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China's Leadership Serious About Keeping Inflation Under Control and Economy Booming

Economics / China Economy Jan 21, 2010 - 12:50 PM GMT

By: Tony_Sagami


Best Financial Markets Analysis ArticleI’d laugh if it didn’t make me cry.

I’m talking about the money-printing, bubble-blowing excuse for monetary policy that our last two Federal Reserve Bank Chairmen have followed. By chopping and then keeping interest rates close to zero, Alan Greenspan and Ben Bernanke were responsible for creating the painful real estate and credit crisis that we’re going through.

Those two are as haplessly blind as Mr. Magoo and I believe will ultimately be treated by historians as the worst Federal Reserve Chairmen in history.

Paul Volcker, on the other hand, was a brilliant Federal Reserve leader. Volcker was the Fed Chairman under Presidents Carter and Reagan from 1979 to 1987.

Inflation had risen to a painful 13.5%, but thanks to Volcker’s unpopular but effective decision to raise the prime rate to 21.5% in 1981, inflation was ultimately beaten back to 3.2% and our economy entered a new period of economic prosperity.

Benanke and Greenspan … Paul Volckers they are not.

You know what country does have Paul Volcker-type leadership in place? China!

Like the U.S., the Chinese money supply and worrisome inflation signs have been growing. Chinese banks loaned out a record US$1.3 trillion in the first 11 months of 2009 driven by China’s aggressive $586 billion stimulus plan. In just the first week of 2010 alone, Chinese banks loaned out another US$90 billion.

China GDP Growth

Chinese leaders have set their full-year 2010 new loans target at around the US$1 trillion mark so that US$90 billion in the first week of January was a warning sign.

Instead of being “reactive” and waiting for inflation to show up, the Chinese leaders are choosing to be “proactive” and heading off inflation before it takes hold. The People’s Bank of China (PBOC), China’s central bank, increased the reserve requirements by 0.5% effective on January 18 from 15.5% for large banks and 13.5% for small banks.

The reserve requirement is the amount of cash reserves a bank must keep on hand instead of loaning it out.

That’s not all the PBOC did. It also increased interest rates on three-month bill rates by 4 basis points and one-year rates by 8 basis points.

I loathe admitting it, but a bunch of communists are showing more prudent monetary management than the people running our country.

While I wish our leaders would act more fiscally and monetarily responsible, the real question for us as investors is whether this newfound tighter monetary policy will derail China’s economic recovery and expansion.

I think the best answer is found by looking at how the markets reacted. The Shanghai Composite Index lost 3.1% last Wednesday when the news came out but rebounded by 1.4% the next day.

Investors around the world breathed a sigh of relief for three reasons:

1. The Chinese leadership is serious about keeping inflation under control.

2. By taking action now the odds for another rate hike are now less likely.

3. The Chinese are behaving more like Paul Volcker and less like our two Mr. Magoos: Bernanke and Greenspan.

China's proactive policies have all but guaranteed a strong economic rebound.
China’s proactive policies have all but guaranteed a strong economic rebound.

My view? I’m more enthusiastic than I’ve been since 2005. Those were great times to invest in China. In 2006, the Shanghai Composite Index jumped by 130%, 97% in 2007, and 80% last year.

In fact, I am now so enthusiastic about China that I just told my Asia Stock Alert subscribers to close out a protective hedge we’ve had in place since the financial crisis unfolded.

If you have not done so yet, THIS is time to jump on the China bandwagon. If you’ve been a reader of this column for a long time, you know that I favor individual stocks over mutual funds and ETFs but if you want to get some fast, easy exposure to China, here are some ETFs for you to consider.

iShares FTSE/Xinhua China 25 Index (FXI): Seeks to track the performance of the FTSE/Xinhua China 25 index. This index consists of 25 companies that represent the largest 25 Chinese companies listed on the Hong Kong Stock Exchange.

PowerShares Golden Dragon Halter USX China (PGJ): Seeks results that correspond to the returns of the Halter USX China index. This index consists of 103 Chinese companies whose common stock is publicly traded in the U.S. The index uses a formula that prevents the largest market-cap companies from becoming too large a component of the index.

SPDR S&P China (GXC): Seeks to replicate the total return performance of the S&P/Citigroup BMI China index. This index consists of the largest 342 companies that are publicly traded and domiciled in China.

There are more sector-focused ETFs too. Claymore Asset Management just launched three new interesting China-focused ETFs.

  • Claymore China Technology: This ETF will track the GICS Information Technology index.
  • Claymore China Consumer is an ETF that tracks the AlphaShares China Consumer Index.
  • Claymore China Infrastructure will track the AlphaShares China Infrastructure Index.
  • Additionally, Global X also unveiled two new ETFs: The Global X China Consumer ETF and the Global X China Industrial ETF. The Global X China Industrial ETF (Nasdaq: CHII).

However you choose … just get on board because the lucrative Chinese train is about to leave the station.

Best wishes,


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