Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Perfect Economic Storm for China:
Slow Growth and Rising Inflation

Wednesday, September 12th, 2012
By for Profit Confidential

Perfect Economic Storm for ChinaThe second largest economy by gross domestic product (GDP) in the world continues to show a deepening economic slowdown. And while the Chinese economy has been grabbing financial media attention for a while, now another obstacle for the Chinese economy seems to have appeared

Inflation in the Chinese economy has become an issue that could escalate economic problems for the country. The Consumer Price Index in China rose by 2.0% in August 2012 from August of last year. (Source: Wall Street Journal, September 10, 2011.) While 2.0% inflation may not seem like a bigger number, keep in mind the government likes a target inflation rate of 1.8%. The big problem is food prices—they rose 3.4% in August from August 2011.

What does this mean for the Chinese economy?

If inflation in China keeps rising, the government’s intentions to ramp up the economy with monetary stimulus could be tempered. I still remember 2008, when attempts to boost the Chinese economy resulted in higher-than-expected inflation and a bubble in real estate prices.

China’s central bank has already cut interest rate in both June and July to promote economic growth in the Chinese economy—and I can’t say I have seen any improvements from these rate cuts in the Chinese economy yet.

Throwing more gas on the cooling fire, Chinese industrial output rose by only 8.9% in August compared to 9.2% in July. This is the lowest growth since the May of 2009. Similarly, imports that might suggest economic growth or provide a gauge of increased output are also decreasing. Importation of crude oil was down 12.5% in August.

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Chinese exports are still in the slump—growing only 2.7% in August, compared to 1.0% in July—the increase doesn’t amount to much when last year the export growth rate was over 20%. (Source: Wall Street Journal, September 11, 2012.)

You might also be interested to know that exports from China to the European Union, once China’s biggest trading partner, were down 12.7% in August 2012 from last August. Because of the decline in exports to the eurozone, the U.S. has now become China’s biggest export market.

The data coming out of China show that an economic slowdown in the Chinese economy is become more visible.

The Chinese economy is seeing a slowdown—it is deepening and the Chinese government is trying to juggle its way to boost the economy. There has been increased fiscal spending and approval of new projects to boost the Chinese economy.

As I have mentioned before, any economic slowdown in the Chinese economy will affect the U.S. economy. Current indicators are suggesting a bigger downturn in the Chinese economy than economists (except me) had thought.

The European crisis is a problem itself. But with the U.S. becoming one of the biggest export markets for China, the question arises: is the U.S. economy growing enough to give China the export market lift it needs to grow? The answer is: of course not.

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Slow Growth and Rising Inflation
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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles