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November 15, 2013

'Big Joe' Clark: China and its economy counts more than you know

The arguments used to be around whether or not the global economy was coupled — tied together in a spectacular web-like nature — where one change affected everyone. The impact of China on your retirement, savings and future should not go understated.

China is the second largest economy in the world, yet Canada still remains our largest trading partner. So why is it when China sneezes, coughs or breathes heavy it affects us here at home so severely?

Because we are the world’s largest economy and we need stuff. So do they. Readers of this column care about equity prices and the value of their 401k plans. That valuation stems directly in proportion to the speed of growth or what we call trajectory.

China is huge, for certain, and the lore surrounding its housing bubble, shadow banking system and cities with no inhabitants is confusing to even the most sophisticated minds. We live in a world where we see through the lens as capitalistic Americans and they live life where they want the best of both worlds in their opinion. They want to retain communist rule and grow on capitalistic process. A hybrid economy.

This week is a big deal for China as they announce a proposal that’s been dubbed the “3-8-3 plan” for the coming years. As with all strategic planning it will address their short-range objectives as well as a longer-term plan. Their real long-term plan won’t be released for our eyes but we can assume it is similar to our manifest destiny thoughts from our early leaders here at home.

China’s economy requires raw materials to grow. When they want them and need them, they pay for them. U.S. companies still need the same raw materials and a price war begins. If supply remains the same, demand increases then prices rise until a winner is declared.

China is searching the world for commodity control because they need the materials and have a long-term plan. In Nairobi, I saw cement trucks the size of houses driving with no hiding of the owner or the intent. They were China owned and for China’s benefit.

In the past month China invested in Brazil’s new oil field at an investment rate that kept top and smart American companies from even considering. They are committed to long-term growth.

The equity markets care about the short-term plan. Will China’s short-term economic trajectory increase, level or slow down? We will be watching as will all serious investors for clues into their economic plan. When it comes to where to invest, when to invest the rate of change from where they are now matters far more than the mass of what they already have achieved.

This is true of all market and economy comparisons.

The 3-8-3 plan will give us a lens into their playbook for sure but their plans and intentions won’t necessarily march what actually happens. We will look for insight, but in the words of Ronald Reagan, “Trust but verify.”

Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.

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