How China’s Craving for Raw Materials Will Affect You

ChinaI have long been a supporter of looking for growth in Chinese stocks. The reverse merger fiasco concerning fraud at numerous Chinese reverse merger companies killed the positive bias towards Chinese stocks, but I feel it was overdone and not justified to that extent.

The reality is that China is the world’s second largest economy and could vault ahead of the U.S. by 2040 if the growth continues, according to Goldman Sachs. China’s gross domestic product (GDP) expanded at an average of 9.3% annually from 1989 to 2010. That is impressive. Its Asian neighbor and former economic powerhouse in Asia, Japan, continues to struggle for renewal with its GDP growing an anemic 0.55% average from 1980 to 2010. China’s economy expanded at 9.8% in the fourth quarter, above the 2.8% in the U.S. and estimated 0.1% drop in Japan.

As I have said in the past, China has done well largely because it has marketed it massive cheap labor workforce and significant manufacturing capacity to the world. When you can produce goods for a fraction of the cost versus domestic production, you tend to go for the cheaper cost, especially if you’re a public company trying to make money for its shareholders.

China’s mega-power economic engine is stalling, but the growth in the country continues to be well ahead of that of the rest of the G7 countries

For 2012, China’s GDP is estimated to slow marginally to 8.6% from the previous 9.2%%, according to Goldman Sachs. This is impressive compared to the industrialized world.

Economic growth in the Asia-Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in neighbor India.

In contrast, Europe has stalled its economic engine, with Germany on the verge of a mild recession in the first quarter.

 With China continuing to grow, the demand for raw materials will remain high across many sectors; from industrial, to mining, to technology. The country is the world’s largest consumer and producer of gold. In 2010, the country produced a record 345 tons of gold, which was tops worldwide, according to research by precious metals consultant GFMS. This demand has helped to drive up gold prices and will continue.

The reality is that China is trying to reduce its need for foreign sources of metals. The country is also the leading domestic producer of aluminum, zinc and lead, and is second in tin. China is also a major producer of copper, nickel and silver. Look at some of the many Chinese mining companies, as there is huge potential under the ground.

 Yet the country continues to scour the world looking at acquisitions in raw materials. Mines with large reserves are sought after. China has made numerous acquisitions and I expect this to continue, especially as the country continues to grow and its appetite for raw materials rises.

As I said, the strong demand for gold from China will add support to gold prices going forward; I discuss this in China and India: Gold Buying Bullish.