Trend: China will continue to export cheaper goods and drive up commodity prices.
Jim Jubak at MSN Money argues that China will produce and export more goods and consume more commodities in the near future, perhaps resulting in deflation. Excerpts below.
Deflation effectively took Japan out of the global economy for more than a decade, slowing global growth and increasing global economic volatility. Serious deflation in China has the potential to be a lot more dangerous. At its least damaging, it would flood the world's markets with even cheaper Chinese goods. At the worst it could stall the Chinese economy, a major driver of global growth, and even send the country into one of its traditional periods of instability.
How did China get into this mess?
Start with an economy built around export growth and feed it with lots and lots of cheap money. And then ignore any signals that the rudimentary, somewhat free market might be sending you about overinvestment or overcapacity.
The result has been massive overcapacity in fixed assets.
Of course, this excess capacity hasn't ended plans to add even more capacity in these sectors.
Companies can raise money to build clearly unnecessary and unprofitable factories because all too many Chinese banks continue to make loans on the basis of political connections rather than market forecasts. Put a local entrepreneur and his local political patrons from the district government in the same room with a banker, and a loan pops out.