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Asia Markets
Nov. 17, 2010, 12:48 a.m. EST
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HONG KONG (MarketWatch) "” As China's stock markets brace for further action from Beijing to cool inflation, some analysts say administrative measures may do little to curb price increases, and might even aggravate the problem.
While price controls often tend to encourage hoarding or force producers of goods to lower supplies, the nature of the Chinese economy "” where actual incomes are believed to be higher than officially reported "” also made the task for policy makers more challenging.
Two U.S. warships make a friendly visit to Hong Kong despite strained military relations over Washington's support for Japan in a territory dispute. Video courtesy of Reuters.
"On many estimates, China's own informal or underground economy can represent up to 10% of gross domestic product," or close to the size of Malaysia's entire economy, Nomura analysts led by Sean Darby wrote in a note Wednesday.
"With such a large part of the economy outside government control or failing to report taxes, the fact that the underground economy is not as dependent on monetary support may mean that its demand may be more inelastic. Hence, monetary tightening may have little impact, nor would any form of tax hike or regulation," they added.
After maintaining an accommodative monetary stance for several months in the wake of the global financial crisis, Chinese authorities have lately started to tighten their policies, raising interest rates and banks' reserve requirements, in addition to tightening foreign-exchange controls and allowing the yuan to rise against the U.S. dollar.
But higher-than-expected consumer price inflation in October have boosted expectations that more policy measures could be on the cards, especially because of a runaway increase in food prices. Data released this week by the Ministry of Commerce showed that average wholesale prices for 18 key vegetables in 36 Chinese cities soared 62.4% year-on-year in the first 10 days of November.
Chinese Premier Wen Jiabao was quoted in a Xinhua news report Wednesday as saying recently that the State Council, China's Cabinet, is drafting measures to curtail sharp increases in the prices of commodities that affect people in their everyday lives.
The report also said China's Consumer Confidence Index dropped five points during the July-September quarter to 104 "” the first fall in the reading in six quarters "” as the pace of the nation's inflation quickened.
The Xinhua report followed an earlier item in the China Securities Journal this week, which said authorities might unveil measures "” including price caps on food, action to prevent hoarding, punishment of speculators in agricultural products and the offering of food subsidies "” in order to control prices.
"Price controls may appeal to officials eager to be seen doing something about rising inflation, but China's experience with controls has not been encouraging. ... The need to resort to such a step would fan fears that the government was going all-out to tame inflation," said economists led by Mark Williams in a Capital Economics' note to clients.
They said that China's move to impose similar price controls at the beginning of 2008, when large-scale producers were required to obtain individual approvals before raising prices, had only led to an acceleration in consumer food-price inflation for some months after the controls were imposed.
Reuters A TCL Multimedia production line at a factory in Huizhou, China.
The research house added that whether producers increase exports to take advantage of higher overseas prices or limit output over the medium term, "the result will be domestic shortages of essential goods, which are arguably more damaging than inflation."
Société Générale global strategist Dylan Grice agreed on the futility of price caps, saying: "Imposing price controls is the worst thing you can possible do. Price controls prevent rationing, price controls prevent the reduction in demand."
"The fact that the Chinese are doing this makes me even more bullish on the agricultural sector," Grice said.
Separately, Nomura analysts said that while loose monetary conditions and an undervalued yuan were also helping to inflate prices, the situation was compounded by Beijing's policies curbing emissions [as well as] controlling electricity supply.
"The difficulty for investors is that unpredictable weather during winter may lead to shortages as [were] seen in 2009. This may mean more draconian measures than investors are discounting," Nomura said.
Chinese stocks were trading broadly lower in Shanghai on Wednesday, with the Shanghai Composite /quotes/comstock/16k!i:000001 (CN:SHCOMP 2,839, -55.68, -1.92%) dropping 1.2%, on top of Tuesday's 4% decline.
Refining and metal stocks led the fall, with PetroChina Co. /quotes/comstock/13*!ptr/quotes/nls/ptr (PTR 124.22, -5.03, -3.89%) /quotes/comstock/28c!e:601857 (CN:601857 11.35, -0.22, -1.90%) losing 3.4%, China Petroleum & Chemical Corp., or Sinopec /quotes/comstock/13*!snp/quotes/nls/snp (SNP 94.02, -2.82, -2.91%) /quotes/comstock/28c!e:600028 (CN:600028 8.28, -0.18, -2.13%) , shedding 2.4%, and Aluminum Corp. of China /quotes/comstock/13*!ach/quotes/nls/ach (ACH 22.66, -0.74, -3.16%) /quotes/comstock/28c!e:601600 (CN:601600 10.48, -0.30, -2.78%) declined 2.3%, while China Coal Energy Co. /quotes/comstock/28c!e:601898 (CN:601898 11.08, -0.40, -3.48%) /quotes/comstock/11i!ccoz.y (CCOZY 0.00, 0.00, 0.00%) lost 2.4%.
Elsewhere in the region, Hong Kong's Hang Seng Index /quotes/comstock/08s!i:hsi (HK:HANGSENG 23,214, -478.56, -2.02%) dropped 0.7%, Japan's Nikkei Stock Average /quotes/comstock/11b!i:ni225 (JP:NI225 9,812, +14.56, +0.15%) was little changed, Australia's S&P/ASX 200 /quotes/comstock/27w!i:xjo (AU:XJO 4,624, -76.02, -1.62%) dropped 1.5%, and Taiwan's Taiex eased 0.4%.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.
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