Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

The Conundrum that is China

Economics / China Economy Apr 24, 2007 - 10:16 AM GMT

By: Paul_Petillo

Economics

There are currently two undeniable truths in this new global marketplace: The US will buy what it wants with borrowed money and the Chinese have so far enabled that buying spree by loaning us the cash.

China has become an economic enigma. Growth in the country is running over 11% and inflation, now at 3.3%, slightly over what China considers reasonable, is beginning to increase much to the dismay of the Communist government.


Concerns over what can be done have left many investors wondering what Chinese officials will do. Investors who believe that an economy needs to grow but disagree on how much growth this good worry that any shifts in Chinese economic policy will ripple around the world. Investors in China sent their exchange tumbling over 4% recently when the government targeted borrowing excesses.

Bad Posture

The United States left with fewer options as its own economic growth slows, has chosen our trade deficit with China as the line in the sand. With dissatisfaction expressed as strongly as they dare, the Department of Commerce decided that imported “coated free” paper was as good a place to begin a revised stance.

This paper product generates slightly more that $224 million in sales here in the US . Hoping that this would allow manufacturing in this country the opportunity to begin to chisel away at the $763.6 billion deficit, the DOC chose this industry suggesting that Chinese government subsidies allow exporters to sell the paper well below costs.

The DOC is focusing solely on unprinted materials and to put that item in better perspective, it makes up only 0.0002% of that total trade deficit.

The US has threatened to use countervailing duties. Described by the World Trade Organization as the result of an investigation that accuses a country of subsidizing an industry to keep competition at bay, this action creates several problems for China .

China would like to achieve a growth rate close to 8%. Yet government officials worry that the state of social stability hangs in the balance should growth slow significantly. The cascading effect of slow growth would increase the value of Yuan, which would increase the value of imported goods while making those cherished exports more competitively priced.

Yet by comparison, we seem equally as vulnerable. With our most willing lender using strongly worded rebuttals such as “deep regret”, the enthusiasm of U.S. Commerce Secretary Carlos Gutierrez over this US action should be somewhat tempered. It is widely predicted that the US will be dealing with a slowdown of its own over the next two years and in no position to cry foul.

Fair Trade

This week, the Canton Import and Export Fair opened in Canton . As businesses from around China gather to this yearly event to display their wares to foreign buyers, they seem little concerned about the trade stance the US is making.

Barriers to trade have been tumbling worldwide creating new markets for Chinese goods. Prosperity in developing countries and largely unrestricted trade policies across Europe (except when it comes to shoes) has given the attendees at the fair the ability to predict expanded growth in exports to continue.

While the US deficit has grown to record levels, exports to this country have fallen steadily from the 2000 high of 31%. Six years later, that number is now 22.7% as China expands its list of customers beyond the American consumer.

Perhaps a better representation of just how far apart these two nations are when it comes to exports lies in the output numbers. China exports 10% of its output to the US . We export 0.2% of our products to China .

The Orderly Fall of the Dollar

As hard as he has tried, Treasury Secretary Henry Paulson has failed at every attempt to get the Chinese to allow their currency to float. The importance of the Yuan, which has appreciated against the dollar a total of 7%, has had little impact in these trade issues. A strengthening Euro has made Chinese exports, which have become cheaper as that currency has risen, has given the Chinese a new and freer market.

Less than five years ago, the specter of a declining US economy would have given the Chinese a reason for caution. No more. The European economy seems to be adjusting to the US slowdown even as it contemplates another interest rate increase.

Inflation on a global scale may be inevitable. While Ben Bernanke, the Federal Reserve Chief has suggested that inflation will be fought with his favorite counterbalance, rate increases, it may now require an international effort. That will become an increasingly difficult sell to countries that have never experienced this type of prosperity.

The Hand the Feeds

The one fact remains, China loans us the capital we use to keep our economy humming. Harder language could jeopardize any future growth here at home while having little effect on our lender of choice.

China has been responsible for purchasing a third of the bonds issued by the government. There has been speculation that a sudden dissatisfaction with US trade policies could trigger a sell-off of the $990 billion in bonds currently held by the Chinese. While it is possible, it is also unlikely.

What is likely although may be just as problematic. Should the Chinese stop buying Treasury bonds, rates here in the US would increase dramatically which would have the cascading effect of slowing the economy and dampening the desire for Chinese imports. The US is betting against such risks.

Internally, China has attempted to slow its economy by restricting loans that are not government approved. A recent edict aimed at local government spending for building has emphasized a return to the austere suggesting any future projects be “stately, frugal, functional, and resource-efficient”.

Increases in the reserve limits that Chinese banks must have before lending will also slow growth. Allowing the Yuan to appreciate would have the net effect of slowing the growth rate of the Chinese economy. But the fix would only be temporary.

The US would do well to tread cautiously while heeding an old Chinese curse that suggests: “May you live in interesting times”.

By Paul Petillo
Managing Editor
http://bluecollardollar.com

Paul Petillo is the Managing Editor of the http://bluecollardollar.com and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via: editor@bluecollardollar.com


© 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

6 Critical Money Making Rules