China's Upcoming Rate Hike and its Ripple Effects

The official numbers coming out of China show that the economy is rapidly expanding.  Consumer prices are up 5.1% for the year.  CPI excluding food is up by only 1.9%.  Higher food prices are fueling China's inflation.  For the period, food prices have shot up by 11.7%.  The Chinese government is attempting to implement price controls on grains, edible oil, and sugar.  Analysts are expecting the Chinese Central Bank to hike interest rates sometime this week.  This has created a ripple effect of economic balance in commodities, Chinese trading partners, and the US.

China's growth did not derive directly from trade; the problem is domestic.  The country's lax monetary policy, tax code, and currency manipulation have contributed to the current property boom.

Rapid construction fuels Chinese demand for commodities, boosting imports, and adding to export productivity in Australia and Brazil.  China's trade surplus narrowed by $22.9 billion in November. A drop from 16% in October, then facing a $27.2 billion surplus. Since then, exports are up by 34.9%, while imports remain higher at 37.7%.

China's trade deals with its South Pacific friends have contributed greatly to the regions trade productivity.  So much so, that the Australian dollar basically mimics China's economy; the value of the Aussie essentially being dependent on China's demand for natural resources.  Brazil is also a hot bed of commodities, and recent deals with China have accelerated South America's export growth. However, China's domestic problems have spread to its trading partners.

Australia and Brazil have property booms of its own. On a much smaller scale, Australia's expansion is almost a mirror image of China's.  Much of Australia's property boom is located in urban areas like Melbourne and Sydney.  However, the inverse with China is that much of Australia's property boom is in developing cities like Perth.  Western Australia holds a large sum of the country's mineral deposits, and the mining industry contributes to job growth, heavy construction which adds value to land, new homes to house the influx of workers, and now a population glut with immigrants flocking to Australia to capitalize on its growth.  Because of this, Australia was among the first to raise rates, and continuing to do so.

In China, much of the growth is in-equal.  The housing boom is on the eastern shore in the tightly enclosed urban areas.  The western part of China remains sluggish, with a large elderly population.

The US almost seems isolated from this. Not so much.  Our trade gap has narrowed with China, with exports up around 8%.

With expectations of a Chinese rate hike, Gold prices are down 2% on the week. US Crude Oil Futures are down 1.57%.  The Australian dollar, despite having a nice rally, is set to decline - rate hike lowering the value of the Yuan, thus decreasing China's  purchasing power for commodities.  If the Chinese government shifts focus to domestic issues, they will need to demand less and tighten monetary policy to cool the housing market.  This will also ease trade productivity.  In sum, expect the Aussie to decline when markets open.