The cost of living, especially food prices, and the money supply are rising at faster rate than the government expected. NPC Standing Committee Vice-Chairman Cheng warns stock market is overvalued and needs further reductions. Economists expect central bank to raise cost of borrowing.

Beijing (AsiaNews/Agencies) – National People’s Congress (NPC) Standing Committee Vice-Chairman Cheng Siwei warned investors yesterday that the speculative bubble in capital markets might still burst despite February’s correction. In February inflation was still rising fast, heightening expectations that the central bank might raise interest rates and adopt other tightening measures. 

“The bubble has become a bit smaller, but we cannot say there is no such thing at the moment,” Mr Cheng said on the sidelines of the annual NPC session. “It is good the market has fallen somewhat, which reduced the risk of the bubble bursting.” However, stocks are still overvalued and investors must avoid “blind optimism.”

In February mainland stock prices plunged almost 9 per cent in one day, but benchmark indices had soared more than 130 per cent last year, making mainland stock exchanges among the world's best performers.

But for Cheng the recent bull market had only been supported by a rise in the value of a batch of blue chips rather than an improvement in the quality of listed companies; only about 30 per cent of the more than 1,300 listed firms had investment value.

Meanwhile Hong Kong’s exchange lost 2.8 per cent today with Shanghai losing 2 per cent, mostly as a result of losses on Wall Street. And inflation is rising despite government price controls on key staple goods.

The consumer price index rose in fact 2.7 per cent year on year last month, with the food component of the price index ring 6 per cent, much faster than non-food items, which increased 1 per cent. The price of meat was up 15.4 per cent year on year last month; eggs were 30 per cent more expensive.

With such rising costs higher farming revenues, involving the bulk of the population, can’t keep up. Even the price of clothing and durable goods, such as washing machines, has been rising for the first time in a decade.

Data released Monday showed that China's trade surplus soared to its second-largest level ever, at US$ 23.76 billion last month. Thus, the mainland's reserves stockpile reached US$ 1.066 trillion at the end of last year and is now the largest in the world.

Because of this Mr Cheng said the government should invest part of its foreign exchange reserves overseas in an effort to narrow trade imbalances.

Separately, the Ministry of Commerce announced yesterday that China attracted US$ 9.71 billion in foreign direct investment over the first two months of this year, up 13 per cent from a year earlier.

With inflation rising and banking interest rates relatively low, there was little incentive for investors to keep money in their accounts. Instead, they probably would look to invest it in stock markets or property, increasing the chances of an asset bubble developing.

Premier Wen Jiabao last week said China's inflation rate should remain below 3 per cent this year, but economists at Goldman Sachs said “if the trend of monetary expansion continues to accelerate at the current speed, it will likely post renewed inflationary pressures heading into the second half of the year.”

Hence, experts believe, if the current trend continues it is highly likely that the central bank will raise interest rates and adopt additional anti-inflation measures. (PB)

• china
• economy
• inflation
• speculative
• bubble
• interest
• rates