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Beware China’s Growth Slowdown: Strategist McCain

Fin - Breakout - US

Four rate hikes in five months by the world's fastest-growing major economy have done little to crimp demand or stem inflation, but analysts say the People's Bank of China has no choice but to stick with their current strategy.

Although China's latest quarter-point hike lifts the country's one-year lending rate to 6.3% and the deposit rate to 3.25%, market watchers say the truly important number to watch there is inflation. Accordingly, the latest statistics show consumer prices rose 4.9% in February, as food prices jumped 11%. Whether you trust Beijing's data or prefer so-called ''core inflation'' measures which back-out food and energy costs, you cannot ignore the fact that the average Chinese family spends half their money on food.

For investors tied to the global growth story, it would be hard to overestimate the importance of maintaining Chinese growth — and stability. Strategists like Bruce McCain of Key Bank, who spoke to Jeff Macke and me, say they're sticking with the trend for now, pointing out that the lag between rates hikes and retreat should keep them protected for at least a little while longer.

McCain, like many strategists, is concerned that rate hikes in China and other emerging markets could affect growth in the U.S. either later this year or early next.

Key Bank has exposure to many emerging markets, from the Asian to Latin American to European. "We believe in spreading it broadly," McCain says, "but China is kind of the canary in the mind because it's the major player, and it certainly reflects a lot of the pressures in those other markets."

And what of Japan? While a lot of people wanted to chase that trade following the disaster, McCain feels that it isn't the area to be investing in now: "We would prefer to be leveraged to economies that have a stronger growth profile into the longer term, and that certainly doesn't describe Japan."

And do skyrocketing food prices help bring the Asian story to a screeching halt?

"We don't think it's over," says McCain, "but we think it's at risk."

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