The Economic Giant-- A Closer Look at China

IT'S NO LONGER NEWS THAT CHINA IS BECOMING A MAJOR player on the world economic scene. Yet, as we've noted in past editions, investing in China is fraught with uncertainty, due to a still un-free political situation, and insecure property rights. Despite our current lack of interest in Chinese stocks, China's renaissance clearly has implications for investor decisions worldwide, simply due to its market's enormous size.

Recently, China's newfound economic strength has become fodder for political electioneering, and talk of protectionism is once again rearing its ugly head. Candidates are falling over each other to see who can blame the Chinese more effectively than their opponents. Of course, our readers recognize such ranting as nothing more than political gamesmanship. Nonetheless, all efforts to "save jobs" at the expense of free trade can only be dangerous to the US economy. Looking back in history, identical rhetoric led to trade barriers, and the Great Depression.

For the moment, the greater issue may be what the future holds for China, and what impact that may have globally. The key to the future centers on China's currency and their banking system. Trade with the US, while important, is truly a secondary issue. So far, every story in the press involving China's economy seems to focus on trade issues, business growth, and cheap labor. Those are interesting. But an issue that is getting little or no press dwarfs them.

China has two overwhelmingly significant flaws in its economic structure that must converge in the relatively near future to cause a devastating collapse. When that happens, politicians and reporters who have focused on trade issues will look silly at best. Only recently have we begun to see unfocused stories about China's economic bubble. They cite skyrocketing real estate prices, and over-investment in specific industries such as automotive or aluminum, but they miss the bigger picture. Blame is cast upon Chinese peoples' penchant for gambling, as though it is the citizens who have brought this upon themselves.

As usual, we know to look to the government for most of the fault. China's financial system is a relic from the past: a dinosaur from the days before competition entered the economy. The nation's financial system primarily comprises four government-owned banks, which may be privatized in the near future. Thus far, these institutions have been shielded from competition and guaranteed by the government. Those who remember the savings & loan fiasco here know that thrusting such incompetent institutions into a competitive world is disastrous. Long overdue for reform and utterly unprepared for the pressures of competition, the problem with China's financial system doesn't end there. China's economy has grown impressively over the past decade but much of that growth has resulted from tricks played by the government related to its currency and exchange rates. Over the past decade, the Chinese government has carefully "managed" exchange rates in such a way to devalue its own currency. This has made Chinese goods unnaturally cheaper for foreign currency holders, simultaneously impoverishing segments of the Chinese population.

To accomplish this valuation, China has had to hold vast sums of dollars, yen, and other currencies, instead of exchanging them for yuan. This leaves other countries holding their yuan, and causes their value to fall. The falling yuan makes Chinese trade goods more attractive to the rest of the world, but the citizens suffer in the short-term, due to their weak currency. We hear that the "new" administration in China (which is directly related to the "old" administration) has an interest in seeking a more responsible balance of payments and reducing inflation, but we find this unimpressive. Until actions follow the talk, there is little evidence that any real change will develop.

The combination of currency disruption and a weak banking system is a recipe for near-sure collapse. This leads us to recommend against the rush to Chinese stocks. However, the bigger question is what impact this collapse will have on the world economy. It is difficult to determine how devastating the repercussions would be, but suffice to say, it won't be good. We'd imagine that stable economies will hold up best, but the very size of China's economy would likely affect everyone. On the other hand, due to the nation's relative isolation, it is possible that problems will be somewhat muted. The greatest threat would normally be a trade disruption. We might see some price increases in Chinese-produced goods, but the impact on the U.S. economy or those of other developed economies would not seem to be incredibly susceptible.

The greater fear may be that when China runs into trouble, it will start spending all those dollars they've been holding. The result may be further pushes toward inflation in the US, an outcome we've already predicted. In these days of rabid spending, and increasing debt, an inflation rate that pushes interest rates higher cannot be good. These concerns are not immediate, but a long-term investment plan requires some foresight.

Despite our concerns about the longer term, we are still quite confident that the economy, and hence the market, will perform relatively well through the elections in November. As a result, we strongly recommend making the best of it, as the longer-term outlook is uncertain. Perhaps when November comes, we will have a clearer view of the future, but for now, investing for the present is all that can be done.

To send comments or to learn more about Scott Pearson's Investment Management Services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

---

Politics

The Republican Party became popular due to its view on... Read More

Doorstops and Paperweights

Ted Stevens (R-Alaska), chairman of the Senate Commerce Committee, has... Read More

Asking For Proof in the Economic Pudding

There are no stupid questions, only stupid people. Ask an... Read More

Lawyers and Franchising

It is amazing how the Federal Trade Commission has destroyed... Read More

International Terrorists Have US Partners; The Federal Trade Commission

The Federal Trade Commission in their latest move to increase... Read More

Newspaper Reporters Tread Lightly on Compulsive Gambling Addiction

Websites designed to help people overcome their gambling addictions have... Read More

Peace in the Middle East

Peace in the Middle East - whoa that is a... Read More

Oil Prices Effect The United States Competitiveness

Just because we have been leading the World in innovation... Read More

Operation Iraqi Freedom, Soldiers and Their Psyche

Have you noticed that the when the service men who... Read More

Interview With A Former ACLU Office

I had the benefit of getting an interview with Mr.... Read More

MORAL ARMOR Condemns Home and Business Seizure Law

Nothing could be more alarming for Americans than what I... Read More

Was Pakistan a British Creation?

The furore in the BJP camp in India, triggered by... Read More

Business: ?Where Is America Headed To??, New York Millionaire Wonders

Hello! Happy new year. May you live a long healthy... Read More

China Finds Humans to Test Bird Flu Vaccine On, in Qinghai

China is serious about breaking into the bio-tech field and... Read More

Banana Republic - United Kingdom

The recent scathing remarks by High Court Judge Richard Mawrey... Read More

Bushs Election Victory: Ethics, Morality and Religion Defeated War, Economy and Foreign Policy

President George W. Bush has unofficially won his re-election bid... Read More

911 Conspiracy Theory Revealed During Coffee Shop Conversation

A coffee shop conversation about a Great Country in Historic... Read More

Will Gay Marriage Slow Down AIDS Crisis

It is widely known in the Homosexual Male Populations that... Read More

When Will America Wake Up?

In order to win the presidency in America, candidates must... Read More

Farming Human Clones

If someone wanted to farm future clones they would need... Read More

Elliot Spitzer Sued By Feds

It appears the Feds are suing Elliot Spitzer over his... Read More

Paper Industry

The paper industry in the US is hurting. Due to... Read More

The British Sikh Army

Britain has a proud tradition of valiant armed forces and... Read More

The Revolt of the Poor: The Demise of Intellectual Property?

Three years ago I published a book of short stories... Read More

Why Dont We Listen To Entrepreneurs?

I just got done reading a series of articles dating... Read More

The Will To Fight for Islam

The more I study the dynamics of WWII the more... Read More

Connecticut Does Not Need Further Income Tax Hikes!

Industrial Recruiting. The absence of a state income tax in... Read More

Politicians Will Save Civilization

Most politicians are completely out to lunch and totally Machiavellian... Read More

PATRIOTIC ARMAGEDDON... Can You Hear Me Now?

Each day the present geo-political reality confirms what The Tribulation... Read More

An ROI on National Security

Do you find it interesting that people complain about the... Read More

The Mother of All Political Battles Has Begun!

News is spreading of the retirement of Supreme Court Justice... Read More

US Government Sore Losers in Not So Neighborly Dispute

I'm getting a little tired of being lectured by that... Read More

Socialist Public Schools In America

Many parents might think it a bit farfetched to compare... Read More