Starbucks is just one of many Western consumer-products companies taking aim at China. Brands from theGap (GPS) to Weight Watchers (WTW) to American Eagle (AEO) have also announced plans to target the emerging Chinese middle class as a major driver of growth. In November, David Zoba, Gap’s senior vice president for global real estate, announced aggressive growth plans for China. He said the San Francisco-based apparel retailer plans to open 45 stores there by the end of 2012—up from eight at that time—with the goal of hitting $1 billion in revenue there during the next three to four years by targeting the country’s growing middle class.

These companies need to be wary, though. China’s middle class does not really exist, at least by the American definition. Many analysts define the 350 million Chinese who live in households that earn between $6,000 and $15,000 a year as middle class. However, Chinese consumers with this socio-economic background do not exhibit the same hopes, aspirations, and shopping habits of middle-class Americans. As a result, brands that emphasize a middling position will not appeal to consumers there.

To understand what these consumers want, China Market Research Group has talked with thousands of Chinese in 15 cities in the past year. Our research suggests that most “middle class” Chinese consumers consider themselves on their way to riches, despite the slowing economy. Their salaries have been rising in double digits or more for the past decade. Everyone knows someone who was tilling farms 15 years ago who now is a multimillionaire, driving a Mercedes, and living in a posh villa. Many of the Chinese we spoke to think they, too, can get seriously rich.

Consumers are likely to either save up to buy high-priced brands such as Louis Vuitton (MC:FP) or Tiffany (TIF) to show off status and sophistication—or trade down to discount brands. Companies that position themselves in the middle place themselves in no-man’s land and are unlikely to gain much traction.

Consider the Gap, which sells jeans for between $50 and $200. Time after time, female consumers told us they would prefer to buy jeans from brands like Japanese retailer Uniqlo (9983:JP) at a fraction of the cost or save up to buy premium and luxury brands such as Armani jeans. One 27-year-old Shanghai woman making $300 a month told me she skipped lunch for five months to save enough to buy an Armani jean jacket. For her, the status associated with Armani proffered better value than multiple pieces from Gap.

Starbucks is one brand that understands that the Chinese will spend a lot for premium products and has adjusted its pricing and marketing strategy accordingly. The coffee retailer’s outlets are more profitable in China than in the U.S., according to Troy Alstead, its chief financial officer. In Asia, the company’s operating margins were 34.6 percent in 2011, vs. 21.8 percent in the United States.

At some point—perhaps 10 years from now, as it becomes impossible for China to sustain fast-paced growth—China’s middle class will truly be middle class in aspirations and economic potential. Brands will be able to emphasize a middling heritage. Until then, however, China’s buyers offer far greater similarities to Indian and Russian consumers, who spend on luxury for some products but are price sensitive on others.

Commodity markets are reflecting “increased differentiation as a group,” the bank said in a report e-mailed today. While China’s demand for raw materials continues to dominate the outlook for individual commodities, it is “no longer the monolithic force” it was in the past decade, the bank said.

“China’s increasingly differentiated impact across commodities is providing abundant evidence that the coordinated commodity super cycle of the last decade may be coming to an end,” New York-based Edward L. Morse, the global head of commodities research, said in a report today.

The Standard & Poor’s GSCI index of 24 raw materials has increased fourfold since 2001, gaining every year except for a 43 percent drop in 2008. Copper and oil rose more than fivefold since 2001 and corn almost tripled. The gauge is up 4.9 percent this year.

“Precious metals are slowing down from their rapid appreciation of 2009 and 2010,” the bank said, adding that industrial metals are entering “what may be a more supply abundant phase.”

The shift is eroding the appeal of “long-only” investment strategies, according to the bank. The investment cycle has been completed for North American natural gas, bringing “an explosion of supply and lower prices,” with similar cyclical investment trends under way across base metals, Citigroup said.

Base Metal Demand

Slower growth in China means less demand for base metals, while the country’s increased investment in raw-material assets and reforms in domestic refining and fabrication are also slowing the pace of usage growth, according to the report. China accounts for 40 percent of copper consumption and 11 percent of oil demand, according to Barclays Capital and the International Energy Agency.

China’s economy expanded 8.1 percent last quarter, less than the 8.4 percent anticipated by economists surveyed by Bloomberg, government data showed April 13. Chinese Premier Wen Jiabao cut the nation’s economic growth target to 7.5 percent last month, the lowest since 2004.

Jiangxi Copper Co. led gains for commodity producers on optimism an improving world economy will boost demand for metals. CSR Corp., the nation’s biggest train maker, advanced 2.2 percent after the Xinhua News Agency said the company will supply high-speed trains to Hong Kong Mass Transit Railway.

