China Interest Rates: Why the Communist Nation Still has Clout

Pinnacle Digest writes: Threats of stimulus from the Fed and an injection of $100 billion into Spanish banks do little for the markets these days. They are seen as empty promises or simply not aggressive enough. China still has clout and for good reason. When it dropped interest rates last week, the S&P 500 rose 3.7%.

China has only cut its interest rates in two of the past ten years. It did so once in 2002 and several times towards the end of 2008. The markets clearly still take China seriously and believe it can create growth at will. Historically speaking, lower rates have been very bullish for China's main index.

Frank Holmes is a strong believer that government policy is a precursor to change. Despite the negative news lately, government policy is making a significant step toward growth. Infrastructure spending is beginning to ramp up again in China to ensure a soft landing.

A big theory justified by J.P. Morgan is that China deliberately tightened its credit policy to curb inflation in 2011. This decreased investment growth in infrastructure, amounting to a 20% year over year decline, says J.P. Morgan. Many believe this is the reason for China's slowing growth.

With credit becoming more readily available and an easing policy in place to promote growth and expansion, many analysts believe increased infrastructure spending is on the horizon.  If this is true it could be a catalyst not only for the world economy, but for the commodities market.

China is expected to achieve second quarter GDP growth of 7.5%. GDP expectations for the year remain at a solid 8%. Frank believes China will outperform and surprise most analysts in doing so.

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