Threat of Worsening Inflation Drags Shares Lower in China

Asian shares were mixed Monday. In China the Shanghai Composite Index fell 0.7% to 2,696 and in Hong Kong the Hang Seng Index edged down 0.3% to 23,802. However, Japan's Nikkei 225 Index climbed 0.7% to end the day at 10,345.

Chinese New Year's Holiday Could Drive Prices Up Further

Chinese shares closed lower as investors worried that inflation could rise further in the lead-up to Chinese New Year. It's the custom to buy new things at Chinese New Year: wear a new outfit, clean out the house, buy a new fridge. And all this shopping generally drives up prices -- not good news in a country where the price of everything from ginger and garlic to cars and air conditioners has been heading skyward. Additionally, the Wall Street Journal's MarketWatch reports that nearly a third of Guangdong factories won't re-open after the new year, while others are desperately trying to hold onto their cheap labor by giving workers return train tickets to lure them back to their low-paying jobs after the holidays. If factories close and competition to produce cheap goods dwindles, surviving businesses could surely increase prices.

Small caps fell precipitously today. Angel Yeast plunged the maximum 10% an Kweichow Moutai, a liquor maker, fell 2.5% and its competitor Wuliangye Yibin, famous for its selection of plum wines, declined 0.9%.

Chinese food producers fell in anticipation of even higher food prices with Beijing Shunxin Agriculture plunging 5%, Heilongjiang Agriculture, a seller of rice, soybean and other grain products, diving 3.9% and Bright Dairy & Food sliding 1.4%. Meanwhile, SunOpta, an organic food company catering to a wealthier clientele, advanced 1.7%.

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Banks also dragged the index lower with Agricultural Bank of China slipping 1.2% and China Construction Bank declining 1.1%. Some say the government plans to hold banking executives accountable for any violations within their organizations and there are whispers that reserve ratios may increase again.

Gainers in China included China Railway Construction, which spiked 3.6% and oil company China Petroleum, which rose 1.2%.

Hong Kong-listed shares in Chinese banks also headed south. China Construction Bank plummeted 1.6%, Bank of China lost 1.4% and Bank of Communications gave up 0.5%. But Hong Kong-based HSBC inched up 0.3%.

Bawang International nosedived 6.7% after admitting it expected to record a loss for last year. The company makes a wide range of shampoos and other hair care products featuring Chinese herbs including Honey Locust, Lemon Grass and Tea Seed that have been endorsed by Jackie Chan. But the company has had a tough year after reports that its products also contain a carcinogenic chemical, dioxane.

Another big loser was China Agri-Industries, a biochemical firm that makes biofuel as well as the malt used to brew beer, whose shares plunged 8.2%. According to Reuters, China Agri expects profits to fall 13% due to lower profits.

Nikkei Bounces Back

In Japan the news was far better, with carmakers leading the index higher. Honda shot up 3.8%, Toyota climbed 1.3%, Mazda increased 0.8%,and Nissan advanced 0.7%.

Computer-related businesses also rose after Goldman Sachs raised its rating on Elpida, a maker of memory chips, causing shares to leap 3.8%. Shares Yaskawa Electric, which makes electronic controls surged 4.5% and Advantest, a semiconductor testing equipment firm, rallied 0.8%. Softbank, a telecom company with e-commerce and Internet advertising arms jumped 1.9%.

Toray Industries and Unitika continued on last week's upward trajectory. Both firms produce a range of textiles like cotton, rayon and spandex and also make high-tech fibers and materials used in manufacturing LCD screens. Today both shot up 4%.