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Three Reasons Why China Will Save the Day

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How to avoid missing the economic miracle.

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To ensure that the stimulus programs flow freely throughout China -- and have the beneficial impact that Beijing hopes -- Beijing's bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt US financial institutions today. They're entirely different forms of lending, but the concerns seem to be inseparable.

To be fair, that might be the case. However, the thing to keep in mind is that China isn't just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we're seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers -- all at Beijing's insistence.

The result of all this is that China's financial system should become increasingly stable even as it grows by leaps and bounds.

Obviously there will be fits and starts, but this is a far cry from the warped system US investors have been forced to rely upon to date -- a system whose hallmarks seem to be inept leadership, somnambulistic or sleazy regulators, conflicted lenders, and greedy Wall Street executives who focus on profits no matter the cost.

3. Chinese Currency

Many Western observers worry about China's intentions when it comes time to purchase our debt. I think that's overblown. The real question is what Beijing will do to manage the concentrated US dollar risk it currently faces.

To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of US Treasuries and US dollars. But don't expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.

Therefore it's logical to expect China to diversify its holdings with additional oil, gold, and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses, such "hard-asset" investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.

Here's one final thought to consider. Unlike the West -- which views the financial crisis as a burden, a mistake, or a bad dream to be lived through -- China's leaders see this as the most significant opportunity of a generation. It's a chance for their country to establish itself as a leading global power.

That's why China will continue to pull further ahead. And that's why US investors who don't wish to be left behind can no longer ignore China.

No positions in stocks mentioned.
Fifteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

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