What if inflation in China hits 8%?

Conflicting forces affecting inflation and growth will result in volatility and downside risks for Chinese stocks.
Inflation in China may go above 8% in the coming months before it retreats. Chinese inflation expectations are also rising and corporates are starting to pass on some of the cost increases to consumers. This argues for policy tightening to defend price stability. At the same time the risk to economic growth is rising, due to damages from the recent snow storms and weakening external demand. This calls for policy easing.

These conflicting forces will create growth and policy uncertainties, and lead to confusion, volatility and downside risk for Chinese asset prices in the short-term. Investors should rebalance their portfolios towards sectors that are less vulnerable to the risks of worsening Chinese inflation, BeijingÆs policy...
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