While that prospect actually sounds quite tasty right now, I’m actually referring to the Chinese economy. Not quite as tantalizing on the old taste buds, but it still packs a pretty powerful punch.

Not sure how Chinese government ministers took the news, considering they’ve been trying to slow the economy for ages now, but official figures show that the economy posted 9.9% growth in 2005. That’s 18.2 trillion yuan worth of total output, or US$2.25 trillion.

Economists now believe China has sprinted past the UK to claim the honor as the world's fourth-largest economy. And of course, the mainstream media is swarming all over this and the perceived threat to America’s economy like Michael Moore at the buffet table.

While services such as banking continue to plow ahead relentlessly, industrial areas like construction are also driving growth forward despite the government’s best efforts to stem the tide. The trade surplus tripled to US$102 billion.

But Beijing has a bit of a problem now. While the country is running enormous trade surpluses with the United States and Europe, it is actually creating big trade deficits with its Asian trading partners. To finance those trade deficits and kick-start domestic consumption, it needs the yuan to remain undervalued against the US dollar.

To keep the yuan artificially low, the Chinese central bankers took a page from the Bank of Japan’s playbook: Beijing piled up US$400 billion in foreign exchange reserves between 2004 and 2005 alone, mainly to stop the yuan from appreciating against the greenback and other currencies.

Total Chinese currency reserves are now close to US$810 billion.

As long as China’s economy depends on exports, the yuan has to stay low, no matter what the Yanks have to say about it. Which means buying dollars, because any increase in the yuan would not only take a bite out of China’s export business but also “impose large financial losses on Chinese people,” as the Financial Times article puts it.

The classical definition of a conundrum.

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***GROWTH EXPLOSION

Nevertheless, it was no surprise to hear a panel of economists at the World Economic Forum declare that China will set the economic growth pace again this year.

In addition, the Bank of China remarkably believes there is still more room for growth, with exports set to push up the rate to between 8.8% and 9.3% this year. So not much of a slowdown there then. Highlighting that coming trend, the American International Group’s Jakob Frenkel states that while the national savings rate is 45% in China, it’s just 10% in the US.

But is this necessarily a good thing? While the economists noted that China is still taking steps to prevent its red-hot economy from blowing up like a volcano (no matter how unsuccessful so far), the US is still sitting on its hands and not addressing the imbalances within its own economy – namely, the current account deficit.

As the Asia Business Times states: “The danger lurking behind the high US current account deficit is that foreign investors begin to lose confidence in the US economy and start withdrawing their assets. This would cause a fall in the value of the US dollar, which could lead to a growth-dampening increase in inflation and interest rates.”

***RISKY BUSINESS

My colleague Brit Ryle believes that if China does manage 9% growth in 2006, it will most likely be the result of further investment that, in turn, raises overcapacity and the risk for China’s economy.

As Brit says: “In my view, the news that Shanghai’s real estate market is stagnating is just one example of widespread over-investment and overcapacity in China. Steel, textiles, even the automobile industry could fall on hard times due mainly to overcapacity. And the potential impact of a decline in real estate value and activity could hurt China’s already weak consumption numbers.”

And check out this quote:

“We are entering a valley of depression such as we have never experienced before. China has become a net exporter…and has become a an unavoidable threat sooner than expected.”

In the light of the statistics above, that might seem like an odd statement. Who do you think said it? Treasury Secretary John Snow? An executive at an American manufacturing company?

Nope. Brit tells me it’s POSCO’s (PKX:NYSE) Chairman and CEO Ku-Taek Lee from a speech he gave to employees on January 2. Sounds pretty bleak, huh?

Brit says: “In case you don’t know, POSCO used to be Pohang Steel, South Korea’s biggest steel producer and fifth-largest steel company in the world. In the quote above, Lee is referring to the fact that massive investments in its steel industry have raised China’s capacity by so much that the country has become a net exporter. And that’s a problem for the global steel market.

“But how big a problem is this? POSCO just reported a 68% drop in quarterly earnings. Sales fell 7% and the company expects 2006 sales to drop another 12%. Cheaper steel coming out of China has forced Posco to lower prices twice since September 1. Other steel giants like Mittal (MT:NYSE) and Arcelor SA (ARLOY.PK) have followed suit.

“This is happening because Asian prices for hot-rolled steel slumped 35% last year – with the trend expected to continue. And while Asian steel companies may be hit hardest by China’s excess capacity, American steel companies will feel the heat as well.

“For example, Schnitzer Steel (SCHN:NYSE) recently missed earnings expectations because of lower sales, lower prices and higher costs.

But here’s my question: What happens if China’s real estate market grinds to a halt? There appears to be problems in the Shanghai property market right now, and analysts believe it will spread to other Chinese cities. If there’s a significant slowdown, China could find itself with a massive surplus of steel over the next year. And that will almost certainly have an impact around the globe.”

***A SHOCK AND A PROFIT

You know, when Brit told me all this stuff, I have to admit that I was a wee bit shocked. I mean, one look at the blistering Chinese economy and you might have a hard time believing that the boom is about to come to an abrupt end.

But rather than sit around and watch this happen, wouldn’t it be much more fun to turn a profit instead?

You can! Back on December 6, 2005, Brit revealed all in an exclusive teleconference to 232 Taipan VIP Inner Circle members. More importantly, however, he also revealed two red-hot investment recommendations. Naturally, response to the teleconference was so huge that our marketing department decided to release it on CD for anyone who missed it.

These CD’s have been the talk of Taipan recently, and as word spread that this was information every investor should hear, we’ve had a tough time keeping enough of them in stock to satisfy demand. They’ve already sold out twice – and we’re now down to the last 50 in stock.

Brit is founder and chief editor of the Money-Flow Matrix trading service and is a whiz when it comes to China. He even beat the renowned Warren Buffet to the punch by a full year when it came to taking advantage of the Chinese boom.

The two picks he made in this teleconference are already showing some nice gains and the money his presentation could save you when China’s economy hits the skids is well worth it.

You don’t want to miss out on this. If you don’t believe a slowdown in China will affect your portfolio, think again. I urge you to grab your copy of Taipan’s hottest-selling item so far in 2006 while we still have some available and “China-proof” your investments today. In the process, Brit’s China strategy could return you 748% on one of these picks alone.

This invaluable teleconference, containing the two picks, is valued at US$1,000. But we’re offering it to you for just US$99. For more information, simply visit this link:

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Have a great Superbowl weekend.

Martin Denholm

Executive Editor, Taipan

MMM

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