How Much Power Does China Have?

Last night the Asian markets all surged higher. The Shanghai, Hang Seng, and the Nikkei Indexes all traded higher by more than 1.50 percent. The rally overseas took place as China voiced support for the recent actions in the European Union. Apparently the world markets are listening to every word that the Chinese are saying. However, the Chinese economy is dealing with it's own set of problems and that is flat out inflation. Recent reports out of China show that inflation continues to increase at an alarming rate and the Chinese central bank(Peoples Bank of China) will need to raise interest rates very soon. The Chinese have increased bank reserves five times already to try and curb real estate speculation. Ultimately, the Chinese will need to raise interest rates and this should slow down the worlds hottest economy a little. Only the Chinese know when rates will increase as many economists have expected the rate hike already only to find out that rates remain the same. When the Chinese leave interest rates unchanged it has caused the leading commodity stocks to surge higher. Stocks such as Cliffs Natural Resources Inc.CLF, Freeport McMoRan Copper and Gold Inc.FCX, and United States Steel Corp.X have all made new 52 week highs recently. China has been the driving force behind the commodity rally. There certainly is not a lot of new building and construction taking place in the United States or Europe these days. Many people are now asking if the inflation rally caused by the low interest rate policy by the central banks around the world will come to an end if the Chinese raise interest rates. It is certainly possibility that the global stock market rally could stall out and begin to fail if the Chinese slow down their growth. In fact , the last time the Chinese took major action to slow down their hot economy was in April 2010 and this is when the stock markets in the U.S. had it's first major correction or pullback. That correction or stock market decline was about 16.0 percent and may have actually been the cause for the Federal Reserve Bank's quantitative easing part two. This is where the Federal Reserve Bank buys U.S. Treasuries on a daily basis to create cash reserves. This action by the Fed is a major cause of inflation and anyone can easily see the increase in the stock market since August 27th, 2010 when the Fed announced it's QE-2 program. Right now China is certainly a force to be reckoned with in the economy and the stock market. Should the Chinese actually raise interest rates it could stall out the global markets. However, only the Chinese know when that interest rate hike will take place. Many professional traders and investors have expected that action by the Chinese to have taken place already. As we all know by know most central banks are usually behind the curve and only react when it is too late and the damage has been done. Keep one eye on the Chinese economy because it is a major part of the global economy. Nicholas Santiago Chief Market Strategist www.InTheMoneyStocks.com