Braking in Beijing

01/21/2010 11:07 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Updated January 25th

Can Zhou Xiaochuan succeed where Alan Greenspan and Ben Bernanke so spectacularly failed? Can the governor of the People’s Bank of China check speculation and imprudent lending without derailing the economy’s recovery?

Educated as a chemical engineer, China’s top technocrat will need all of his considerable skill and a lot of luck to perform that feat of alchemy. In the meantime, some Chinese banks have been told to suspend lending until the end of the month. Chinese bill rates have begun creeping up as another way to mop up excess liquidity. Traders got the memo, wringing 3% from Shanghai stocks Wednesday.

Things might have seemed really grim, if it weren’t for the fact that China’s economy has accelerated to a double-digit growth pace, and if China’s banking regulator wasn’t expecting credit to expand 16% this year (after last year’s 32% surge). Bernanke and about 200 other central bankers from around the world would kill to have such problems.

No one would hurt a fly to share the lot of Greece, the erstwhile workers’ paradise up to its eyeballs in debt and fiscal woes. Greek bonds are getting greased on worries that the Socialist government lacks the will for the draconian belt-tightening demanded by European partners and the markets. Meanwhile, Athens stocks have crumbled ahead of the inevitable austerity and credit crunch.

The euro’s getting trashed as well, not helped by slowing growth at the core of the continent. Economic sentiment in Germany is souring on expectations that the comeback trail will be “burdensome and long.” And sober, too, as Belgian workers continue to blockade InBev breweries in a dispute over planned job cuts.

Nearly 16,000 jobs will be jettisoned in Japan now that the flagship national carrier, Japan Airlines Corp, has landed in bankruptcy court. The filing and the resulting restructuring mark a departure from the unconditional bailouts of recent years. In a related development, the government is trying to reassure bond buyers that Japan is not a larger, more indebted Greece, despite what most of the numbers say.

Japan now means to add its voice to the rising murmur urging China to revalue its currency, which might be a boon for a China currency ETF, like the WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB).  As long as the yuan remains pegged to the dollar, the ETF should continue to deliver boredom. And once the peg gets shaken loose, the odds could tilt toward a great leap forward.

Even without the benefit of a stronger yuan, China’s consumer boom is powering demand for everything from sugar to platinum, writes Greg Weldon. Revaluation would only speed the process up, to the benefit of such domestic China plays as an underground mall developer recommended by Yiannis G. Mostrous. (That stock lost all of a Hong Kong penny during Wednesday’s market carnage.)

Canadian commercial landlords have also held up well, and Gavin Graham suggests one of the stronger ones with an enticing yield. Coincidentally, Russia’s now planning to park some of its foreign exchange reserves in Canada, which boasts sound banks and low public debt. Canada stayed prudent and well-regulated when the times were good, and is now reaping its rewards. China could do worse for a tutor. 

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