Share By Melissa Pistilli-Exclusive to Silver Investing News

Tuesday, silver spot prices managed to recover slightly from last week’s sell-off hitting as high as $16.81 in New York early morning trading to close later in the day at $16.70 an ounce. However, silver fell as low as $16.37 early Wednesday morning as the dollar rebounded. Analysts expect prices to move sideways between the $16 and $17.75 range this week.

A whole slew of economic factors are influencing both precious and base metal prices right now and this type of market environment makes volatile silver especially wonky.

The usual suspects are the US dollar/economy and worrisome economic data out of Europe. And now we can add China’s crackdown on bank lending to the list. Even more worrisome: the notion circulating in the markets that China is not the global economic savior everyone had hoped. The Dragon might be all smoke and no fire.

China‘s Market Power

More and more, China’s economy is taking a much larger role in shaping the global economy.

“China led the recovery and is now leading the tightening cycle,” say JPMorgan Chase analysts. Morgan Stanley China strategist Jerry Lou says China’s fiscal actions reduce “the risk of global inflation from increasing earlier and the Fed from tightening earlier.”

While some are bothered by China’s move to restrict lending from its big banks, Lou is more concerned about tightening in US lending.

Others are also not so worried about China. Stephen Jen, director of currencies and macroeconomics at BlueGold Capital, former economist at Morgan Stanley and the International Monetary Fund, has said “the kind of tightening we are seeing in China is appropriate and will not be a repeat of what Volcker did while he was the Fed Chairman.” During the early 1980′s, the US fell into a recession after Fed Chairman Volcker’s attempt to combat inflation.

Jen advises that China will take a more cautious approach and he expects economic recovery to continue this year, reports Bloomberg.

As James Steel, HSBC gold analyst, points out investors aren’t just “looking at the Fed” these days when it comes to trends in precious metals. China’s monetary policies are adding influence as well.

Silver has suffered in part from China’s decision to tighten bank lending, which further amplified concerns economic growth will slow in the Asian nation. A slowdown in growth from the world’s third (some say second) largest economy dampens demand for commodities, especially industrial use metals.

In the January edition of its monthly metals publication, VM Group Metals highlights the impact of China on global metals markets over the short- and long-term. “Clearly the powerful economic growth of China and other emerging countries has fuelled very strong demand, and investment interest has taken note of that and latched onto commodities.”

VM Group analysts caution China’s crackdown on bank lending could have a major, although perhaps short-term, impact on demand as well as speculative investment for industrial metals like copper, aluminum, zinc, and nickel.

“This is a genuine threat, as loose bank lending has lubricated China’s strong 2009 GDP growth and any sign of policy tightening is almost immediately reflected in weaker copper prices,” said the report.

As we have seen in the past, silver’s dual role as precious and industrial metal often brings it into correlation not only with the price of gold but also with copper prices, the bellwether of the industrial complex. While VM Group sees less of an impact from China on the precious metal front, clearly silver’s fate is still tied to market perceptions concerning the health of the industrial sector.

VM Group’s price forecasts for silver this year fall in the range of $16 to $18 an ounce.

Despite the short-term pullbacks, analysts like Mark Mobius, chairman at Templeton Asset Management, are confident the overall trend is up. “Commodities are going to continue their upward trend,” said Mobius.

A Bubble Waiting to Burst?

There’s a lot of talk circulating lately that China may be a pin-prick away from a bubble burst that could rival Dubai.

Hari Sud, retired VP of C-I-L Inc and a former investment strategies analyst, has recently written an interesting article featured on UPI Asia.com that forewarns of a Chinese economic collapse brought about by the Asian nation’s “aggressive and arrogant” move toward “policies that serve Western consumer markets.”

Sud says the indicators pointing towards a possible “internal implosion” include a US$ 580 billion stimulus package, US$ 1.4 trillion lent to businesses (including the real-estate sector), and the US$ 80 billion in foreign direct investment received last year.

All this coupled with an undervalued currency and increasing real-estate prices have produced a bubble that “could burst with any minor international event,” he warns.

China’s tightened down on lending is a sign its leaders are well aware of the threatening financial storm, concludes Sud.

But slowing down lending may actually speed up a collapse in the Chinese real-estate market as demand wanes, warns independent economist Andy Xie, former chief Asian economist at Morgan Stanley.

A recent government report revealed property prices in 70 cities rose nearly 8 per cent in December 2009, the fastest rate since June 2008 and sales were up about 76 per cent in 2009.

However, Mobius disagrees and says he doesn’t see any property bubble in China. He himself is buying stock in Chinese developers because he believes the lending freeze won’t stall economic growth.  ”There’s too much demand, not enough supply,” said Mobius.

Too Much Focus on China?

While the doom and gloom over China’s potential global economic impact is casting a shadow over the markets as of late, there are those who feel the worry is a bit overdone.

“I am starting to think that some investors simply don’t understand China, even though they feel they do,” said Jen. “It is highly unlikely, in my opinion, that Beijing will drive the economy into a growth recession just to contain inflation.”

The best perspective on the possible Chinese threat comes from Canadian Mining Journal field editor Marilyn Scales. “I think sometimes the ‘experts’ are ignoring other economies that might temper the global outlook,” says Scales. “I fear we, and by ‘we’ I mean the educated public, are losing valuable perspective by concentrating so much on only one country.”

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