Despite Inflation “Victory,” China May Still Hike Rates (FXI, CYB, CNY)

Tim Seymour:  Officials in Beijing are politely differing over whether inflation remains a threat for the Chinese economy.

The latest statement from the People’s Bank of China (PBOC) indicates that the upward pressure on prices remains “large” and that as a result, its monetary policy must remain “prudent.”

This is subtly different from the “victory” over inflation that premier Wen Jiabao was bragging about in the Financial Times barely 10 days ago.

And in fact, Western economists expect to see Chinese inflation soar above 6% when the official June numbers are released later this month.

When you consider that May inflation of 5.5% was already at a post-2008 high — despite several interest rate hikes and seemingly endless moves designed to curb lending — that does indeed start to look like a “large” amount of inflation.

Besides, May’s print was higher than inflation China has seen since August 2008, when the wheels were still in the early stages of coming off the global economy.

If June will top that high water mark, then PBOC governor Zhou Xiaochuan may be right in repeating that while a fragile global rebound makes his situation “complicated,” fighting inflation remains his primary job.

Many expect Zhou and company to go ahead and announce a surprise interest rate hike over the coming weekend.

Meanwhile, the tightening cycle has been hard on China funds like iShares FTSE China 25 Index Fund (NYSE:FXI):

On the other hand, the yuan has prospered. The Chinese currency is now at a six-year high, giving traders in funds like WisdomTree Dreyfus Chinese Yuan ETF (NYSE:CYB) and Market Vectors Chinese Renminbi/USD ETN (NYSE:CNY) the rewards.

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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