China’s precarious position

One of the major reasons for the market’s continued rally is China.

China has been buying up commodities, especially copper, and that has caused a resurgence in the price of copper. Because copper is such a fundamental unit in overall economic demand, many are taking the surge in copper prices as a sign that underlying economic demand is rebounding and set to run for quite some time.

But, is the demand from China fundamental, or is it due solely to economic stimulus from China’s government? Even if it is due to government stimulus, does that mean such demand will or will not continue? These questions are not easy to answer.

China’s banking system is not very sound because so many loans are given out as political favors. On the other hand, the Chinese save a huge percentage of their income, some say 20-40%, which is three to seven times higher than here in the U.S. (and that’s the highest U.S. saving rate of around 6% since the 1990’s). Savings become investment over time, and investment can make up for a lot of bad loans.

China is also experiencing political unrest. China’s highly centralized government is fighting to balance the interests of 600 million people living on the east coast (who benefit from free trade) with the interests of 700 million people living in China’s interior (who are mostly dirt-poor farmers). This is a delicate balancing act, and, without high economic growth, likely to get much more difficult.

China’s economy is very dependent on exporting products. Because worldwide demand is down so much, China has little to export. They are trying to shift their economy more from exporting to internal demand, but this will take a lot of time and effort, and success is by no means assured.

If China succeeds in their efforts to keep growth going, then expect higher commodity prices and increasing growth for the world economy. If China can’t keep the growth engine going, then expect commodity prices to tank and for the world economy to muddle along.

China is likely to be the main driver of short to intermediate economic growth for some time.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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