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As China Continues To Grow, They Watch For Inflation The Power of Yuan
My friends and I exited the train onto the long, cracked concrete platform. A drainage stream littered with rusty steel barrels trickled by. On the northern bank, a concrete wall backed by an even more daunting barbed wire fence served to support the numerous lookout posts dotting China’s most traversed southwestern border. This wasn’t the Rio Grande. Hundreds of mainland Chinese scurried by. The rush for customs ensued. The soldiers, dressed in their long pea-green military topcoats, suspiciously surveyed the masses, nudging to and fro, hoping to find the most expedient line to re-enter the mainland, like cattle in a stockyard. We, on the other hand, patiently held back. Lo Wu is called a “control point.” I imagine the Chinese authorities used the Korean DMZ as a suitable inspiration. Consequently, I saw no dicernable need in drawing the army’s attention. My friends, Western journalists from Hong Kong, certainly weren’t the red-carpet type. **********Special Opportunity********** Wanted: Aggressive, Wealthy and Tight-Lipped Agora Financial Reader Who’s not afraid to make an extra $94,050 this year? If you’re not wealthy, aggressive and tight-lipped, you might not be able to get the greatest advantage from this opportunity, so please feel free to stop reading right now. I apologize for using the past five seconds of your time. ************************************* My fire engine red North Face duffel bag drew some stares, but Western garb doesn’t facinate as much in Shenzhen as it would in the more remote, rural regions of northern China. That’s because I should probably thank the thousands of Chinese hustling all around me for stitching it together. That’s probably also true for just about every item of pure Americana attached to my priveleged self. And if the Chinese didn’t construct the authentic item, they could easily point me to an alley where I could haggle for a repro. Shenzhen, Deng Xiaoping’s first attempt at capitalism, Chinese-style, received the elevated status as China’s first Special Economic Zone (SEZ) in 1980. Seemingly overnight, factories popped up along the hot, humid delta like a nasty uncontrollable weed. Naturally, more factories required more transportation. Shenzhen became the world’s fourth busiest port by 2005. Within 20 years, market reforms turned a relatively remote city the size of Green Bay, Wis., into an industrial and financial powerhouse on par with Chicago. Wal-Mart shelves and Christmas mornings in the West have been built on a 90-hour, six-day work week in the East. The last 20 years of growth have produced more than 90,000 export-oriented processing firms on the mainland, with nearly 70,000 based in Shenzhen’s Guangdong province alone. It’s no wonder Chinese officials fear what ramifications a slowdown in the export economy may bring. Domestic growth and stability have risen with Chinese workshops. And make no mistake, the first three long-term domestic priorties on Beijing’s list are and will remain stability, stability and more stability. The yuan-dollar peg has gone a long way in ensuring constancy. Chinese economic growth — we would argue, all economic growth — ensues under the auspice of a stable currency. But ties to the greenback have recently come with a price. American policymakers have facilitated a weak dollar. For China, a weak dollar makes critical imports (wheat, corn, iron and soy) more expensive. Expensive imports mean higher prices. Higher prices mean more inflation. More inflation means less stability. "The primary task for macroeconomic regulation this year,” said Chinese Premier Wen Jiabao, addressing the equal and opposite reaction on the other side of the planet, “is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation." In his annual policy speech to China’s legislators, Wen clearly labeled rising commodity prices and the subsequent food shortages as China’s No. 1 policy issue for 2008. So Beijing finds itself in a bind. ************************************* Wall Street’s Most Profitable Stock Strings: Revealed AT LAST... Starting with $200 in January 2006, you could have been sitting on $9.4 million by July 13 2007, thanks to Wall Street’s most profitable secret… Get the details on four underground stocks set to rise eight times over in the next year. If I don’t deliver gains, I’ll give you DOUBLE your money back. Click here to learn more. ************************************* Going forward, yuan appreciation would certainly help alleviate rising prices (commodity imports would be cheaper). Export dependence, however, has thwarted this policy. On the other hand, protecting the export industry by enforcing a close yuan-dollar peg only intensifies further inflation as the dollar contines to slide. In the meantime, Beijing has turned to price controls. But price controls are nothing more than a short-term solution (“stopgap” would be a better word). Price controls disincentivize ample production. Shortages ensue. Prices, therefore, rise even higher. Beijing may have hope. China’s appetite for consumption keeps growing. Meaning Chinese dependence on an export economy to support sustained GDP growth looks to be waning:
According to The Economist, “The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year in the fourth quarter of 2007 (see chart above). Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points.” Meaning the Chinese economy appears to be transitioning into a sustainable form of adolescence. Achieving a more proper balance between domestic production and consumption should enable Beijing to gradually allow more currency appreciation as a means of fighting inflation. What that will mean for the American consumer remains to be seen. Political threats of more American protectionism combined with a rising yuan won’t do much to alleviate John. Q Public’s pain. If anything, he’ll have to spend more of something he already doesn’t have. On the other hand, companies with assets denominated in Chinese yuan should see a boost. Companies racing to construct Chinese infrastructure shouldn’t fare too badly, either. A stronger yuan will mean a great deal to companies around the globe. The question is how will your portfolio react when the yuan starts flexing its muscles? Until next time, P.S.: I’ve been saying this for years… China, if you can do it right, is the place to put your money. We haven’t seen anything like this since our own Industrial Revolution. That’s why I created my Free Market Investor newsletter. I have already given readers tons of foreign investment opportunities. Many are even traded here in the U.S. to check out my latest pick, read this report now… |
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| Christopher has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. <click here for full bio> |
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