Now that the world has looked into the stock-market abyss, inflation seems like a relatively small price to pay to keep global credit markets and economic growth alive. This plays into your China strategy.
Despite grousing over the July 6.5% inflation from China, it is clear that the second-biggest economy on earth can handle the combination of price pressure and rising interest rates.
The country’s trade surplus surged to $31.5 billion in July on record exports, which proves that the main Chinese economic engine is still roaring.
If anything, Chinese factories are getting even busier. Export activity over the last year is now up 20%, compared to an annualized growth rate of 17.9% reported in June.
Good news for the export-heavy FXI:
And since people outside China are clearly buying all those exports, the rest of the global economy may not be so weak after all.
Even where the European Union is concerned, shipments from China are up 22.3%, so the long-dreaded “austerities” do not seem to have hit the consuming public, yet.
This, in turn, confirms that the fundamentals in the developed world have remained solid and the associated ETF (EFA) has support:
For the near future, the growth story is more controversial.
The Federal Reserve says deflation is a bigger issue for the global economy than inflation. Receding commodity prices should translate into cheaper food and fuel for Chinese consumers — which is all Beijing wanted in the first place.
Already, China’s ruling State Council has dropped its boiler-plate vow to fight inflation from its official policy statement.
And receding inflation fears mean the People’s Bank of China now has room to put further interest rate hikes on hold at least until next year.
There is now little reason to suspect any of the BRIC countries will keep tightening, until we know exactly how deeply the recent crisis has wounded underlying demand in the U.S. and Europe.
That includes Brazil, so the suffering large-cap stock fund EWZ may finally get some relief.
But even if China may get to delay future interest rate hikes, it might not get the luxury of letting its currency drift.
Beijing’s massive surplus keeps pushing the yuan upward, leading some economists to expect another 3% appreciation by the end of the year.