The United States and Europe have been struggling to manage their debt lately in a big way. The same can’t be said for China, which is growing at a pace too fast for itself and is further threatening the economies stateside and in Europe. Runaway inflation in China, now the world’s second largest economy is threatening to inhibit their ability to produce goods at their current low rates. Manufacturing though, wouldn’t head back to the U.S. or to Europe, it’s much too late for that, rather those economies would have to pay more for their products, further taxing the economy beyond the painful price hikes being endured across markets.
Already, the price of food has sky rocketed as a result of demand from emerging nations. The same goes for the cost of fuel, which in turn drives up overhead for businesses, makes shipping, flying, driving and just about everything else more expensive, draining the capital that would otherwise be reserved for retail spending.
Now, if other Chinese manufactured goods begin to rise in price it could take a major toll on the businesses and specifically retailers that rely on Chinese production. Lower end chains like Wal-Mart (NYSE: WMT), dependent on Chinese manufacturing for much their stock of consumer electronics and clothes would be forced to address higher prices. American makers of clothes and shoes with high-exposure to China are also at risk, and would also need to either swallow costs or raise prices for their customers. Coupled with higher shipping costs from sky-high fuel prices, it’s likely that the consequences would strike both ends. In anticipation of the Chinese bubble bursting, investors should be encouraged to review their portfolio for stocks with high exposure to Chinese markets or products. If a company relies heavily on importing Chinese goods or exporting to the nation, it might be wise to reevaluate the investment.
A recent Fitch Ratings gauge suggests that within next couple of years China faces a 60% chance of a banking crisis. In the event that occurs both Chinese manufacturing stocks and American companies that carry Chinese-made goods will suffer the consequences.
The head of China's sovereign wealth fund, China Investment Corp., confirms this assessment, although he believes Chinese hyperinflation as more far reaching than higher prices in American stores. He sees no conclusion to the property slumps stateside and laments the economic losses endured by Japan after the recent disaster. The combination of these factors, alongside European debt problems and stagnation do not paint a positive picture for the global economy. A demand everywhere, if China can no longer produce inexpensive goods at the rate they were, will decline.
If China is unable to curb their inflation, which is most evident in their housing market at present, international business will be threatened. Multinational blue chips like General Electric (NYSE: GE) or copper ETFs which rely on China as an engine for growth will no longer be safe investment.
Basic materials with exposure to Chinese markets, specifically those that go toward building, would all take a hit if the housing bubble in China bursts. All this depends on whether China is able to get their inflation under control; however, and investors can continue ride the wave of rising agricultural ETFs, Pecans are like gold in China right now, and raw materials being utilized in Chinese growth until either the bubble bursts or Chinese attempts to cool inflation prove successful.
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