Markets were pretty quiet overnight, and the only mover that caught our eye was oil, up another few dollars.  We have discussed oil for the last two days.  Today’s comment deals indirectly with oil, profiling the demand powerhouse China.

The Olympics are over and have been hailed a success.  China has made a good impression on the world.

The investment for the Olympics will cement Beijing's place as a world-class city and business centre, and leave a legacy of improvements for its residents.

Unlike Athens and some other past host cities, where the Games led to a mountain of debt and many of the venues now sit unused, Beijing and the Chinese government can comfortably afford the roughly US$40 billion they have spent on the Games.

More importantly, less than a quarter of that bill has gone on purpose-built venues such as the Bird's Nest stadium. The rest has been spent on infrastructure such as new subway lines and projects, like upgrading buses and boilers to cleaner technology.

The transformation and the ever-expanding subway lines will help reduce vehicle emissions and allow the development of residential hubs in the suburbs.

US$40 billion bought a lot of good news, though the economics of China suggest that there have been some costs.  China's PPI is running at 10% and last month's increase was the highest since 1996.  Ironically, China's export markets continue to grow despite the world economic slowdown.  The trade surplus is currently US$25.3 billion. 

The problem for China is that imports continue to be strong.

China is still scheduled to build the equivalent of two coal-fired power generators each week for the next five years.  Twenty-one percent of the world’s population, or 1.3 billion people, are transitioning from the developing world into the first world, a world where cars, washing machines, etc. are afforded to everyone who can purchase one. 

Also, approximately 40 new airports are scheduled for completion in the next 10 years.

As a consequence of this expansion, the prices of commodities have felt the buying power of 1.3 billon new mouths.  And it seems unlikely that this demand will change.  This is particularly true for oil.

However, as time goes by, the 1.3 billion are being forced to pay more for their steel, more for their coal, and more for their oil.  Inflation is clearly hurting the Chinese economy.  And left unchecked it will start to eat away at the prosperity that China is feeling. 

The stock market has clearly reacted to increased inflation.  The stock market is down a staggering 62% from its peak.  For the moment, is seems that the Chinese are happy to pay up for commodities. For how much longer remains allusive.