Possible Chinese Inflation Curbs Offer `Buying Opportunity,' JF Asset Says

Chinese stock declines spurred by government measures to curb inflation offer a “buying opportunity,” said Howard Wang, head of the Greater China team at JF Asset Management Ltd. in Hong Kong.

Wang, whose team at the JPMorgan Asset Management unit oversees more than $50 billion, said he may add shares tied to the strength of the world’s second-biggest economy, including consumer and health-care companies, without naming any individual stocks.

China’s cabinet said yesterday that the government may impose temporary price controls on “important daily necessities” and production materials to counter the fastest inflation in two years. The Shanghai Composite Index has fallen 10 percent from an almost seven-month high on speculation efforts to cool prices will be a drag on growth, creating a window for investors in Chinese stocks. The government is wrestling with inflation that accelerated to a 4.4 percent annual pace in October.

“This is a buying opportunity as fundamentals are solid but the rebound may take time as the consumer prices are not going to ease off that quickly and the market probably will want a better sense of the government toolbox,” Wang said in an e- mailed response to questions from Bloomberg News. “The market is attempting to price this in.”

The State Council also pledged to stabilize natural gas prices, crack down on speculation in agricultural goods and ensure the supply of vegetables, grain, cooking oil and sugar. Price caps will be used if necessary, the council said in a statement after a meeting chaired by Premier Wen Jiabao.

‘Inflationary Psychology’

“Policies like this are aimed at inflationary psychology,” Wang said. “The actual impact tends to be negative but I presume the authorities have decided the balance of risks warrants them.”

The Shanghai index fell 1.9 percent yesterday, bringing the gauge’s decline since Nov. 8 to 10 percent, a so-called correction. Nomura Holdings Inc. said in a report yesterday that it is turning “bearish” on China’s yuan-denominated shares, saying that the government may introduce price controls and “more draconian’” measures to curb accelerating inflation.

China may increase borrowing costs for a second time this year as soon as Nov. 19, the China Securities Journal reported yesterday, citing an unidentified analyst. The People’s Bank of China boosted its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent, the first increase since 2007.

Importance, Urgency

The government should recognize the “importance and urgency” of tackling prices, the State Council said yesterday.

October’s inflation rate was higher than any of the estimates in a Bloomberg News survey of economists. The government is also seeking to cool property prices as money flows into the economy from the trade surplus and investors abroad betting on a strengthening yuan and economic gains.

China in January 2008 temporarily froze prices for oil products, natural gas and electricity, as well as daily goods and school and transportation fees, to counter inflation that surged to the fastest pace in more than a decade.

The price restrictions caused a 65 percent slump in the Shanghai Composite that year after the gauge had more than quadrupled during 2006 and 2007.

“The last time China enacted price controls, they ended the Shanghai bull market,” said Gavin Parry, managing director of Parry International Trading Ltd. in Hong Kong. “The knock-on could be larger this time given the global focus on China.”

--Darren Boey. Editors: Linda Shen, Peter Branton.

To contact the reporter for this story: Darren Boey in Hong Kong at dboey@bloomberg.net.

To contact the editor responsible for this story: Laura Zelenko at lzelenko@bloomberg.net.

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