STOCKINVESTMENTUNDERINFLATION初.doc

STOCK INVESTMENT UNDER INFLATIONTeam name: BravoTeam member:0913063 赵 悦 Chloe 0801035 陈煜丰 Johnson 0841001 詹 派 Jam Pie 0955007沈含弘 Simon 0902071 朱文佳 Grace 1049035 金鸣辉 DamageA thesisaims to analyze the personal financial management under the monetary tightening policyand to provide an investment direction.April 6, 2011Stock Investment under InflationAbstract: After the financial crisis, our countrys economy now again is facing a challenge: inflation. Inflation has brought great impact on the nations economy and common peoples living standard. So it is important for us to understand the government policies and choose a right method to invest money.Keywords: Inflation, Influence, Government policies, Stock marketOutlinePart One Introduction1.1 Research Background1.2 Motivations and ObjectivesPart Two Macroeconomic Analysis2.1 Current Influences and Causes of Inflation2.2 A Series of Policies Adopted by the Government2.3 Current Market ConditionsPart Three The Analysis of Financial Market3.1 Financial Markets3.2 Structures of Financial Markets3.3 Instruments of Financial Markets3.4 Two Different Kinds of Stocks: Common Stocks & Preferred StocksPart Four The Choice of the Investment Industry4.1 Specific-industry Analysis4.2 Cycle of Investment of the Investment Target4.3 Income of the Investment TargetPart Five AppendicesPart one Introduction1.1 Research BackgroundAfter the 2008 financial crisis, the world economy is in the process of recovery. Our Government has taken slack fiscal and monetary policies, as well as issued a lot of money to stimulate economic growth. But there are a large number of hidden dangers behind issuing so much money- the continuous depreciation of the RMB and the pressure of inflation. Since 2010, with prices rising, the consumer price indexes have risen by 4.9% comparing with the same time last year, from which we can see that China is there under a huge inflationary pressures. Inflation can influence each of the people living in China; the government should strive to maintain the value of the currency they issued. The purchasing power of a note comes from the credibility of the government which issued the notes. In the inflation process, the government-issued currencys purchasing power is lost as well as the Governments credit. Therefore, in order to resist to inflation and prevent excessive price from rising, the Chinese government started to take a series of tight-based policy. In the March 25, 2011, the central bank raised the deposit reserve ratio again. This is the third increase this year, reaching a record high 20.00%; reduce the commercial banks ability to provide loan, then the money multiplier becomes smaller, thereby reducing the entire commercial banking systems deposit creation, result in the reduction of money supply, and ultimately reach the objective of easing inflation.1.2 Motivations and ObjectivesIncrease of price is an inevitable trend of economic development; a low inflation rate and economic development coexist with each other. But high inflation means negative interest rates; the deposit in the hands will be only getting less. How can people face this serious problem? The tight monetary policy adopted by the Government is gradually easing inflationary pressures, while also inhibiting the investment enthusiasm of people; what kind of investment should people choose? This article aims to analyze the personal financial management under the monetary tightening policy and to provide an investment direction.Part Two Macroeconomic Analysis2.1 Current Influences and Causes of InflationAs the financial crisis, the world economy entered a recession; in order to stimulate economic growth, governments around the world have been lowering the deposit reserve ratio. China is no exception; in December 2008, China reduced deposit-reserve ratio twice (the reserve is to limit the credit expansion of financial institutions, guarantee customer withdraw deposits and fund liquidation), and also issued a large amount of currency to stimulate economic growth. And in recent months, prices rise constantly and China have come to the era of high inflation. Inflation relates to each person living in China; inflation means that the overall price level rise continually. General inflation includes currency depreciation and reduced purchasing power, and currency depreciation means relatively reeducation of the currency between the two economies. The former is used to describe the national currency, while the latter used to describe the additional value on the international market.Is generally believed that there are three negative effects of inflation:1. The impact on economic development. Prices rise results from inflation makes the price signal distorted and misleads manufacturers to go astray, resulting in the blind development of production, abnormal development of the national economy, deformity of the industrial structure and economic structure, and finally lead the entire national economy to imbalance. When the deformed economic structure brought about by inflation need to be corrected, the government is bound to take various measures to curb inflation, the results will lead to a sharp drop in production and construction, therefore, inflation is not conducive to stability and coordinated development of the economy.2. The impact on income distribution. Currency devaluation declines the standard of living of some lower-income residents, and its hard for the majority to raise the standard of living. When inflation continued to occur, it may cause social disruption and unrest.3. The impact on external economic relations. Inflation will reduce the export competitiveness of domestic products, causing the outflow of gold reserves, so