Wall Street's latest rally made in China?

Martin Wolk Chief economics correspondent • Profile • E-mail

China's President Hu Jintao was not amused when a Falun Gong protester managed to disrupt a formal ceremony on the White House lawn this week, but he should be pleased with the coincidental timing of the latest stock market rally.

After a long, sometimes frustrating climb from bear market lows more than three years ago, broad market indicators have pushed through to their highest levels since the heady days of early 2000, and China's rapid growth is at least part of the reason.

Strong demand from China has helped boost other Asian economies, most notably providing a baseline of support for the long-stagnant Japanese economy, which at last is showing evidence of a sustainable expansion. China's well-known role as a global factory is helping to keep a lid on U.S. labor prices and contributing to strong corporate profits.

And a series of Chinese decisions easing financial market regulations — announced just ahead of Hu's visit to the United States – might have been a factor behind the stock market's big move this week, including a nearly 200-point spike in the Dow Jones industrial average Tuesday. The benchmark indicator edged higher again Friday to close at its highest level in six years with a gain for the week of 1.9 percent.

The Chinese moves, including a change allowing individuals to buy up to $20,000 in foreign currency, up from $8,000, are expected to generate more demand for foreign securities from China's growing middle class.

But after three years of steadily rising stock values, some analysts are wondering how much longer the rally can persist, especially with U.S. growth expected to slow in the second half of the year.

And then there is the flip side of all that Chinese growth — sharply higher prices for commodities including crude oil, which rose to a record $75 a barrel Friday.

"China is emerging as a key growth engine for the world economy, contributing over a quarter of total global growth in recent years, more than any other country," Wells Fargo senior economist Scott Anderson said in a note published Friday. "The downside for U.S. consumers and businesses is that this is forcing global commodity prices higher."

Higher prices for metals and other natural resources don't always lead to consumer inflation because raw materials are such a small part of the cost for most finished products. But oil is a different story, with the ability to both fuel consumer inflation and dampen growth.

So far, consumers and businesses seem to be tolerating rising energy prices, said Jeff Kleintop, chief investment strategist for PNC Advisors.

"Oil and stocks have been moving higher together for three years," he noted. "You have got to think there would be a point where (oil) tends to stoke inflation and cut economic growth, but we just haven't gotten there yet."

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