Another Look at China

In my blog yesterday, I mentioned in passing how disappointing Chinese data helped trigger a wide-reaching case of risk aversion in the markets to the benefit of the yen. Today, we will dig a little deeper into the issue and discuss what exactly China’s weaker-than-expected economic figures mean for the global economy.

Earlier this week, China revealed that the fixed capital investment of companies slowed down again in July, marking its eighth consecutive month of decline. The industrial production report followed suit and showed that production decelerated for the fifth straight month.

china_glass.pngEven though China is still expected to expand by a whopping 10% in 2010, these less-than-stellar reports suggest that China’s growth has hit a peak. This means that the country’s growth could start to drop to 9% and even lower by the end of this year.

With the recent slew of poor data that came out, I can’t help but wonder what Chinese officials are going to do now…

After all, just a few months ago, they were waving their magic wands, implementing tightening measures to help slow down growth and curb inflation. I guess you could say that those moves are finally kicking in.

While recent reports show that year-on-year inflation hit its highest level in almost two years this past July at 3.3%, some are saying that this is the highest it’s going to get. Analysts are pointing to flash floods that destroyed crops as a reason why food prices rose sharply last month. They’re optimistic that once the effects of these natural disasters subside, prices could revert back to normal levels.

What does this mean? Well, it could be one reason for Chinese officials to kick back, relax and have a Tsingtao beer before they implement more tightening measures. Obviously, they don’t want to curb growth too much right?

Whatever they decide to do, they better be sure they are sobered up and know what they are doing. As I’ve said time and again, China now plays a huge role in the global recovery…

With China being at the forefront of economic growth, its resilient consumer demand and need for raw materials pump up international trade with commodity-producing countries such as Canada and Australia. Both countries have China as one of their major trading partners so they have a lot to lose when the Chinese economy slows down. Just ask the Loonie and Aussie bulls how they got a helluva beating when all the poor Chinese data was released earlier this week!

This makes the Chinese decision a lot harder. They can afford to hold back on tightening measures in order to maintain growth and stimulate global demand, but run the risk of overheating. On the other hand, if they implement more measures, they might just be cutting the lifeline to global recovery. Not an easy choice eh?