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China’s growth speeds up–and that’s not all to the good

posted on April 1, 2010 at 12:03 pm
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I’m filing this post from the beach. I’m on vacation the week of March 29 to April 2. Unless the sun stops shining here in the Bahamas (or the kids decide to hire themselves out on a fishing boat), I don’t anticipate filing more than once a day for this week. JubakPicks.com will go back to its normal schedule on Monday April 5.

Growth in China isn’t slowing down—at least the manufacturing sector isn’t. The Purchasing Managers’ Index climbed to 55.1 in March from 52 in February, Li Fung Group reported today April 1. So far, Beijing’s attempts to rein in growth by raising reserve requirements for banks and setting lower quotas for loans isn’t having any noticeable effect on the sector.

At this point in time, strong growth in China is a two-edged sword, however.

On the plus side, strong growth from China is good for the global economy.

According to the IMF (International Monetary Fund), the global economy will grow by 3.9% in 2010. That’s up from a decline of 0.8% in 2009. China is clearly the engine that’s getting the train rolling. The IMF forecasts that China’s economy will growth by 10% in 2010. The U.S. economy, the IMF forecast in January, will grow at just better than 2% this year and the economy of the European Union will grow by just 1%.

So this morning’s news on an acceleration in growth for China’s manufacturing sector drove up the stocks of global commodity producers and global exporters.

But China is fighting a battle to prevent inflation that came in at a distressingly high 2.7% in February from moving even higher. Prices at the wholesale level have been rising at an even faster rate—5.4% in February. (For more on the danger of higher inflation in China, see my post http://jubakpicks.com/2010/03/26/coming-to-a-wal-mart-near-you-inflation-from-china/ )

And this inflation battle is the other edge of the sword. If growth in China doesn’t slow as a result of current government efforts and inflation threatens to move higher and indeed to escape control, then the government will take further steps such as actually raising interest rates charged to banks, cutting lending targets further, and maybe even, finally, allowing the renminbi to appreciate against the dollar.

The Chinese government has been extremely reluctant to end the renminbi/dollar peg that it put in place during the global economic slowdown in an effort to protect Chinese exporters. At that point the dollar was a declining currency so that the peg made Chinese exports cheaper against competitors from the rest of Asia and Europe.

But the huge inflows of currency that come along with roaring growth in the export sector make inflation harder to control and an undervalued renminbi makes imports more expensive to Chinese consumers, which also adds to inflation.

And, of course, speculation that Beijing will revalue the renminbi has led to hot money flowing into China in an attempt to profit from that appreciation in the currency, whenever it should come.

Where does all this leave investors?

Still bouncing around between hope—that China’s growth will drive the global economy and demand for commodities—and fear—that China’s government will be forced to take stronger steps to slow the economy in order to fight inflation

Until that situation is resolved, until that is inflation is clearly under control, I’d expect China’s stocks and the shares of the companies that depend on China’s growth, to bounce around without much in the way of a strong trend lasting more than a few weeks.

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  • EdMcGon on 1 April 2010

    IMO, the best play on China can be found in the countries that supply China, such as Brazil, Australia, and Malaysia.

  • ticktock on 1 April 2010

    This is a double edged sword for the Chinese authorities as they must balance exterior issues with their own growing domestic economy. Large parts of China have benefited little compared to the high growth areas we always hear apart. Too many people in the rural areas are still struggling. Inflation hurts them the most but at the same time their only chance for economic success is increased growth that eventually trickles to their areas. Add to that the need for China to remain competitive in the global market and also keep the US consumer afloat.

    I see the recent actions concerning the executives of Rio Tinto as another important sign of China’s internal/external tug of war. At the same time they are grabbing large shares of the world’s natural resources they are also attempting traditional imperial like power threats. Shades of gun boat diplomacy. :) For the time being I tend to agree with EMG that one might be better off trying to ride the tiger’s tail via the resource rich countries of the most transparency.

  • terryw on 1 April 2010

    this stock photo is more appropriete for China than the old honkong one

  • semievolved on 1 April 2010

    am curious what others’ thoughts are on how much of china’s resistance to letting the currency float is that as their currency appreciates against ours, it makes payments of our debts to them cheaper for us and effectively lowers the amount they recover on these debts.

  • YX on 1 April 2010

    People like panjwar think that I am defending China. In fact, I don’t even own any Chinese stocks directly, here or there. I even said it’s because of the Chinese government’s involvement. However, as I said few months ago, I own stocks of many foreign companies doing business in China and they are doing well. China has become big part of these companies’ business and lives. Many of them are among largest US employers. It takes a lot of ignorance and insanity to trash these companies’ customer, China.

    I think I posted this during the people’s congress that when I asked people over there how things were going, the first thing I heard was “the current (Chinese) leadership does people’s business very well”! I wish I can say the same here.

    It’s interesting that ED mentioned Malaysia. I think few months ago, I posted that India is the most overrated among BRIC. Several countries have better (than India’s) potential to rise after China and Brazil. Two of them are Malaysia and Indonesia. What amazing is that despite these two are muslin countries, it’s the improvement of their relationship with China made them more prosperous.

  • viwi on 5 April 2010

    I do not think that I’ve heard the answer to my question, which I posted long time ago. Anyway, how long this fast growth in China can continue?

    Most of the products you are buying in the US are already made in China, so there is not so much room for growth in terms of the export to the US. I am sure other countries (in Europe, most notably) can say the same. So, it is all about Chinese consumers? But they have their own internal limits. Or about Chinese government? But, no matter how much money they currently have in their reserves, it is not unlimited.

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