Looming Economic Downturn in China’s Future?

US investment bank Goldman Sachs recently revised its forecast of inflation in China from 4.5% to 6.8%. They further predicted that inflation could actually hit double digits in the coming months. This comes on the heels of China's Central Bank predicting the same, citing increased prices of food, which makes up 1/3 of China's CPI as the root cause.

This couldn't come at a worse time as Chinese stock market analysts are predicting a burst in China's stock market bubble. Investors are cashing in on the government's perceived unwillingness to step in to control the market before the 2008 Olympics. Many expect the government to begin regulating the market immediately after the Olympics and are planning to cash out just before that happens. A mass exodus from the market would cause a correspondingly large correction. Further, in a market without rules or regulatory agencies to speak of, that correction could have a devastating affect on Chinese businesses and the investments of those that will not be able to find buyers for their shares.

It will be interesting to watch this play out. As the US and Chinese economies have become increasingly intertwined, the domestic economies of each country are having a larger and larger affect on the global economy. The US Federal Reserve is desperately trying to fight off a recession in the wake of the "Mortgage Meltdown". China has played a major role in keeping the US economy moving by pegging the Yuan to the Dollar and financing the US national debt by buying US Dollars. An economic slowdown in China could have a dramatic effect to the US economy, which in turn would amplify the problems China is facing.