Stock Ideas 
Stock Ideas Investors Daily Edge The Chinese Miracle Has Run its Course
Stock Ideas Investors Daily Edge The Chinese Miracle Has Run its Course 
Market Watch
|
by Andrew Mickey Last Saturday, the entire mining industry converged in Vancouver to recognize the most successful projects, analysts and financiers from the last year. After such a great year for the commodities market, you can bet it was going to be a fun affair with everyone involved. |
|
| More... |
Most Popular
Login Form
| The Chinese Miracle Has Run its Course |
| Friday, 05 September 2008 | ||||||||
|
Have you ever had your beliefs questioned… only to find out you were wrong? If you have, then you know just how hard it can be to change your belief around to what is actually true. I bring this up because today I’m asking you to take another look at a closely held belief. The Chinese Miracle Has Run its Course It’s pretty crazy, I admit. In fact, I didn’t want to believe it at first. Because believing that China won’t save the world’s economy has huge repercussions. This whole commodity boom, without China, isn’t booming at all. The economy of Australia and Japan can’t grow as easily if Chinese demand is waning. Of course, up to this point, the thought of China slowing down was purely hypothetical. It’s one of those academic questions you ask yourself just to see where it leads. It’s a question I’ve asked myself hundreds of times over the past few years, but I didn’t consider it a serious outcome until recently. Has the Chinese miracle run its course? Will China stop pushing the global economy forward? The Proof Just Keeps Piling On To answer that question, we first have to see if China is slowing down. So I’ll let the following articles do the speaking… That’s just one news article, but it’s a biggie. You see, unlike the US, China is a huge manufacturing nation. If a contracting manufacturing sector signals economic contraction in America, you can imagine what it means to a nation whose economy revolves around it.
From Bloomberg… Manufacturing in China, the world's fastest-growing major economy, contracted for a second straight month in August, according to a survey of purchasing managers. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement. Since July, Chinese policy makers have put extra emphasis on sustaining the economy's expansion rather than cooling inflation. Growth has slowed for four quarters and Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on China's exports for the rest of the year. Of course, this Chinese slowdown isn’t something I’ve made up. Even China is acknowledging a fear of a slowdown. According to Forbes… China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter. The report said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts. Now, initially I thought that this slowdown was just an after affect of when China shut down manufacturing around the time of the Olympics to drop pollution levels, but now I’m seeing big companies making future decisions with the assumption of a Chinese slowdown. From the Financial Times… Growth in Chinese steel consumption is expected to slow markedly in the second half of this year amid weakening demand from the construction, household appliance and automobile industries, according to industry experts. Yang Siming, general manager of Nanjing Iron & Steel told a steel conference in Xiamen this week that most Chinese steel mills had cut output last month, because of shrinking demand and high costs of raw materials. “We’ve been cutting production since last month, and according to my knowledge, most domestic mills are cutting output too,” Mr Yang said. According to Steel Business Briefing, the steel consultancy, steel consumption in China is forecast to grow by only 8-10 per cent in the second half of this year, as little as half the 16 per cent growth rate for the first half of 2008. Of course, eight percent growth is still growth, but it’s a 50 percent drop in demand. Now imagine if this spreads through other industries in China. Sure, growth is still there, but its 50 percent lower than it was. This drop in demand will lead to… A Much Needed Drop in Prices Yes, the possibility of a slowing China continues to grow a little each day. I mean think about it. China is an export driven economy. In other words, they rely on foreign spending to buy their goods. What happens when two of the biggest foreign economies – the US and Europe – both see a slowdown in consumer spending and even a shrinking GDP? Well, export growth in China would then slow. Even though China is still growing, they would be at overcapacity – producing more than outsiders will buy. That would lead companies to shutter factories and lay off workers. That leads too… well, I think you get the picture. If Chinese demand slows down, that means prices of commodities should drop. It means the value of the Chinese Yuan would drop. It means that the Australian and Hong Kong dollar would both take a hit, among other things. It also means that China isn’t decoupled from the affects the US has on the global economy. And Now, an Admission A few months back I talked about higher oil prices. I said the higher oil prices were being driven by fundamentals. Some people may think I’m biting my tongue now, but I also said that we’d know a peak was reached when we saw emerging nation’s slowdown their consumption of oil. It’s here. It’s right now. And I hope you’re ready to deal with it. Of course, commodity prices may move higher from today’s prices. It looks like panic selling has hit the resource sector, leading to drastically lower prices. The fundamentals outlining the big, secular bull market in commodities are now starting to unwind. And we can’t be sure how bad things will get unless we see how long and how deep this slowdown gets. The most likely scenario is that late 2009 and early 2010, the US economy will begin picking up speed. As demand improves here, the world should follow the year after, and as the world economy picks up speed again, it will be full speed ahead for commodity prices. Just realize that you might be in store for lower or flat commodity prices for the next couple of years. That’s OK, though. All big bull runs take a little break. Prices can’t go up forever, lest we want the global economy to be overrun with inflation and destroyed. As an investor, if prices look good to you, dip your toes in the water, but don’t go all in. Don’t even invest what you normally would, either. Just take it slow. This is the time to be patient and keep your eye on what’s going on in the world economy. In no time, China will pick up speed again, the US economy will rebound, and we’ll be right back in the ridiculously inflationary environment that we see around us today. Stay free, Charles P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
This investment news is brought to you by Investor's Daily Edge. Investor's Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It's published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you'll receive practical strategies for protecting your portfolio and multiplying your money. You'll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor's Daily Edge .
|
||||||||
| < Prev | Next > |
|---|