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This Morning’s Tightening in China Does Not Bode Well for Chinese Equities in 2010

January 7th, 2010 Michael McDonough

Inflation has begun creeping back into the China’s heating economy, and it was only a matter of time before the government’s hand was forced to tighten exceptionally loose polices. In 2010, a dance between inflation, growth, and government policy will guide Chinese equity markets. Coming into the year growth led the dance with policy and inflation warming up on the sideline, but recent tightening by the Chinese government due to inflationary fears has pushed all the dancers to the floor, and now the three must dance together to more somber music.  I had anticipated Chinese officials would wait to begin tightening until later in the year, but I was wrong, and now Chinese equities face a bumpy road ahead.  I believe there may still be some upside over the next couple months, at least until the tightening cycle moves into full swing, but I do anticipate a peak towards the end of 2Q10.  I remain bullish on the Chinese food and ag sector with my favorite positions being Zhongpin Inc., which should benefit from rising hog prices. For a much more detail analysis on this topic please see my upcoming column on RealMoney at TheStreet.com.

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