Caterpillar: Lower Interests Coming For China?

| About: Caterpillar Inc. (CAT)

This past year hasn't been kind to Caterpillar (NYSE:CAT) by any means. After the 2008 crash, Caterpillar's stock price recovered rapidly and seemed to take off with no signs of slowing down. Times have changed though, and Caterpillar is facing some tough situations. The Chinese economic slowdown has caused Caterpillars sales to slow and has lead to a falling share price all throughout 2012 thus far.

Those who wonder what exactly is going on in China currently should know that the Chinese government has jacked up interest rates in an attempt to control rising real estate and high inflation. China's gross domestic product has grown only 7.6% year to year for Q2. The gross domestic product growth has also slowed for six consecutive quarters as China is still restricting its banks lending rates until they bring inflation levels down to a targeted 4%, which just recently occurred. The main industry impacted by the high interest rates has been the construction industry.

Aside from high interest rates hurting Caterpillar's revenues, Caterpillar has been hurt particularly badly due to its own poor estimates. Caterpillar thought China's interest (which started increasing in 2011) would ease up in 2012, increasing demand for equipment. The interest rates remained high though and Caterpillar overestimated construction equipment demand.

Since China's inflation rates have fallen below the targeted 4% rate, and have now hit a 30 month low of 1.8%, it can be expected that China will begin lowering interest rates. Pay close attention because if interest rate are lowered, Caterpillar's growth will resume. These current stock levels would be a great entry point for anyone looking to buy stocks involved in the construction industry. Other stocks to consider include John Deere (NYSE:DE), Cliffs Natural Resources (NYSE:CLF), Rio Tinto (NYSE:RIO), and for a foreign company, Japan's Komatsu Ltd (OTCPK:KMTUY).

Disclosure: I am long DE, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.