The assumption among many economic analysts has been that sooner or later the declines in the US and European economies would combine to slow down the break neck growth in China. After all, isn’t the secret to China’s double digit growth over the past decade the fact that they have become the world’s premier exporter? The majority of analysts have been waiting to see when the slump in US demand will catch up with China and it looks like that waiting will be in vain. The Chinese have grown a solid domestic market and that demand is offsetting what they are losing from a decline in exports. The growth in retail sales in April was the highest since 1999 – reaching 22% and that was on top of a 21.5% rate of growth in March. That is the good news. The bad news is that some of that growth has been fueled by an inflation rate that is also reaching record highs. The inflation in food and fuel has been severe and has pushed the country’s rate to 8.4%. That is far too high to be sustainable and the government and central bank have been taking steps to address the issue through everything from raising bank rates to limiting investment. What the government of China has not done is reduce the subsidies that have encouraged consumers to spend more than they might otherwise and there has been relatively little effort to revalue the renminbi to a position more in line with its true market value.

Armada Strategic Assessment

China is not at the point that it is immune to the vagaries of the global economy but it is very clear that a fundamental shift is underway in the way the nation’s economy functions and this will have some serious implications for the US. The assumption in the past is that each nation needed the other and that this mutual dependency would keep political differences from becoming too serious. The Chinese have been major purchasers of US debt and now hold billions in dollars. The weakening of the dollar has been a big concern to the Chinese but they really can’t shift away from these holdings into something like euro or yen without seriously reducing the value of those reserves. The Chinese were thought to be dependent on the US market for the bulk of their economic growth and that made it possible for the two nations to be intertwined in an economic engagement. The US needs the cheap Chinese imports to hold down inflation and China needed the income. It still does but the day is coming when China’s domestic demand will be enough to sustain the economy – along with their expanded trade with other Asian states. When China is less dependent on the US economically than the US is dependent on China, that creates a new dynamic that will complicate the interaction between the US and China.

This information is provided by Armada Corporate Intelligence, Kansas City KS.  For more information contact Chris Kuehl, Managing Director, ckuehl@strategic-briefs.com.

The dollar has started to climb consistently against the euro and most of the motivation has been the belief that the Fed will discontinue their interest rate cuts and perhaps for an extended period of time. The Fed comments lately have been consistent in their warnings about the threat of inflation and their concern that at some point the high prices in the food and fuel categories will start to percolate more aggressively through the entire economy as has been the case in Europe. Granted there are some serious differences between the two – mostly in terms of the ability of the unions in Europe to demand pay raises that would offset the impact of inflation. There are compensations in the US to consider as well and the Fed is worried about these developing in the months ahead.

Armada Strategic Assessment

If the dollar keeps gaining against the euro there will be some significant pressure on the investment funds to start to shift away from their hedging strategies and that might mean some reduction in the price per barrel of oil. There is also some suggestion that US oil inventories are up a little this week and that is likely to have an impact on oil as well. It is still premature to assume that this is the signal that the price bubble is about to burst but there might be some time for prices to settle and allow the market to catch its breath. -CK

This information is provided by Armada Corporate Intelligence, Kansas City KS.  For more information contact Chris Kuehl, Managing Director, ckuehl@strategic-briefs.com.

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