CHINA’S RUNAWAY ECONOMIC growth has fuelled investor confidence in Asian stock markets. But it has done little for the country’s own stocks. This year, China was the only Asian stock market that delivered negative returns. The Shanghai SE Composite Index is down 11.8% this year while the Hang Seng China Enterprises Index is down 3.1%.
 

In Singapore, the FTSE ST China Top Index is up 4.5% to the Straits Times Index’s 8.7% rise.

Gripping investors is the fear that China is tightening its hold on the economy and will continue to do so. A fortnight ago, the government hiked the reserve requirement ratio for financial institutions – making it the third time in a month. The country also raised interest rates in October and officials have threatened to impose price controls and pledged to use other tools to reduce inflation.



But Francis Cheung, head of China-Hong Kong strategy at CLSA, sees weakness in Chinese stocks over the next few months as a good buying opportunity. Cheung believes that much of the inflation that China is grappling with today is more perceived than real. “I don’t think it’s as supply-driven as people think it is,” says Cheung, in reference to the shortage of food and other commodities.

“They are fighting expectations of inflation.” Cheung says that looking at things like the price of fruits and vegetables at the market in China, prices have not moved up that significantly.

Given that China’s authorities have been introducing measures to fight inflation for the better part of this year, Cheung thinks that inflation will be under control soon – probably as early as 2Q2011.

And once inflation is under control, China will be able to ease up on its tightening. Once that happen, the stock markets will perform again, he says.

Several sectors will do better than others though, he says. Banks, for instance, don’t perform well in an environment of rising interest rates.