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China Check-up: Q3 GDP and the U-S-D

|Includes: FXI, ProShares UltraShort FTSE China 25 ETF (FXP)

In the wake of China's release of their 3q GDP update today, I had to bring my first-glance reaction to the table.  Here's the meat, from Clusterstock:

According to preliminary estimation, the gross domestic product (OTC:GDP) of China in the first three quarters of this year was 21,781.7 billion yuan, a year-on-year increase of 7.7 percent, which was 0.6 percentage points higher than that in the first half of this year. In terms of growth by quarters, it was up 6.1 percent for the first quarter, 7.9 percent for the second, and 8.9 percent for the third quarter.

They missed that 9% yoy target by 1/10th; not a big deal with the 4th quarter in full swing.  Let's focus here on the bigger picture, because the Dollar's demise continues to be the international story in the works (particularly since the BOE, ECB, BOC, et al are mulling their monetary tightening options--following the Aussie lead).
As if it's something new, talks of a Yuan revaluation against the USD are picking up again.  Although these speculations are commonplace, my ears perk when it reaches the blogosphere in earnest.  Says Business Insider:

A strong Chinese economy has sent yuan forwards up to fourteen-month highs.
Expectations are that China could soon allow the yuan to strengthen against the dollar.
This must be one of the biggest one-way bets in history, whereby it's just a matter of time especially given the dollar's weakness against most floating currencies.

I was having this conversation with an FX analyst for AllianceBernstein yesterday.  Citing Chinese exporters, he sees no reason for China to revalue its peg off the dollar.  I've heard so many analysts (and laymen) turn to the "export truncation" defense of today's status quo Yuan peg... so I did some digging.  My premise was that China has been using its economic stimulus not only to build a bridge over the global recession, but to reallocate its economy unto a more endogenus growth model.  In other words, they're looking to tap domestic demand in a bid for more autonomous self-sustainability.
First, I looked at trade's share of Chinese GDP 2009 vs 2006:

  2009 ytd      %GDP 2007 FY      %GDP
GDP 21781.7           ---- 20940.7          ----
Ex 846.6 3.9% 969.1 4.6%
Im 711.2 3.3% 791.6 3.8%
Ex+Im 1557.8 7.2% 1760.7 8.4%
Nx (Ex-Im) 135.4 0.6% 177.5 0.8%
Dom Cnsmr Sales 8967.6 41.2% 7641.0 36.5%
*values in billion Yuan        


2007 was a good year to serve as a control, since it fell before the global crisis when China's economy was relatively "normalized."  Given the growth in their Monetary Base and GDP since 2006, ignore the gross numbers in my chart, but focus on the % contributions each category makes to GDP.  The data confirm the perceived shift from an exogenous (Export) economy to a more endogenous one.
Duh.  That's the easy part.
Government spending and ailing global demand account for that natural shift.  But that statistical confirmation opens up a train of thought.  Maybe China doesn't have to keep its peg to the USD?  If they've shifted to a more consumer-driven model, the damage wrought on exports by a Yuan appreciation would be merely a flesh wound.
Now, we have to consider the impact of Government Spending and stimulus in China's recent growth.  All that stimulus had been directed at the domestic economy: lending, investment, infrastructure, etc.  Does the ball keep rolling in those categories after the government stops pushing?  Retailers will have stand/fall on their own, but something like Investment in Fixed Assets (15,505.7bn Yuan ytd) won't cease.  China's Consumer doesn't have nearly the presence of the US's.  We're told that the American consumers account for 70% of US GDP.  China has a long way to go to reach that eschelon.
Bottom line: a snapshot of their economy makes it look like they really don't need to fret so much about Yuan revaluation and its collateral damage on exports, because GDP is proving that China has growth being generated endogenously.  Taking that analysis from a more dynamic scope, they'd see some increased FDI and Yuan demand as a result of a value correction, but it's hard to gague how domestic industry would be affected by cheaper imports (as if China's afraid to restrict trade).  They've also got this thick insulation of hard assets/commodities plus some other dollar denominated assets (Treasuries and Agencies) to consider.  My inclination is that the Chinese are always patient in their approach, so they're willing to take the longview, revalue today, take their licks, but prosper in the longer term.