Against the unpleasant backdrop of high food and energy prices and slowing global growth we've talked recently about the commodity trade (Commodities are the new T-bills - June 20th) and the money pouring into commodity funds as investors face a diminishing number of opportunities in the traditional asset classes (equities, bonds, real estate...). The out-performance in commodities in recent years has been joined at the hip to the surging economic growth in emerging economies, namely Brazil, Russia, India and China (the BRICs). Taking a step back however, it would be more appropriate to write this acronym as briC given the overwhelming influence of China's voracious demand and its mind-blowing infrastructure build-out - $9.3 Trillion over the next ten years... accounting for roughly 43% of the expected build in ALL emerging economies over the next decade (Russia, Brazil and India are but an RBI to China's Grand slam). Taking yet another step back, the Chinese economy has been growing at roughly 9.3% annually for the past fifteen years (meaning it has roughly quadrupled since 1993), but it hasn't grown at that rate every year... there have been a few speed bumps along the way. For instance, in the late 90s economic growth in China slowed to roughly 7% (see chart below), while inflation coasted along at about zero from 1997 to 2002. Today though, the situation is a little different and the authorities in Beijing are dealing with a new set of economic circumstances, including the following:

• Growth appears to be cooling. Export growth recently declined to 17.6% on a year over year basis and has been quietly decelerating for the past year. At the same time the currency, the Yuan, has rallied more than 11% over the past year, which along with rising energy and wage costs, has put considerable pressure on manufacturers. Meanwhile, all-important industrial production has itself eased to (only) 16% growth, down from a recent peak of close to 20% last summer.
• Inflation has returned. Unlike the late 90s, Consumer Price Inflation has been running at roughly 8% over the past 6 months, which risks cutting into real economic growth and forces the central bank to tighten monetary conditions if they want to keep a lid on inflation (something they and other Asian central banks seem less than inclined to do)
• The Olympics have finally arrived. Part of the build-out of the last couple years has been preparation for hosting this summer's Olympics. There is a history of post-Olympic economic blow-offs as was seen in the high-growth Asian economies of Japan in 1964 and Korea in 1988.

Rolling over?

Our concern is that given the already gloomy outlook in the global equity markets, should investors start to worry about the health of the Chinese economy (and more precisely, its demand for commodities) we could see some stress in the mighty commodity complex. Such stress could be exacerbated should funds flow back out of commodity funds and/or should the US Dollar regain its footing. That's a lot of 'shoulds', and we're not overly pessimistic on the Chinese economy, but in the near-term it does appear that the risks are to the downside of market expectations. Longer-term we would view such pullbacks as buying opportunities for what will likely be a multi-year run in emerging economy infrastructure build.

In other news...

Staying with the Beijing Olympics for a moment, it appears that there's an ever-increasing controversy around the clothes/uniforms/footwear worn by Olympic athletes and the advantages they give competitors in their quest for world records. When every tenth of a second counts, technologically-enhanced clothes may make the difference in reaching the podium. Of course, in ancient times athletes competed naked in a 'celebration of the achievements of the human body' - doing that today might cause all sorts of wind resistance problems and would result in comparatively few world records, but it sure would be good for TV ratings.