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China's 'goose' to the economy could backfire--or not.

The markets have been wonderfully calm, peaceful and life-affirming lately. It's actually a little unsettling.

In the face of consistently inconsistent economic reports, adequate earnings reports and soothing words from Europe, the S&P 500 gained a strong 4 percent over my writer's month (July 21 to Aug. 21). Since June 1, the S&P 500 is up more than 10 percent. It's up more than 12 percent so far in 2012.

Read that last line again.... The S&P 500 is up more than 12 percent this year!

Is it just me, or have we taken a pretty nice stock market ride for granted? This needs to be celebrated? Please take a deep breath, ease back in your chair, close your eyes ... and enjoy it.

That was a nice moment. Now, let's get back to worrying about the future. While Europe and our U.S. economy continue to get all the well-deserved publicity, I want to show some attention to the third important cog in the world economy: China.

China has been the shining star of the global economy over the past few years, but its current rate of growth is generally considered unsustainable. The gazillion dollar question, of course, is whether China is poised for an economic crash, or whether the Communists can competently steer their rapidly changing economy to a smooth landing.

Recently, in the face of weakening economic news, the Chinese government attempted to "goose" its economy by cutting the primary interest rate one-fourth of a percent to 6.31 percent. While the markets panicked at that news, my reaction was different. I was amazed at just how many cards Chinese policymakers can still play.

A 6.31-percent interest rate leaves plenty of room to drop rates further. That stands in stark contrast to the U.S., where our interest rates are already so low, that the Fed has been forced to resort to gimmicks like Quantitative Easing and Operation Twist.

Beyond the implications for the global economy, China's handling of its economy is also destined to impact the way Americans feel about democracy and capitalism for many years into the future. If China's leadership manages to pare its economic growth down to a strong, sustainable level without crashing it, we may have to reluctantly give some credit to China's form of "Communist Capitalism." If, on the other hand, China's economy overheats and runs into a wall, we'll once again be able to sleep well knowing that our American beliefs have been reinforced.

For the time being, China appears to have things under control. In the second quarter, China's GDP rose at a rate of 7.6 percent. That's the slowest pace in three years, and is markedly down from 8.9 percent and 8.1 percent in the prior two quarters. However, 7.6-percent growth is a far cry from running into a wall.

It's OK to be conflicted on this issue. For the sake of the global economy, I hope China steers its ship well. On the other hand, there's a part of me that yearns to see them perform a perfectly executed face plant.

Either way, China bears watching. Of course, so does Europe, the U.S. economy, the fiscal cliff and the many potential geopolitical crises that could erupt at any time.

Perhaps that is why we haven't fully appreciated the gains we've experienced in the markets. We simply have too many other things to worry about.

Brad Blackburn

July 21-Aug. 21

Brad Blackburn, CFP[R], is the owner of Blackburn Financial, Registered Investment Advisor at 121 Cottage Ave., Cashmere. He can be reached at 509-782-2600 or email him at brad@blackburnfinancial.net.
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Title Annotation:MARKET UPDATE
Author:Blackburn, Brad
Publication:Wenatchee Business Journal
Geographic Code:9CHIN
Date:Sep 1, 2012
Words:611
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