Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

40 Years of Chinese Economic Reforms and Gold

Commodities / Gold & Silver 2019 Feb 01, 2019 - 06:05 PM GMT

By: Arkadiusz_Sieron

Commodities

The economic development of China is one of the most important events in the history of the world. In an unprecedentedly short time, millions of people have been taken out from poverty. But, as no country has ever developed so fast, that great story raises important worries.

We invite you to read our today’s article about the great progress China made in the last forty years and find out whether it’s too good to be true and it must end with some catastrophe, triggering rally in the gold prices.

One of the biggest risks for the global economy which can materialize this year is the slowdown of China’s economic growth. So, it is wise to analyze the current state of the Chinese economy – its implications for the gold market and what will happen next. As December 2018 marked the forty years of market reforms in China, we will adopt a long-term perspective, explaining how China transformed itself from a poor, backward and isolated country to the world’s economic power. We will examine what the global economy and the precious metals market can expect in China’s fifth decade of reform and development.


Emancipate the mind, seeking truth from facts and unite as one to face the future” – these are the famous words Deng Xiaoping said in December 1978, triggering China’s economic reform and opening to the international economy. Initially, the changes were rather modest, in line with the “bird-cage economy”. The market was compared to a bird, which had to be contained, as otherwise it would fly away. The planned economy was still in force, but with market experiments. The reforms were implemented gradually, often started in only a few regions – the leaders expanded them upon proven success, in line with the country’s motto “crossing the river by feeling the stones.”

But when the Soviet Union collapsed, China decided to speed up its transformation. The government did not merely reform the socialist economy, but it opened the economy and included market mechanism wherever possible. The next turning point was in December 2001, when China joined the WTO. The country then received a new powerful impulse for modernization, rapidly changing its status of a developing state into a reviving power. In 2009, China became the largest exporter on the globe (and in 2014 the largest trading state) and one year later, the second economy in the world.

At the turn 2014/2015, a tectonic shift occurred. The incoming capital to China turned out to be smaller than the capital outgoing China, while the IMF admitted that China is already the largest economy in the world, when using the GDP adjusted for purchasing power parity (see the chart below).

Chart 1: China’s Official Real GDP (blue line), China’s Alternative Real GDP (green line) and US Official Real GDP (yellow line) in millions of 2017 PPP US dollars from 1968 to 2018.


In the face of all these successes, the Chinese leaders rejected the previous strategy of building power quietly, offering China and the world new, highly ambitious programs, such as the Belt and Road Initiative – an infrastructure program worth 1.4 billion dollars, several times more than Americans allocated to the famous Marshall Plan after the World War II.

The country also set three ambitious goals to realize the Chinese Dream. First, by mid-2021, for the centenary of the Communist Party of China, the existing economic model, based on investment expansion and export, is to be replaced by a sustainable development and strong internal consumption. Second, by 2035, China will become a global leader in innovation. And, third, by the end of 2049, for the centenary of the People’s Republic of China, the country wants to achieve “great renaissance of the Chinese nation”, through a reunification with Taiwan, creating the leading civilization on the globe.

These are quite ambitious plans, aren’t they? No wonder that the current global hegemon woke up. After all, the trade wars are not (only) about trade or tariffs, but (also) about dominance, hegemony and primacy in high technologies. 

China’s economic rise over the last 40 years thanks to the systematic adoption of structural reforms has been extraordinary. However, as the country faces many challenges, the pace of economic growth has been declining in recent years, as one can see in the chart below.

Chart 2: China’s real GDP growth (official estimates – blue line, left axis, in %; alternative estimates – green line, left axis, in %) and the gold prices (yellow line, right axis, London P.M. Fix, annual average) from 1968 to 2018.

One of the biggest challenges is the transition from the export-led to a domestic-consumption-driven growth model. Given that exports account for a decent part of GDP growth, the slowdown seems to be inevitable. But the question is: will China follow in Japan’s footsteps, entering a multi-year stagnation? Possibly, but investors should remember that before Japan fell into stagnation, it had already reached high-income status in terms of GDP per capita, while China remains significantly below the threshold.

What does it all imply for the gold market? Well, China has experienced tremendous progress since 1968, lifting hundreds of millions of people out of poverty. It fascinates but also terrifies. This is why some people argue that the Japanese-like stagnation is inevitable, while other prophet that China will become the next global hegemon, with US dollar replaced by Chinese yuan. And, of course, both scenarios are considered to be positive for the gold prices (either due to the global slowdown, or the demise of the greenback).
           
However, the truth is in the middle. China will not replace the US. The Red Dragon just returned to the prominent role in the global economy that it played long time ago. We will have two- or multi-polar world, but do not expect China to dethrone US anytime in the near future, especially that America has finally adopted a more confrontational stance towards China. Sorry, gold bulls.

And the country is not likely to fall into stagnation either. The slowdown is projected to be gradual (and, after all, the economic growth at 4-6 percent is still relatively fast). This is because China’s governance system – characterized by centralized policymaking and decentralized experimentation and implementation – is relatively flexible and, according to some analysts, better-suited to rapid decision-making than dysfunctional and polarized politics under democracies.

Having said that, it’s clear that China will not be exempt from the iron law of regression to the mean in the long run. We are not naïve – and we do predict a slowdown in the economic growth. Actually, this is already happening. The World Bank forecast the GDP growth in China for 6.2 percent in 2019, a decline from 6.5 percent in 2018.You see, the country is going through painful structural reforms, just when the US decided to tighten its trade policy, while President Xi Jinping boosts his authoritarian rule, and the debt burden is mounting (Chinese households’ debt to GDP ratio has soared from around 18 percent in 2008 to over 50 percent in 2018). All these factors increase the risk of crisis. The boom fueled partially by debt will have to finally come  to an end. When it happens, it will affect the whole globe, including the gold market.

Investors should not underestimate the Chinese ability to sustain growth, but the challenges for Beijing get bigger each year. The industrial profits have recently fallen for the first time in three years, while the car sales have dropped for the first time in nearly 30 years. The simultaneous slowdown in both largest economies in the world – the US and China – would, if sharper than expected, increase the odds of an abrupt global slowdown and upset the stock markets. The yellow metal should shine, then.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in