Funny, we just wrote a not so positive outlook for Chinese shares in the weekend, citing inflation problems, and here’s what happens.

Turns out that inflation really is the problem we feared…

• China’s benchmark Shanghai Composite Index fell 5.2 percent Monday following the release of economic data showing wholesale price inflation jumped to its highest level in 12 years in July. The Shanghai index closed at 2,470.07 on Monday, down 135.65 points. That was its lowest close in more than a year and a half.
• The Shenzhen Composite Index of China’s smaller, second market plunged 6.6 percent to 698.37.
• Airlines, textile exporters and refiners led the decline. Two of three major publicly traded airlines dropped by the daily maximum 10 percent.
• The government reported Monday that the producer price index rose 10 percent in July over a year earlier, its highest rate of increase since 1996 and a jump over June’s 8.8 percent rate. Such increases, fueled by rising energy and raw materials costs, add to pressure on consumer prices, complicating Beijing’s effort to rein in politically sensitive inflation.
• Chinese investors have become increasingly jittery over the economic outlook amid signs that the malaise afflicting the U.S. and Europe might be spreading to Asia, with corporate earnings bound to suffer. Analysts said the start of the Beijing Olympics last week had quashed any lingering hopes for a games-related rally.
• “Investors still think the market is weak,” said Qian Qimin, a strategist at Shenyin Wanguo Securities. “They are disappointed,” he said.
• So-called “B-shares,” which are denominated in U.S. dollars and take up only a small segment of market volume, fell sharply in Shanghai, dropping 9 percent and helping to pull the composite index lower.
• Stricter foreign exchange controls and a strengthening of the U.S. dollar against the Chinese yuan could be leading speculative investors to pull out investments that had been targeting gains in the local currency, said Zhang Linchang, a strategist at Guotai Junan Securities in Shanghai.
• “It’s hard to calculate, but it’s possible that hot money is leaving China because of that,” Zhang said. The U.S. dollar was trading at 6.8583 around 0800 GMT on the over-the-counter market, down from Friday’s close of 6.8592.

We also showed you in the weekend that the indexes were at critical support levels. These are now broken, so more downside is likely.

It’s all such a pity for eFuture (EFUT), the Chinese suplly-chain management software company we’re following. The company is doing very well, they won’t be affected much by overseas slowdowns, so they have become very cheap but in this merciless environment, that’s not counting for much. They might get a boost from earnings though, but whether that boost will last, we’re not terribly hopeful.