Where is China headed?

China's economy galloped ahead for much of the decade and gobbled up a sizable chunk of the world's raw materials, ending a 20-year deflationary cycle in commodity prices. When the US financial crisis erupted last September, fears of falling demand quickly pricked the speculative bubble and sent everything from silver to copper to oil down sharply in price.

There is now talk that China's economy will be among the first to emerge from the global recession, helping to lift developing economies in the region, while aiding countries dependent on commodities.

We are already seeing raw materials like copper, a key industrial metal, bounce off lows. See What can see glean from Dr. Copper. And that's a good sign for the global economy.

Furthermore, some of this buying appears to be coming from China, but there is also a speculative component that is anticipating renewed vigor late in the year, not just in China but also in the US.

That's why I found the Bloomberg article "Bubble of Belief" in China Economy Seen Bursting: Chart of the Day rather intriguing.

China is unlikely to return to its robust past if the US and other major economies remained mired in a recession because exports have been a solid driver of growth in prior years. But China continues to invest in infrastructure so it seems unlikely that China will sink into a severe recession.

Still, as pointed out on China Economy Watch, the Asian giant may just be stockpiling commodities and adding to manufacturing capacity - and doing this at a time when there is excess capacity around the world.

If the global economy experiences only a meek upswing over the next 6-12 months, Chinese demand for raw materials might quickly trail off, commodity deflation could reappear, and China's expansion may stall.