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China Is A Major Potential Problem
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| By Ronald Sadoff Sadoff Investment Management The U.S. economy is humming along at a near perfect pace - maybe a notch or two too fast, which in turn, would necessitate some Fed tightening. The Fed may just want to insure that inflation doesn't escalate. Our belief is that any inflationary problems, if they do exist, should be short lived. Meanwhile nearly half a world away, trouble is percolating. China is attempting to cool down its vastly overheated economy. Just last quarter the growth rate in China was a booming 9.7%. The developments in China need watching because its economy can influence the world's growth pattern. China has been the driver of global growth, most notably for the United States, Southeast Asia, Korea. "Two-thirds of the reason for Japan's recovery is China," according to Japanese management consultant, Kenich Ohmae. China and new Japanese plants in China are sucking in so many Japanese exports there are not enough ships to bring them over fast enough. In essence, China is pulling Japan out of its slump. Here is another way to measure China's importance in the global economy. In 2003, 28% of total German export growth went to them and in the United States the figure was 21%. Multi-nationals - from automakers - to chipmakers - depend increasingly on Chinese demand for new growth. Motorola relies on China for 10% of its chipmaking revenue. General Motors reported that first quarter profits from Asia quadrupled to $275 million, thanks to soaring demand from the mainland. The soaring demand from China has been the primary force behind the advance in commodity prices over the last 18 months. China is one of the world's largest consumers of materials like aluminum, coal, copper, iron ore, nickel and steel. China is swallowing up 7% of the world's oil supply, 30% of its iron ore output, 27% of all steel products, 31% of coal and 25% of the aluminum market. No wonder commodities have skyrocketed over the last one-and-a-half years. A sudden slowdown in China could cause commodity prices to decline (perhaps significantly) and slow the global economy. China's effort to dampen its run away, bubble economy has just started. Because China has been such a powerful stimulus to the world as both a producer and consumer, its economy must be closely monitored. If China were to go from boom to bust, it could inflict great damage on the rest of the world. How much weight China swings economically can be observed by the recent downward price trends for commodity prices from copper to aluminum in response to its moves to slow its excessive growth. Nickel, one of the hottest commodities over the past year, has tumbled from $17,000 a ton to around $11,000. Most commodity prices have plunged 15-20% over the last few months. Even gold and silver prices have tanked over the past two months - a sign of quieting inflation pressures. And as Beijing applies the brakes more forcefully, commodities could easily give back all their gains. The commodity boom, if not reversing, is losing momentum. Keep in mind that China does not have the experience in slowing a run away economy. For them, this is a learning experience. In summary, China is a very important variable that will determine the path of the global economy. Top Four National The Chinese economy is red hot but its foundation is a broken third world financial system. Within the banking system, 45% of all loans are already non-performing. The top four national Chinese Banks are insolvent: China Construction Bank, Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China. A Potential Trouble Spot China is a potential trouble spot. Its influence is huge and widespread. The best observation post is to watch industrial commodity prices. The good news is that a soft decline for commodity prices will portend slower world growth and a moderation of inflationary pressures (very bullish for bonds). A waterfall tumble for commodity prices could signal a forthcoming deflationary spiral. If commodity prices push higher, it will signal that China's torrid growth pattern will extend. In turn, this would necessitate further tightening and more restrictions by Beijing to slow down the economy. |
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