China's economy shifts into a higher gear

11/11/2009 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Good news, bad news from China.


Good news first: China’s economy continues to roar ahead.


Retail sales climbed at an annual rate of 16.2%. Exports slowed their slide and the trade surplus almost doubled to $24 billion in September. GDP growth looks well on its way to exceed 10% in the fourth quarter of 2009. The Chinese economy grew by 8.9% in the third quarter.


All that’s good news for investors counting on China to power the global economic recovery until the U.S. economy can pick up some momentum


Now, the bad news. China’s money supply grew at a record annual pace and money poured into urban fixed-assets. That’s another word for real estate. Investment in those assets has now increased by 33% in the first ten months of the year.


That will worry investors who fear that China is creating an unsustainable bubble built on cheap money.


With the economy soaring and liquidity racing ahead, the guessing now focuses on when the Beijing government will start to rein in the money supply and when it will end the dollar peg for the renminbi that has been in effect since the global economy went into a stall. The renminbi has been pegged at 6.83 to the dollar since July 2008. The Chinese government had allowed the currency to appreciate by 21% against the dollar in the previous three years.


The betting now is interest rates in China and the currency exchange rate will start to rise in March. That would give the economy another four months or so to build up momentum.


That delay will b e painful for China's trading partners who are already suffering from competition with a cheap Chinese currency. Another four months of momentum, however, would be good news for commodity economies, commodity producers, and any supplier that sells to China.

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