Some strategists start looking past the headlines in China to a point where the tightening cycle is over. "This is the time to start building positions," says Aadil Ibrahim of Bowen Capital, who sees a "major rally" after inflation peaks later this year.
With Shanghai down 19% in a year, Goldman Sachs throws in the towel, saying "we have tactically reduced our weight." Worried about imbalances in India as well, GS is recommending rotating out of the BRICs and into Western markets, where monetary policy remains in a sweet spot.
On the eve of his visit to DC, Chinese President Hu Jintao calls the monetary system centered around the dollar a "product of the past," but says making the yuan a true international currency "will be a fairly long process." Continuing concern over monetary tightening sends shares sharply lower. Shanghai -3.03%
Instead of focusing on the Shanghai Composite (down 14% in 2010), keep an eye on the Shenzhen Small and Medium Enterprise Index, which has tripled from its GFC lows. If and when monetary tightening really starts to bite, it will show up as difficulties for China's smaller firms.