that exchange rate depreciated. Since the currency devaluation led to price increases, and lower deposit interest rates make money in the pockets constantly shrinking.The current inflation is due to excess liquidity, which is mainly because of these facts:1. Over-issue of currency. After the outbreak of the financial crisis, due to excessive worry about deflation, China has taken an extremely slack monetary policy. In September, 2008, China turned to moderately slack. In early 2009, the State Council proposed that M2 growth by 17%, and more than 5 trillion Yuan of new loans, comparing to 8% of the expected GDP growth and 4% CPI index, which is still a moderately easy monetary policy. As a result, the central bank eventually over-issued 43 trillion Yuan. While since the current year, the central bank has raised the deposit reserve ratio three times, the current reserve ratio adjustment is a normal action to recycle too much money to maintain a neutral initiatives, does not mean that further tightening. The constantly rising price data is another factor which brings about the action of raising the deposit reserve ratio. On March 11, according to National Bureau of Statistics price data, CPI in February rose 4.9%, PPI up 7.2%, which are still at a high level; but what surprised the market is that the central bank didnt use rate instruments to contain inflation expectations. But increasing the deposit reserve ratio can recovery mobility, prevent excessive growth of credit-although not so direct as raise interest rates, while it plays an indirect role in adjustment of inflation expectations. 2. The speculation factor of the hot money. As domestic hot money can not get enough profits from the property market and the stock market, then they flow to agricultural products, causing agricultural products price rise non-normally, leading to affect peoples lives; so some new words such as “douniwan” “suannihen” comes out. The harm caused by hot money is not the time it came in, but it went out; liquidity is the characteristics of hot money; swarm in, and the instantly left. When the hot money comes in, it will cause the monetary base increase, pushing up prices, causing inflation. When hot money suddenly withdrawal, it will cause a sudden significant reduction in price, a panic sell-off, leading the economy into recession.2.2A Series of Policies Adopted by the GovernmentHow many goals do we have then we should have a number of means , that is, we are in the face of multiple goals, to achieve the target, we must use multiple policy instruments, also to master the degree. In view of preventing inflation, and many factors that lead to the current inflation, our country has implemented the tight monetary policy and prudent fiscal policy with combined attack.1. Control the money supply. Since money oversupply is the direct cause of inflation, therefore, the most basic measures to control the inflation is to control the money supply, then to meet the demand for money to make currency stable, lastly to stabilize prices. As for controlling the money supply, we must implement tight monetary policy to maintain an appropriate amount of credit. The Central Bank flexibly and effectively uses various monetary policy instruments to control money and credit aggregate, this will adapt money supply to the level of demand. International balance of payments surplus led to an increase in basic money supply, reducing the trade surplus will be a powerful tool to solve the money oversupply, in other word, to control the export and expand import and promote appreciation of the RMB timely and appropriately.2. Regulate and control aggregate demand. Management of money supply is not enough to deal with inflation, we must base on various underlying causes of inflation to take the right medicine. For the type of pull inflation, adjusting and controlling of aggregate demand is the key. Countries in need to take actions will mainly establish and implement the right fiscal policy and monetary policy. Fiscal policy on one hand is to reduce expenditure, make efforts to increase revenue, uphold the balance of payments, not to engage in deficit financing. Monetary policy on the other hand is tightening credit, controlling money supply, reducing the total money quantity. Matching comprehensive measures of fiscal policy and monetary policy, two ways are very important: controlling of fixed assets investment and excessive growth of consumption in order to achieve the purpose of controlling aggregate demand.3. Increase the effective supply of goods, adjust the economic structure. From two aspects we need to control inflation simultaneously: on the one hand to control the total demand; the other hand increase the total supply. Neither of the two can be neglected. If blindly focus on controlling aggregate demand with notice of increases in aggregate supply will affect economic growth, we can only obtain at a low level of equilibrium, and ultimately may come to naught at the extended cost of controlling inflation. So, at the same time of controlling demand, it is also necessary to increase the effective supply of goods. In general, the primary means to increase effective supply is to reduce costs and consumption, increase economic efficiency and improve the input output ratio, while adjusting the industrial structure and product mix, supporting production for the shortage of goods.4. Strengthen particular financial supervision in specific economic sectors. In the context of economic globalization, economic instability is strongly infectious in the global. Although under the current trend of financial freedom, countries try to promote financial and economic liberalization, but because our country is in a critical stage of economic