How to Profit from China's Easing Inflation Rate

The Chinese government's efforts to cool inflation finally seemed to be paying off when the National Bureau of Statistics reported on Friday that consumer prices in August were up just 6.2% from a year earlier, down from a 6.5% increase in July. Although the lower inflation rate was welcome news, many economists were expecting that consumer prices would be even lower before pork and vegetable prices started climbing higher over the last couple of weeks and sent food prices up 13.4% in August. One positive to come out of the news that the rise in consumer prices is easing is that the Chinese government could reduce its efforts to slow the rapid growth of the Chinese economy. Another positive from the news is that it gives the Chinese government more options in the event of a global economic slowdown. With the United States and many governments in the European Union looking to limit government spending in order to reduce their deficits, there is growing concern that we could be headed for a global recession. If China's inflation continues to slow before such an event occurs, it would give the Chinese government more options to stimulate the economy if a global slowdown occurred because the government could focus on promoting growth instead of fighting inflation. Inflation is among the Chinese leadership's biggest worries because it is concerned that the rising cost of living could lead to widespread civil unrest. The government has put great effort into lowering inflation with measures that have included several interest rate hikes, raising bank reserve ratio requirements, increasing down payment requirements for real estate, introducing property taxes to penalize property speculators and creating a $200 billion program to build and renovate 10 million low cost homes. There are a number of investment options for investors to consider, depending on whether they think that the August numbers were a one time slow down or a sign that the Chinese government may finally be winning its fight against inflation. Although the August inflation numbers were lower than the previous month, the drop was expected and the price of food continues to soar. It's too soon to tell if the August dip in overall prices will be short lived. If food prices continue moving higher, the Chinese government may feel the need to hike interest rates again or consider other measures to cool the economy. If that were to happen, the ProShares Ultrashort FTSE China 25 FXP could see its share price rise. Still, the news that inflation is slowing is considered positive by most. If the Chinese government decides to hold off on further interest rate hikes and it loosens monetary policy, the iShares FTSE China 25 Index Fund FXI, the Global X China Consumer ETF CHIQ and the Guggenheim China Real Estate ETF TAO could all take off.