Upstream Chinese consumer staples are attractive investments due to the rising expectation of inflation, said Eddie Lau, regional head of consumer research at Citi.
"The expectation of inflation is positive for the upstream companies, and is negative for the downstream companies," he said.
Upstream companies would have an easier time expanding their margins in an inflationary environment, Lau explained, whereas the margins of downstream companies have been squeezed so far this year as they face stiff competition and challenges raising prices at the retail level.
China's agricultural wholesale price index dipped in the second quarter of this year but started to regain momentum in July, he noted, however said the rising prices were nothing to be worried about.
"Inflation would probably stay at the current level for the rest of this year. We're not as much worried about the food prices. The upcoming half is supposed to be very good for rice and corn. and so, we don't think that the grain prices are going to rise substantially,"