transformation, there are many and complex economic instability factors, and Chinas finance sector has just completely opened to the outside, as a result, in current economic situation, we not only need to cancel some of the unreasonable financial and economic regulations, but also continuously perfect legal system for supervision. The most important for doing now is to coordinate supervision between sub-sectors, avoid the vacuum of supervision and duplication of regional financial regulation so as to avoid the financial instability of the currency and thus promote the economy, especially inflation problems.To optimize the allocation of financial resources, innovate financial products, strengthen bank liquidity management. To promote diversification of bank asset structure, optimize credit orientation structure; strengthen the loans of real estate development and credit management of individual housing mortgage loans, strictly control the demand for real estate investment loans; further guide the funds to health care, education, social security and other aspects; accelerate bank asset securitization; promote commercial bank take proactive measures to manage liquidity; establish the appropriate amount of the multi-level liquidity reserves, to achieve liquidity and efficiency phase-coordination; be active in liability management, reduce the pressure of excess liquidity.5. Resist the impact of imported inflation on China. Price situation in China is facing the upward-pressure from cost-push and demand-pull, which we should not ignore. Recent price increases such as oil and electricity, the needs of the building materials for post-disaster reconstruction may also contribute to the increase. Therefore, currently, controlling inflation is still a prominent task which we should do everything possible to suppress from rising rapidly. Whats more, imported inflation is still the key factor we are going to be against at. To control the inflation which is in the context of globalization, to avoid the combination of pressure on price from imported goods with accumulated price increases as a result of yeas of high-growth resulting in continued pressure on inflation, the government should focus on economic structural adjustment, labor productivity improvement, implementation of rational allocation of resources to stimulate the real economy with the technical innovation, energy conservation, and environmental protection and accelerating the transformation of the mode of economic development to improve resistance to imported inflation.2.3Current Market Conditions1. Overheated development of investment industry, including real estate, mainly reflected on the demand and prices. Slack monetary policy, preferential taxation of land and fiscal policies have led to the real estate bubble. Hainans housing bubble is directly related to the local real estate policy.2. Owing to the capital and real estate market absorbed a large amount of money and property, combined with regulation and control policy, making the capacity of storing funds reduced , thus resulting in agricultural products becoming a new platform for investing and leading to a sharp rise in prices in this industry.3. Because of inflationary pressures and revaluation of RMB, manufacturing industry is facing tremendous pressure and combat, so that it will enlarge its inflation expectations.Part Three The Analysis of Financial Market3.1Financial MarketsFinancial markets funds transfer capitals from lender-savers to borrower-spenders. Lender-savers include households, business firms, government and foreigners. Borrower-spenders include business firms, government, households and foreigners.There are two segments of financial markets: direct finance and indirect finance. Direct finance means borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrowers future income or assets. However, indirect finance means borrowers borrow indirectly from lenders via financial intermediaries by issuing financial instruments which are claims on the borrowers future income or assets. Here we focus on indirect finance. 3.2Structures of Financial Markets1. Debt markets (Short-term (maturity 1 year) Capital Market)2. Equity markets (Common and preferred stocks)3. Primary markets (A primary market is a financial market in which new issues of security such as a bond or stock are sold to initial buyers by the corporation or government borrowing the funds.)4. Secondary markets (A secondary market is a financial market in which securities that have been previously issued can be resold.)5. Exchanges (Trades conducted in central locations (Tokyo Stock Exchange & NYSE).)6. Over-the-Counter markets (Dealers at different locations buy and sell.)3.3Instruments of Financial Markets1. Money Market Instruments(1) US Treasury Bills (Short term debt instruments of the US government. They are issued in one, three, and six-month maturities to finance the federal government. They pay a set amount at maturity and have no interest payments and effectively pay interest by initially selling at a discount (price lower than the set amount paid at maturity).)(2) Negotiable Bank Certificates of Deposit (It is a debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price.)(3) Commercial Paper (It is a short-term debt instrument issued by large banks and well-known corporations, such as Microsoft.)(4) Bankers Acceptances (They are money market instruments created in the course of international trade. They are a bank draft (promise of payment similar to a check) issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps “accepted.”)(5) Repurchase agreements (Repos are short-term loans (usually with a maturity of less than two weeks) for which Treasury bills serve as collateral. In othe