Western Economists' interpretation on Chinese policy usually stays on the surface without knowing the true purpose behind it. The recent worry on Wall Street is that China is ready to start a new monetary policy tightening lending and hence the world economy is going to shrink, and a double dip is coming. Sounds like the Great Depression is coming back among us if China starts to act now. The fact is Chinese policy makers know clearly that an early exit of loose monetary policy is a threat to global recovery. It is good to see that China is bearing more global responsibility in their minds than most people think.
The message from China at Davos over the weekend was to "maintain current monetary policy in 2010 and target 8-9% GDP growth". Even more clearly, China will not start its exit strategy until "the rest of the world is ready", said the head of the Bank of China.
So why was there such a misinterpretation of China in the last 2 weeks? China started to raise a 3-month bill yield 2 weeks ago by 0.04%. Wall Street senses that tightening is coming, as a result, commodities such as copper, coal, gold, silver, and steel fell hard on that speculation. China's CPI added 1.9% in the 4th quarter. Wall Street again believed China will raise interest rates on Friday(Jan/22). It didn't happen (is 1.9% CPI really that bad?). The fact is that the Bank of China froze the 3-month bill rate on the week after. The most powerful tool on Wall Street is rumor, and it may have played a big role in the panic selloff in the last two weeks.
The truth behind the central bank's hike on the 3-month bill yield is the effort from the government to curb the housing overheat in China. This is the only concern for the moment. However the government is still aggressively pushing for further industrial expansion, such as a high speed railway network around the country and green energy. The government has now begun redirecting funds into these high priority industries. As a result, copper demand may drop, but steel, iron ore, metallurgic coal, solar PV demands will pick up in 2010. A brighter outlook for these industrial commodities may also get a boost from President Obama's push for a high speed railway in the United States and the to-be passed jobs bill in Congress. Steel and iron ore demand in the USA may surprise everyone in 2010 and 2011. Companies in these sectors deserve a better future in 2010:
US Steel (NYSE:X)
Cliffs Natural Resource (NYSE:CLF)
AK Steel (NYSE:AKS)
First Solar (NASDAQ:FSLR)
Solarfun Power (SOLF)
Trina Solar (NYSE:TSL)
Suntech Power (NYSE:STP)
BHP Billiton (NYSE:BHP)
Freeport Mcmoran (NYSE:FCX)
For the Solar industry, adding to the fuel is the IMF (International Monetary Fund), who said on Saturday that the organization plans $100B to support green energy, low carbon growth globally.
Disclosure: long FSLR