The Chinese stock market yesterday reacted calmly to the June inflation figure that was at the high end of most expectations.

The benchmark Shanghai Composite Index shed 17.12 points, or 0.44 percent, to close at 3912.94 points, with 372 companies out of 673 companies closing higher. Turnover on the bourse dropped by 17.5 billion yuan to 63.7 billion yuan from the previous trading day.

Analysts said the market calm indicated that investors have largely discounted the impact from a consumer price index (CPI) rise.

"The newly released CPI rise confirmed the widely held expectations of the market for the past month," said Feng Yuming, an analyst of macroeconomy with Oriental Securities. "The market (already) made corrections ahead of the released figures."

Although many economists and stock analysts said they expected the central bank to raise interest rates to dampen inflationary pressure, they noted that the just-announced 4.4 percent rise in the CPI does not necessarily point to an overheating economy.

Zhu Min, vice-president of Bank of China, said "CPI is not the sole index to judge whether the economy is overheating or not".

Zhu further suggested an adjustment of current CPI components "by increasing the weighting of power, energy, traffic and communication" to lessen the impact of food prices on the index would truly reflect consumer prices.

Food accounts for 37 percent in China's current CPI, followed by traffic and communications, at 14 percent, and entertainment and education at 12 percent.

Industry insiders expect that the food-price-driven CPI rise will bring price increases in agricultural produce in the second half of the year.

Ma Xiaofei, an analyst with China International Futures (Shanghai) Co Ltd, said "with the continuing surge in pork prices and feed stocks such as corn and soybean meal the up-trend will continue in the months to come".

Other economists and analysts worried that continuing food-price-driven inflation could create pressures for wage increases, which would in turn cut into future corporate profits.

"(Higher food prices) will cause low-income consumers to save more and switch spending away from non-food items, possibly causing discomfort for manufacturers down the road," said Shanghai-based Standard Chartered economist Jason Chang in a report released yesterday.

(China Daily July 20 2007)