target of 4 percent inflation is looking practically unattainable. If inflation remains too high, which above 5 percent, then the temptation for the PBOC, the Chinese Central Bank, may be to take a more draconian approach to get ahead of the curve.

This is a possibility that shouldn’t be overlooked. If that happens, there is no doubt that China would suffer, but so will its trading partners such as Australia and the global economy as a whole.

Many investors think “emerging economies/markets” may soon become something of a misnomer given that many so-called markets seem to offer a sounder alternative to the indebted nations of the developed world.

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Greece seems to do exactly what the European Union has vehemently insisted it do, which is to show the world its good intentions of doing the impossible and holding off the inevitable, at least for the time being. Keep in mind that the road to hell still is paved with...
Thursday, 30 June 2011 10:31 AM
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