Can China Pull the World Out of Recession?  
By Ron DeLegge, Editor
January 27, 2010

SAN DIEGO (ETFguide.com) – As the world’s fastest growing world economy, who wouldn’t want to be China? Economic growth during the last three months of 2009 was double digits and China’s GDP grew 8.7%.

Unfortunately, things aren’t so good elsewhere. Dubai’s overbuilt property market is still a strain on the Middle East. The European Union is dealing with fiscal turmoil from Greece, Portugal and Spain. In the United States, the economy remains in disrepair hampered by high unemployment and a depressed real estate market.

Can China come to the rest of the world’s rescue and lead them out of recession?

Bubble Trouble
China is experiencing an unprecedented property boom, much like what occurred in the U.S. from 2001-2006. According to the National Bureau of Statistics, 2009 property prices in China rose the most in 15 years as sales jumped by 75%.

Poly Real Estate Group, China’s leading property developer, reported a 50% increase in last year’s profits aided by surging sales and skyrocketing property price. But not all is wine and roses.

If you’re an average working person in China and looking to buy a house, please accept our condolences. Residential real estate prices have surged to nosebleed levels, putting home ownership out of reach. Quite simply, obtaining affordable housing in major cities like Beijing, Shanghai and Guangzhou is no longer possible. Shelter depravation isn’t good for any economy, even fast growing ones.

Widespread financial damage caused by deflated real estate prices here in the U.S., might be in store for China. Their property market is ripe for a sharp painful pullback. And as the U.S. government is learning, it’s hard to protect few hundred million people from self-imploding. Can you imagine trying to do it for a nation of 1.3 billion?

Exporting Deflated Currency
Cheaply made goods aren’t the only thing China exports. You can add deflated currency to the list. In 2005, the fixed exchange rate of the renminbi or Chinese yuan into U.S. dollars was eliminated. As a result, the renminbi has enjoyed a 20% plus run up against the dollar. Still, China's idea is to keep its exchange rate artificially low to give it an exporting advantage. The renminbi is the currency for all of mainland China with the exception of Hong Kong and Macau.

China’s currency policies were loudly criticized at the World Economic Forum’s annual meeting in Davos, Switzerland. George Soros said the case for revaluing the renminbi is “getting stronger and stronger.”

In the end, China’s manipulation of its own currency was largely seen as self-serving, of course, to everyone else but China. The final consensus was that China has done a great job of preventing balanced competition from other nations’ exports. From China’s perspective, it’s business as usual.

Decoupling Facts and Myth
The investment scene has dramatically changed. The freefall from the 2007 highs to the March 2009 lows, was deeper than any other since the Great Depression. The rally from the March lows was more powerful than any other rally since the Great Depression. It was led by emerging markets like China.

Despite being proven badly wrong on numerous levels, the myth of decoupling persists. History however tells us otherwise. For example, there was no decoupling between emerging markets (NYSEArca: EEM) and developed markets (NYSEArca: EFA) during the financial crisis from 2007-09. In 2008, China’s largest stocks (NYSEArca: FXI) along with its broader equity market (NYSEArca: GXC) still fell 50%.

Likewise, there was no decoupling between stocks and commodities (NYSEArca: GSG) during the last bear market episode. There wasn’t even a decoupling between defensive and offensive industry sectors.

Conclusion
The more things change, the more they stay the same. The idea that China is an invincible economic powerhouse is the furthest thing from reality. Didn’t people have a similar view of the U.S. until recently?

Even China realizes the problems it faces. Why do you think its government is restricting bank lending? They’re trying to prevent a bubble from bursting. Ironically, it’s the very same bubble China’s own economic stimulus helped to create. Given their shaky track record, it remains to be seen if the Chinese government’s one-trick pony financial solutions will work.

Thus far, China’s stock market doesn’t seem too impressed. Top Chinese stocks are down around 15% from where they began the year. Could more pain be in store? And what will it mean for gold (NYSEArca: GLD) and other commodities that rely so heavily on China? And what about global stocks (NYSEArca: VT)?

The brand new issue of the ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast for all major asset classes, along with target and safety levels for the U.S. stock market.