The Chinese have studied the Japanese bust carefully and have concluded that a sharp reevaluation of the renminbi is not the way to go. While a one-off revaluation could ease inflation pressures in China, the Chinese central bank is likely to continue its gradualist approach — as historically has been the norm.
Considering all of this, I believe that the Goldman prediction is more accurate than the IMF prediction. While I am a strong believer that China will overtake the U.S. in total economic output sometime in the next 20 years, the timeframe will more likely be in the next decade instead of the next five years. Given the demographics and sheer number of people in China, it is only a matter of time before the country becomes the world’s largest economy.
China is already the No. 1 consumer of many commodities — the most important of which is oil — while the Chinese trade surplus has been shrinking in the aggregate due to increased domestic consumption that benefits many western companies. With its rapid GDP growth rate at almost 10%, the Chinese economy has become a driver of global growth — and there are plenty of ways to take advantage of China’s rise.
China Rising Play #1 – Gold
The global economy needs to rebalance. China and the East in general need to consume more, while America and the West needs to save more. In the meantime, there is huge friction in the currency markets as the Chinese have accumulated more than $3 trillion in forex reserves. This is putting big pressure on the U.S. dollar as they seek to rebalance their holdings. In this environment, it is easy to see how gold bullion will continue to rally as long as this pressure on the dollar persists.
Gold bullion may be at all-time highs, but inflation-adjusted highs are at about $2,500 –and I don’t think the bull cycle for gold is over. Although some are calling for a sharp pullback in the precious metal, I’m not seeing any signs of a bubble here. The run so far in the past several years has been relatively slow and steady, missing the sharp spikes typical of a bubble.
Corrections in the long-term uptrend in gold are buying opportunities, and the SPDR Gold Trust (NYSE: GLD) remains the best way to play gold’s climb.