Eye onthe Market | July 11, 2011 J.P Morgan Topics: Portfolios, US corporate profits and the Twilight of the Gods (in the US, Europe, China and the IEA) Twilight of the Gods part 3: Why is everyone assuming that the next Chinese tightening is the last one? Every time China tightened monetary policy this year, most China research maintained that the tightening cycle is close to its end. Perhaps; Premier Wen has stated that the country’s efforts to control inflation have worked, that price stability is in an acceptable range, and that it will drop steadily from here. But last week’s headline inflation release of 6.4% hit a three year high, and it is not clear to us that China is about to end its various inflation control policy measures. In favor of Wen’s argument, food inflation has been a large contributor, some of which should be transitory. Blue-ear pig virus (PRRS) killed hundreds of thousands of pigs in 2010, which affected this year’s supply (2006 was worse). As shown below, pork prices have soared, but should come down if the supply situation normalizes. [Note: a “Strategic Pork Reserve” can be released to mitigate price increases]. However, according to the Food and Agriculture Organization’, new virulent strains of the virus have a fatality rate of 20% (even higher for piglets), and what is considered a temporary supply shock may be more permanent. Chinese pig facilities have the highest animal densities in the world, contributing to the spread of disease to 25 of China’s 33 provinces. Antibiotics have proven ineffective, and once one pig gets the disease, it tends to spread to the entire herd in 7-10 days. China has vaccinated 100 million of its 500 million pigs, but existing vaccines do not prevent infection, they only slow the rate of transmission to other pigs. China headline inflation Chinese wholesale pork price Percent change, Yo" RMB per kilogram 10% 26 ao 24 cai 22 20 4 Begining of 45% 1g 4PRRS outbreak 16 2% 14 | O% 12 -2% 10 2005 2006 2007 2006 20