Beware Wall Street Sales Pitches Based on China Fantasies

Gaming China seems to be one of Wall Street's favorite pastimes. And given the country's blistering growth and gargantuan foreign reserves, that's understandable.

The country plays along with analyst prophecies every once in a while, too. The recent decision to let the yuan appreciate in value somewhat, for example, has been speculated about for months.

But more often than not, an anticipated move by secretive Chinese authorities serves as ideal cover for Wall Street's relentless sales machine. So investors should take any recommendation relying on the emerging giant's possible moves with a grain of salt.

Reality Deflates Sales Pitches

The latest reminder for skepticism comes by way of the gold market, where some gold bugs have salivated at the prospect of China causing prices to jump as it makes the precious metal a core part of its reserve holdings.

But Chinese authorities seem to have missed the memo. The gold market is simply too small, volatile and illiquid for asset allocation, China's State Administration of Foreign Exchange (SAFE) said in a report earlier in the month.

Before that, markets sold off sharply, only to rally again when Chinese officials denied reports that they were mulling bailing on the euro amid Europe's debt crisis. Recall that much of the euro's gains over recent years was spurred by anticipation that Beijing would use it as a way to diversify beyond dollar assets.

And speculation that China would turn away from the sliding U.S. dollar fueled considerable volatility during dark days for the greenback late last year. But those fears, too, seem to have been unfounded given the dollar's sharp rally this year.

Wall Street is packed with self-serving fantasies of what the Chinese might do. But investors should note that Beijing seldom plays along.