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China Tightening Will 'Get Much Worse': Strategist

Wednesday, 5 Jan 2011 | 5:27 AM ET

China is nowhere near seeing the end of inflation and the amount of monetary tightening it will have to implement will surprise the markets, Arjuna Mahendran, head of investment strategy at HSBC Private Bank told CNBC Wednesday.

China faces continuing price rises, coupled with pressures on salaries, which are "any central bank's nightmare," according to Mahendran.

"I think inflation in China is nowhere near done," he said.

China Helps EU to Buy Its Goods
China is lending money to Europe, as it did to the US, to help the block buy the goods it exports, Arjuna Mahendran, head of investment strategy at HSBC Private Bank told CNBC.

China will have to continue to tighten to keep inflation expectations under control and, if Chinese demand falls, other emerging markets will follow suit, Mahendran added.

"I tend to believe that this tightening in China is going to surprise the markets … I think the tightening is going to really get much worse," he said.

"If China slows down it will mean the whole of Asia will slow down," Mahendran added.

A Helping Hand

China is also helping Europe buy the goods it exports by lending it money, just like it helped the US, Mahendran said.

Looking at the latest data, it seems that the Chinese are diversifying away from US Treasurys into European assets, he said.

"Europe is at the stage at which the US was three years ago. The Chinese are basically lending money to these blocks to buy their exports."

At the beginning of a visit to Europe, Chinese Vice-Premier Li Keqiang said China will continue to buy Spanish debt and expressed confidence in the Spanish financial market.

Besides Spain, Keqiang will also visit Germany and the UK.

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