China Is a Drama Queen
Nov 23rd 2011 2:01PM
Updated Nov 23rd 2011 2:10PM
You may not care for China's politics or the way many of the U.S.-listed Chinese companies have handled their corporate accounting, but you do have to respect the fact that regardless of what happens with the global economy, it will in some way depend on what's going on in China. The worst part of all is China knows this all too well.
China is perhaps the only country where the demand for material goods is still strong enough to keep many companies in the U.S. from sinking into the abyss much like we're witnessing in Europe. But what if that demand disappeared?
That could be just what's happening based on last night's preliminary purchasing manager's figures out of China. The PMI of 48 not only represents only the second time the Chinese economy has experienced a contraction in manufacturing since the lows of 2009, but it's also a sharp 3-percentage-point decline from the previous month.
The decline in manufacturing and from double-digit GDP growth shouldn't come as a surprise to anyone since the People's Bank of China, essentially the equivalent to our Federal Reserve, set out to begin raising lending rates last December in the hopes of slowing down the inflation that would invariably come with booming growth rates. Their actions do appear to finally be working. Inflation rates in October dipped to 5.5% from a peak of 6.5% in July, but that should in no way indicate that China is ready to lower interest rates anytime soon even if inflation is finally heading in the right direction.
This leads me to my main assertion: China is nothing more than a drama queen.
The U.S. has long claimed that China's cheaply priced Yuan has given it an unfair trade advantage that makes U.S. imports too expensive and puts U.S. businesses at an inherent disadvantage. A low Yuan is great for companies like Wal-Mart (NYS: WMT) , Target (NYS: TGT) , Dell (NAS: DELL) , and Hewlett-Packard (NYS: HPQ) , which either import low-margin goods or employ Chinese workers to make products then sold in America, but it's bad news for the majority of American businesses.
So in 2010, when China declared that it was going to float the Yuan against the U.S. dollar, everything seemed like it was going to change. Then, just weeks after allowing its currency to float, the central government in Beijing announced its intentions to keep the Yuan at "stable and reasonable" levels, reversing the decision it had made just weeks before to let free-market policies dictate the price of the Yuan.
China simply knows its economy is too important to ignore and is more than willing to pout about it when it doesn't get its way. Unfortunately, it won't really matter whether China's slowing economy comes in for a hard landing or a soft one because we're all along for the ride. So sit back and relax, because the drama's just beginning.
Does China deserve its own daytime soap opera slot? I think so, but I'd love to have your opinions in the comments section below. Also, I invite you to claim your copy of our latest free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks," which were handpicked to thrive even in an uncertain economy.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Dell and Wal-Mart Stores, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that covers foreign stocks, but is written in plain English.
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