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12/28/10

Beware of Underestimating China - by Dr. Stephen Leeb

We've talked a lot about China in recent years – about its miraculous growth, the strain it puts on the world's resources, and the fact that China's leaders seem to “get” the emerging commodity squeeze in ways that Western leaders do not.

Let's make something clear. We are not in love with China, so much as we are worried that complacency has led the West astray. Following World War 2, the U.S. economy was the envy of the world. To any American who lived through the post-war expansion, the fall of Soviet-style communism is more than sufficient proof that our system, based on individual freedom, capitalism, and democracy, is superior. The idea that a semi-totalitarian regime could possibly succeed for long is laughable. So every tiny negative event in China is taken by the Western press as proof positive the Chinese economy is about to implode. Worse, it becomes an excuse for ignoring the real global problem of resource depletion, which China's success is bringing into the open so much quicker.

So we see that some analysts took China's latest 0.25% hike in interest rates as another sign the sky is falling in Beijing, even though this will probably turn out to be a non-event. Let's remember that before the global financial crisis took hold Chinese interest rates were at 7.8%. The recent move back to 5.8% is hardly evidence the Chinese government is in a panic over a runaway economy. (If you really want an indicator of an economic disaster, watch for copper prices falling below $2.00. That would be a sure sign of a Chinese economic downturn, if not a global depression.) China raising interest rates to 5.8% means little, especially considering that other emerging economies have been far more aggressive in tightening.

For more: Beware of Underestimating China - Seeking Alpha

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