Who Benefits From Robust Chinese Growth?

At 10 pm Eastern time we get a new battery of Chinese economic statistics.  Many of the anticipated numbers are mind boggling.  For example, the GDP is expected to be up 11.6%, above last period's 10.7%.  Despite the rapid growth, the CPI in projected to increase by only 2.6%.  Investment in fixed assets such as factories, road, bridges and power equipment is expected to increase 26.1% year versus year.  The US equity market cheered this morning when retail sales increased 1.6%, but the year to year increase in Chinese retail sales is expected to come in tonight, up a staggering 18.2%.  

It is tempting to dismiss these numbers as exaggerations by the government keepers of statistics.  Perhaps some are, but you cannot ignore the trend nor the vigor of the Chinese economy.  A 26% increase in the fixed asset investments can indeed cause a hearty increase in the demand, and usually the price, for such basic industrial commodities as cement and steel.  Total Chinese car sales last year increased 45% to an estimated 13.6 million cars, overtaking the US as the world's biggest auto market.  Sales of cars in China for March 2010 are estimated at 1.2 million cars.  For the entire year Rao Da, the general secretary of the China Passenger Association says: "We are confident that China’s vehicle sales will surpass 17 million units this year, growing by about 25 percent.”.   There are those who estimate the ultimate demand for autos in China may be 50 million cars annually, so it is best not to dismiss the rapid Chinese growth. 

It is human nature to be wary and perhaps a little jealous of the 'nouveau riche' in the neighborhood, but the new wealthy have a tendency to spend a lot, and hence share the wealth.  An upward revaluation of the yuan will give them even more money to spend, so who is going to benefit from the new purchasing power of the Chinese?

Australia and Canada have been big winners because of the Chinese economic transformation.  Australia with their sparse population and ample supplies of coal, wheat, iron ore and other commodities needed by China, has been able to escape most of the global recession.  Canada has enjoyed a capital inflow from China as they welcomed their investment in oil and other natural resources.

Going forward the country which will emerge as the biggest trading partner with China will be Japan.    Manufacturing of consumer products including cars has long been a specialty of the Japanese.  With the aging population in Japan more interested in preserving capital, than buying consumer items, this has been a problem.  Much has been written about the dour longer term outlook for the Japanese economy, and not enough attention has been given to bright future prospects manufacturing for and trading with a wealthy neighbor.

The short side of the yen has become a very popular trade for spec, both large and small for the past three weeks.  They have accumulated net short positions of 63,000 contracts.  When blowing through some buy stops, the yen climbed to 94.77, but has since retreated, and is currently trading at 93.02.  Going forward the Japanese will indeed have some problems, but they also have some opportunities.  Recent trader bearishness might have become too popular, and without some additional selling of the yen or bear news, an advance of the yen to 91.50 might prove a shocker for the bears.

Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.