Chinese inflation is likely to ease off in the second half of this year, as government measures to curb prices will stem the rise of the consumer price index (CPI).
"We think inflationary risk will ease off in the second half of the year," HSBC equities investment director Mandy Chan said.
"The non-food inflation, utility pricing, health care pricing, a lot of it is controlled by the government. Gasoline prices, utility prices, natural gas prices, they are all recommended in China, so they are under good control," Chan said.
Food prices, which make up 30 per cent of the CPI basket, have been partly responsible for recent rise in inflation, but Chan said that similar measures were taken here.
"We often say that CPI means China Pork Index, because if the pork prices went up CPI would go up. Last year, the Government has donned the inventory of pork with a 40 per cent discount to the market to inference the pricing."
"I think they are doing a lot of precautionary measures on controlling food inflation," she said.
In recent months, a number of institutional investors have reallocated funds from emerging markets back into developed markets due to concerns over Chinese inflation and encouraging results of the US equity market.
But Chan, who manages more than $9 billion in Chinese equities, argued that equity prices in China were likely to go up before the inflation trend would turn around and therefore the best opportunities lay in the near future.
"We definitely see value in the Chinese equities market," she said.
"Normally, the market will run three to six months ahead of the CPI peak, so we think it is a good time to invest. Because of the inflationary concern and the tightening concern the market is trading at a discount right now."
The Chinese economy has continued to grow strongly, with gross domestic product (GDP) increasing by more than 10 per cent. But the equities market in the country has not experienced the same growth.
The MSCI China A Share Index lost 8.6 per cent over 2010 calendar year.
Chan said that investors could tap into the economic growth by allocating to selected sectors.
"Last year when we looked at the ten sectors within the MSCI China, the banks and the interest companies underperformed and that accounted for 40 per cent of the market, that is why you see the index not doing well."
"But when you look at the sub-sectors, the industrials, the pharmaceutical sectors, the consumer sectors, they outperformed massively. In the consumer sector most of the companies went up by 50 per cent last year," Chan said.
She argued that the banking sector suffered because of concerns over aggressive lending to government vehicles to support infrastructure projects.
But lending levels have come down since and the sector is looking in much better shape Chan said.
"They will have to make additional provisions for those banks, but they will do it over two to three years time. That would have a minimum value on the book value," she said.
"We think a lot of bad news has been factored in," Chan said.
