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Pressure point

Countries across Asia take action as rising inflation becomes a reality, with China in particular feeling the pinch. Gregor Watt reports

If inflation is becoming a concern in the UK, it is already a fact of life for much of the rest of the world.

Fidelity International global chief investment officer for fixed income Andrew Wells says: “The world is exp-eriencing structural changes which, in combination, point towards the likelihood of higher inflationary pressures than has been the case during the deflationary environment of the past 20 years or so.

“The search for the commodities which act as the building blocks of industrialisation in the populous emerging world is a key driver, exemplified by China’s growing influence in Africa. The shortage of rare earth minerals – a key component of the technological development needed to elevate living standards in the developing world – is just the latest pinch point.

“A second inflationary impulse is the slowdown in the trade globalisation trends of recent decades as individual nations look to protect their competitiveness and emerging nations face domestic inflation – a necessary corollary of their increasing living standards.”

Investment firm Alliance-Bernstein predicts inflation across the Asia ex Japan sector will be 4.7 per cent in 2011, up from its previous forecast of 3.6 per cent. The company says this increase is being driven mainly by significant increases in food prices.

Webb says: “It is in Asia that the perceived threat of inflation is greatest. Food prices in the region are rising in double digits in some countries. In China, for example, food price inflation reached 12 per cent in November. The region’s stronger than expected recovery from the financial crisis has also led to increased demand for industrial commodities and is feeding through to higher wages.”

Webb says many Asian countries will be trying to avoid raising interest rates too sharply for fear of attracting a glut of overseas money market funds.

“Although some countries in Asia have already started tightening monetary policy, fears of hot money flows into the region and concerns over the fragile state of the global economic recovery mean they are in no particular rush. The interest rate environment is still relatively loose.”

China has been particularly struggling with inflation above its long-term target of 3 per cent. In December, inflation hit 5.1 per cent and although this has fallen back slightly, AllianceBernstein is predicting this will be around 5 per cent all year.

China has already taken steps to tackle the inflation issues by restricting bank lending and increasing banks’ reserve requirements as well as raising interest rates three times in the last five months, with the most recent increase just last month.

Martin Currie Pacific Investment Trust manager John Millar believes the Chinese authorities seem to have the issue under control.

He says: “We do not feel that the Chinese authorities are behind the curve in addressing inflation but markets are likely to be preoccupied with this issue for some time. This is why emerging markets made a poor start to 2011 as investors have shifted allocations from emerging to developed markets.

“Although we see some of the global inflationary pressures easing as the US Fed reduces its quantitative easing, we cannot say this will be the last rate hike in China.”

Miller does not predict that inflationary issues and increasing Chinese interest rates will have a wider impact in the region.

He says: “A re-run of the Asian crisis of 1997-98 is unlikely. Both the private and public sectors have stronger balance sheets this time round. But after a very strong run-up from the March 2009 lows, some profit-taking is likely as central banks address the build-up in inflation.”

AllianceBernstein is forecasting growth of 7 per cent across the Asia Pacific region this year and Waverton Asia Pacific fund manager Alan Gibbs feels inflation has been a factor for some time in the Far East. He says while it is a concern, it remains under control and is a factor of the growth being seen in the region.

Gibbs says: “We have commented on inflation many times over the last year and continue to believe that it is a risk, as loose monetary policy in the West filters through into negative yields in Asia and rising commodity prices across the board.

“This was most obviously brought to light in November last year when inflation jumped to 5.1 per cent in China, giving the China bears a pedestal to shout from. We remain of the view that Chinese inflation is under control and will likely peak in the first half of the year.

“Food prices, which have contributed to 70 per cent of CPI growth in the last months, will likely pass through before the second half. People forget that China has been growing at 15 per cent nominal for the last 30 years with inflation averaging about 5 per cent for the entire duration. Nothing has changed.”

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