All eyes are now on China as a source for consumer strength in the developed world. Customs data released on December 10 tells a concerning story - China's overseas shipments are growing, but at their slowest pace since 2009.
In November, China recorded 13.8% growth in overseas shipments from the year-ago period. However, Chinese trade balances are beginning to turn decidedly toward an imbalance. The balance numbers recorded a 35% plunge in China's trade surplus, enough to worry investors that European consumption is dropping dramatically in light of a debt crisis.
Analysts expect the Chinese central bank to loosen reserve ratios and allow easier lending standards to come back into place in the property market. Alongside monetary stimulus, some expect a massive stimulus project aimed at developing domestic sources of demand. For much of the last decade, China's economic growth was fueled externally by international buyers. As the populace ages and becomes wealthier, China's consumer class will have to give it the strength necessary to wade through slowdowns in the general global economy.
There is little debate about whether or not a slowdown will occur, but rather when the slowdown will occur. The least confident estimates point toward a Chinese trade deficit occurring by the first quarter of 2012 – which is just months away.
Official inflation readings from Beijing ran at only 4.2% as of last report. The precipitous decline in inflation is, according to analysts, an effect most directly linked to the cause of credit controls. The Chinese government vastly increased the amount of capital necessary for purchasing real estate on credit to stifle a building real estate bubble. Now only a few months out from the enactment of anti-bubble policies are fears of global inflation.
Investors are even reversing bets on Chinese yuan appreciation, a surefire sign that the market expects more slowing from China, as the long-yuan trade has been historically one of the most consistent in all of the global markets.
The Two "Cs"
Few investments are more directly linked by investors than the two Cs - China and copper. China's robust growth creates a growing proportion of total copper demanded and is the source of ever-rising prices. For this reason, copper has become a very popular source of exposure to China for international investors.
For bullion investors, particularly investors in silver bullion, copper prices are equally important. Lower copper prices mean far less silver production, as most silver mined today is mined as a result of mining for other, more plentiful metals like copper. In going forward, weaker copper prices could greatly strain silver production in 2011, even as industrial growth rides a trend that is mostly resilient to economic slowdown. Silver's best source of demand is photovoltaic cells, which are certain to be subsidized for several more years by western governments, even as prices continue to fall.
The bottom line is this: China has plenty of capital to enact a stimulus spending spree and will likely do so. Silver investors should take the chance to buy inexpensive silver on every copper dip, as China's foreign holdings will fund any stimulus of any size.
Dr. Jeffrey Lewis