China looms large in all the forecasts made for Asian investment markets and, with inflation on the march in the booming mainland economy, analysts are divided on the outlook for the region's markets for next year.
'Fasten seat belts' is the advice from Calyon Capital Markets Research in response to this month's data that shows inflation in the mainland, as measured by the Consumer Price Index [CPI], jumped to a decade-high 6.5 per cent last month, year-on-year, from 6.2 per cent in September. Food prices rocketed by 17.6 per cent.
Sebastien Barbe, Calyon senior economist for Asia, warns that higher interest rates for mainland borrowers and a further squeeze on credit arising from another rise in bank reserve ratios are on the cards as the authorities bid to stem price increases.
'But all this will remain of limited impact if the yuan does not accelerate its appreciation pace, not only against the US dollar, but against the euro,' he says. The latest tweak to inflation will 'definitely fuel incentives for the Chinese authorities to push up the yuan more aggressively', Mr Barbe says.
Goldman Sachs analyst Yu Song has raised his CPI inflation forecast for 2007 to 4.8 per cent from 4.5 per cent previously, and to 4.5 per cent from 4 per cent for 2008. 'We believe the central bank will probably respond with additional tightening measures, including strict control on bank lending and two more rate rises before the end of this year,' Mr Song says in a research note, published after the inflation data was released.
Ahead of the higher-than-forecast CPI figure, and yet another regulatory announcement affecting the overheated property market, investors began taking profit on the mainland's A-share market, selling the Shanghai Composite Index down from its peak of 6,092 on October16, to below 5,200 by the middle of this month.
UBS analyst Jonathan Anderson says: 'This is a drop of roughly 15 per cent, which is sufficient to raise investors' eyebrows.'
