-- Posted 17 March, 2011 | | Discuss This Article - Comments:

Without having feet on the ground, it is nearly impossible to understand precisely what is happening in China.  The middle class is exploding, but jobs for skilled workers are few.  New cities are going up overnight, but the pictures show that no one is actually living there.  In many cities, hundreds of buildings are erected, left to be ghost towns for many months or even a few years before the buildings are again destroyed and new buildings are erected in its place.

Unlike much of the developed and developing world, China still has a government roadblock that impedes its progress.  In light of the rapidly changing relationship between the people and their leaders in the Middle East, some worry that the Chinese government may have to increase internal consumption in order to maintain employment.  However, there may be something that many are missing, especially silver buyers.

It is commonly reported that China exists as the fastest growing market for silver, having reversed its net export trend and then increased imports by multiples over a period of a few short years.  And now, having amassed wealth for years, it may just so happen that China is finally ready to consume. 

Perhaps these silver buys aren’t entirely investment, but also future jewelry and fine products intended for a consumption economy.  And even more realistically, a middle-class boom in China could lead way for two sources of metal demand: inflation and consumption.

What the Numbers Show

Recent data regarding Chinese imports and exports reflect a 19.4% increase in imports against export growth of only 2.4% annually.  At face value, the trend, should it continue, means China could be a sustained net importer by 2012, taking in more foreign goods than it exports around the world, and suggesting that China may finally be taking the step toward an internal, and international, consumption economy.

While the recent changes in Chinese consumption may be buoyed by celebration of the Chinese New Year, the fact of the matter is that slowing growth in Chinese exports and rapidly accelerating growth in imports may lend way for Chinese citizens to lead the recovery elsewhere around the world. 

China’s Hedge

Commodities will have to remain on the investment plate for most mainland Chinese, from the lowly factory workers to those who call the shots.  Given renewed pressures to allow the Renminbi to appreciate, Chinese investment overseas may continue to improve, but the question remains whether consumption will overtake investment in leading the Chinese rebound.

In order to accelerate its new push, the Chinese will rely on the commodities market more than they ever have, seeing the need to snap up massive amounts of metals to create new, “affordable” housing for the masses.  By 2015, the country hopes to build some 46 million homes and apartments to cool the real estate market, as well as provide for the massive leap the country is soon to undertake.  That may provide housing for as many as 100 million people, assuming a family size of less than three people.

Given this changing dynamic, investors should prepare for a temporary shift in Chinese metal demand.  Demand for silver may drop, at least in the interim, as the Renminbi strengthens and inflationary demand gives way to flashy demand. 

If one thing is certain, the future for China makes a perfect case for metal investment.  Make no mistake about it.  The Chinese consumer can lead a surface recovery and can certainly afford the gold and silver jewelry that may have been priced-out around the world.

Dr. Jeffrey Lewis

www.silver-coin-investor.com