George Leong writes: What happens in China will have an impact on the U.S. economy and the global economy. The linkage between economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.

The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption in China.

China’s inflation rate is currently manageable at 1.8%, which allows for added monetary stimulus. (Source: National Bureau of Statistics.)

China’s recent industrial production is a sore spot compared to the sizzling results from 2003 to 2006, as reflected on the chart; albeit, the number has risen in the past three straight years. Industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since 2008, when the global recession started and there was a need for monetary stimulus. According to China’s Ministry of Industrial & Information Technology, the country’s industrial production is estimated to fade to 10% in 2012 versus 13.9% in 2011, which is an ideal level for monetary stimulus.

The World Bank predicts China may see its economic growth expand by a mere 7.7% this year and rebound to an optimistic 8.6%. But these metrics may not be easily achievable, especially given the financial crisis in the eurozone, hence the need for monetary stimulus in China.

The country’s gross domestic product (GDP) has declined over the past six straight quarters. GDP growth came in at 7.6% in the second quarter and is estimated to contract for the seventh straight quarter to 7.4% in the third quarter of 2012, according to Reuters. This is a sign that monetary stimulus is needed.

What makes the situation in China and its associated impact on the U.S. economy worrisome is the fragile state of the eurozone and Europe, which continue to fight an uphill battle of high debt and muted growth. China will suffer as demand for Chinese goods declines. But there are some encouraging signs. The country’s exports exploded up 9.9% in September, versus 2.7% in August and one percent in July, according to a Bloomberg survey. Of course, we need to see if a positive trend develops or if the reading was an aberration.

Chinese imports increased 2.4% in September, an improvement over the decline in August, but well down from the 4.7% increase in July and the previous year’s growth.

And to make matters worse, there’s also concern that Mexico will take market share away from China in the manufacturing of cheap goods. The country’s wages are just slightly above China’s, where wages have steadily moved higher. Mexico also has plenty of manufacturing capacity and, more importantly, the country’s location adjacent to the United States makes for cheaper shipping costs rather than using containers to ship goods across the Pacific Ocean.

The bottom line is there’s lots of work ahead for the Chinese government, including the need for monetary stimulus.

I expect the country to continue to introduce new monetary stimulus into the economy, but at the end of the day, Chinese consumers will need to reach into their pockets and want to spend.

Source: http://www.investmentcontrarians.com/inflation/worried-about-america-youd-better-watch-china/822/

By George Leong
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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