Fast Chinese Growth Sure to Alarm Trade Hawks

Tomorrow, the Chinese government will release its second-quarter gross domestic product report. Economic growth for the period will probably come in between 10 percent and 11 percent. Another amazing performance, one not likely to go unnoticed on Wall Street or Capitol Hill, says the always-insightful Donald Straszheim, vice chairman of Roth Capital in Los Angeles, former chief global economist at Merrill Lynch and China expert:

U.S. trade and currency hawks will complain about the trade deficit and unfair play by China. Chinese equity investors, blindly bullish, will be happy. The commodity bulls and energy bulls will like the strong demand story. And the Chinese policymakers will wring their hands on too-hot growth but will remain largely observers, without a convenient handle to do anything very effective.

A few other interesting China observations and factoids from Straszheim:

— Expect China to continue to grow annually in the 10 percent range well into the next decade and beyond.

— A market meltdown or a major problem in the banking sector is insufficient to stop the economic gains. Only some kind of uprising that Beijing could not control would stop it.

— Exports were rising at a 28 percent rate in May, with imports rising 19 percent. China's trade surplus was up 73 percent [from a] year ago in May . . . . Expect the 2007 trade surplus to sharply exceed 2006, with 2008 over 2007 . . . . Washington and Europe are going to agitate even more.

— Retail sales were up 15 percent from [a] year ago in May and have wobbled between about 13 percent and 17 percent for the last five years. While Beijing continues to voice the desire to have consumer spending become a more important factor in China's economy, the statistics do not show any real progress

— China has its problems . . . the most polluted environment in the world . . . provinces that Beijing can't control . . . a business climate that is often undecipherable . . . hundreds of millions of rural workers still left behind . . . and the enormous complexity of integrating the Chinese economy into the global system without giving up too much power to the invisible hand.

— There are about 350 million more rural workers ready . . . to move [to the cities] over the next 20 years . . . . No major wage inflation.

My take: If Straszheim is right, all of the factors pushing Congress in a more protectionist direction will remain in place: big trade deficits and a big difference in U.S.-Chinese wages that drives manufacturing outsourcing. As Straszheim concludes: "America's currency and trade hawks will see this as vindication that they must push harder to get China to accelerate their revaluation." And guess what? China won't do it.