Inflation and Hong Kong

Robert Hsu, March 13, 2008

Making headlines in China this week was the astounding rate at which inflation increased in February. For the month, inflation rose 8.7%. Compare this with the 7.1% increase in January, and you can see that the 8.7% rate was the fastest monthly leap in more than 10 years.

When you see inflation increasing at such a rapid clip, you have to wonder what affect it is having on the Chinese consumer. According to the Xinhua News Agency, food prices jumped more than 23% in February. And when you break out certain food groups, the increase is even more shocking -- meat, eggs, veggies, cooking oil and fruits leapt about 50%.

As you know, inflation has been increasing at this level for the past year. The Chinese central bank even aggressively raised interest rates six times in 2007 in an attempt to curb inflation. But these efforts haven't made much of a difference.

One of the reasons for this is the extreme interest rate cuts that the United States Federal Reserve implemented throughout the end of 2007 and early 2008. The Fed is cutting rates to combat a slowing U.S. economy. And while the initial news of interest rate cuts has caused the American markets to rally -- for a day or two -- underneath it all, the U.S. economy is still weak, and the American markets continue to be volatile.

But, unlike the United States, China is not suffering from an economic slowdown and is actually benefiting from a lethargic U.S. economy, as investors search for investments outside of the American markets in order to get more bang for their buck.

That's why, in my China Strategy service, I've been recommending that my subscribers focus on the abundant opportunities that China is offering us right now. I've been particularly interested in Chinese companies that trade on Hong Kong's exchanges and do business across China. To learn more about the amazing investment opportunities I'm seeing in China, join China Strategy today.

Hong Kong is the Place to Be

When the United States Federal Reserve cut interest rates by 1.25% in January, the Hong Kong Monetary Authority (the region's de facto central bank) cut interest rates by the same amount. Remember, the Hong Kong dollar is pegged to the U.S dollar, so Hong Kong must implement similar monetary policies to keep currency conversions in line.

Hong Kong's economy, though, isn't slowing. It is actually white hot, with projected growth of at least 5% in 2008 -- which is high by developed economy standards. So the rate cuts in Hong Kong made this Chinese city's already-strong economy even hotter.

The real interest rate in Hong Kong -- the interest rate minus the inflation rate -- is now about -1.0%. This means that cash sitting in a Chinese savings account is actually losing value even as it earns interest. As a result, people need to put their money in investments, not bank accounts, to earn real returns. This search for higher returns is exactly what keeps money flowing into Hong Kong's stock market and economy.

You see, in January alone, the S&P 500 Index dropped 6%, wiping out all of last year's gains and then some. But the market in Hong Kong did much better -- Hong Kong's benchmark Hang Seng Index posted a 37% gain in 2007 and only sold off 16% in January, giving back less than half of last year's gains. So even though investors in Hong Kong experienced quite a tumble in early 2008, they still ended in positive territory with their holdings. This demonstrates that although Asian markets can be volatile, in the long run their gains tend to outpace their returns.

Based on these recent economic developments, it is clear to me that Hong Kong is emerging as a major global financial powerhouse and has what it takes to continue to grow into the future -- even as the United States suffers from an economic slowdown.

As I said above, in my China Strategy service, I've been recommending companies that trade on Hong Kong's exchanges and do business across China. One of the most effective ways to take advantage of rising prosperity in Hong Kong is through an exchange traded fund. This allows you to benefit from Hong Kong's massive growth in one easy investment. My subscribers are already sitting on a 30% gain in this ETF. Join China Strategy today and learn more about this exciting opportunity and how you can reap the rewards of investing in Hong Kong, too.

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