Economist: Rising Stock Markets Prelude Inflation

飞雪寒冰

New loans issued by China's four biggest commercial banks totaled 497 billion yuan in June, double the amount in May. On July 2, A-share stock markets bounced to a new high.
  
Ha Jiming, chief economist of China International Capital Corporation Ltd., said inflation expectations tend to lead to inflation.

Cycles of inflation in the United States and China have shown that inflation often arrived in three steps: first rising stock prices, then soaring housing prices and finally, rising consumer prices, he added.

The economist said that the amount of term deposits has recently peaked and already started falling while the amount of checking accounts has continued to rise, indicating that people are transferring funds to stock markets.

Meanwhile, Ha noted that medium and long-term loans, mostly mortgage loans, increased markedly. The amount of loans increased by 100 billion yuan for three consecutive months, even faster than during the 2006-2007 housing boom. Although housing prices may not be reasonable, inflation expectations boost investment in stock and housing markets.

飞雪寒冰

Ha said a rise in asset prices, which occurs with inflation expectation, is often a prelude to inflation.

When monetary policies are lax, investors tend to buy stocks, bonds and real estate properties to hedge inflation risk, he said, adding that stock markets rise first, and the resulting inflation expectations force buyers to hasten the purchase of real estate property, thus pushing up housing prices.

The wealth effect and consumption related to house purchases in the end push up consumer prices, he noted.

Only when consumer prices rise do monetary authorities realize the arrival of inflation, the economist said.

The monetary policy will be tightened next, but assets prices will continue to soar as the interest increase in China will draw more capital inflows, he said, adding that when the tight monetary policy is in place for some time, assets prices will fall.