Friday, June 3, 2011

China's Commodities Crisis

People who are getting concerned about the prospects of inflation may find some good news coming from an unlikely source: China. Unlike our own, China's economy has been growing like gangbusters the past couple of years, putting up 10.3 percent GDP growth last year. But inflation there is also over 5 percent, and the Chinese government would like to put the brakes on its economy. China's central bank has raised interest rates four times in the past year.

Now, a new report from Standard & Poor's suggests that China's moves may result in drastically lowered commodities prices. China is the world's biggest consumer of industrial commodities, and if they stop purchasing, the effects could be felt around the world. One hedge fund manager predicted that commodities prices could "easily" drop 25 to 40 percent in the next year.

The end result could be bad news for investors in commodities. But a drop in prices of things such as copper and coal - China is a major purchaser of both - could bring good news in other parts of the economy.

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