“The implication here is that the global economy is doing better and therefore export numbers out of China will be better,” Elena Ogram, who manages $50 million in emerging market assets, including Chinese stocks, at Bank am Bellevue AG in Zurich, said by phone yesterday. A better global outlook is “positive for China’s economic growth and for Chinese equities,” she said.

The Shanghai Composite Index (SHCOMP) rose 9.04 points, or 0.4 percent, to 2,344.03 as of 9:31 a.m. local time. The CSI 300 Index (SHSZ300) added 0.5 percent to 2,555.07. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, added 1.2 percent in New York yesterday.

About 8.5 billion shares changed hands in the Shanghai Composite yesterday, 2.3 percent lower than the daily average this year. Thirty-day volatility in the gauge was at 18.1, near a one-week low.

Global Outlook

The Shanghai index has climbed 6.6 percent this year amid speculation the government will take measures to boost the economy. Stocks in the gauge are valued at 9.9 times estimated earnings, compared with a record low of 8.9 times on Jan. 6, according to weekly data compiled by Bloomberg.

Jiangxi Copper, China’s biggest producer of the metal, added 1.8 percent to 24.90 yuan. Tongling Nonferrous Metals Group Co., the second largest, rose 1.3 percent to 20.16 yuan.

The MSCI Asia Pacific Index advanced 1.2 percent today after the IMF said the world economy will expand 3.5 percent this year and 4.1 percent in 2013, up from January projections of 3.3 percent and 4 percent, as the euro region stabilizes and the U.S. outlook improves. The Washington-based lender maintained a forecast of 8.2 percent growth for China, where policy makers last month cut their 2012 own target to 7.5 percent, the lowest level since 2004.

Spain sold 3.18 billion euros of bills, compared with a maximum target of 3 billion euros the Treasury set for the sale.

Europe and the U.S. are China’s top two export markets, making up about 35 percent of the nation’s overseas shipments, according to Shenyin & Wanguo Securities Co.

China Exports

China’s overseas shipments rose 8.9 percent last month, more than economists’ forecast. Still, it was down from 18.4 percent growth in February.

“The slowdown in export growth was broad-based with the biggest drag coming from Europe, driven by the sovereign debt crisis that remains to be fully resolved,” HSBC Holdings Plc economists Xiaoping Ma and Hongbin Qu said in an April 10 report. Exports to the European Union contracted by 3.1 percent in March, it said.

CSR gained 2.2 percent to 4.63 yuan. Delivery of the first train will start next year, Xinhua reported yesterday. The trains will be used for the Guangzhou-Shenzhen-Hong Kong Express Rail Link, which is expected to start operations in 2015, it said.

Seven hundred and thirty-one companies in the Shanghai Composite have released annual earnings. They posted profit growth of 14 percent on average, trailing analyst estimates by 2 percent, according to data compiled by Bloomberg. That compared with an increase of 38 percent in the previous year.

The IShares FTSE China 25 Index Fund (FXI) (FXI), the biggest Chinese exchange-traded fund in the U.S., added 1.2 percent to $37.52 after a two-day decline.

While there are many Western, corporate-media outlets spouting such drivel, I’ll use the Financial Times as my example. “China stuck in dollar trap”, crows FT on May 24^th. Then, later “…[Beijing] has little choice but to keep pouring the bulk of its growing reserves into the U.S. Treasury”.

What somehow escaped this “analysis” by FT is that China won’t touch any U.S. dollar asset except Treasury bonds. The monthly flows of capital into (or out of) the U.S., which is known as the Treasury Department’s “TIC” report tells a clear story.

So far, in the three months of data which have been reported for this year (Jan., Feb., March) the net result was an outflow of capitalfrom the U.S. totaling $211.4 billion.

Does this number suggest China is “trapped” into buying U.S. debt?

The March number is slightly more instructive. This marks the beginning of the newest propaganda-offensive from the U.S. corporate media in asserting (yet again) that the U.S. economy was starting to “recover”. This was epitomized by U.S. court-jester Ben Bernanke prancing around, braying about “green shoots”.

In March, the TIC inflow into the U.S. was a paltry $23.2 billion. However, net purchases of U.S. Treasuries totaled $47.9 billion – meaning the net results for all other categories of U.S. debt was yet another outflow of $24.7 billion.

About the only useful piece of information in the Financial Time’s propaganda was to note that China was only purchasing short-term Treasuries. This is highly significant for two reasons.

First, the shorter-term Treasuries are the most-liquid form of U.S. debt. It’s no surprise that China is choosing only these types of Treasuries, since it is currently on a commodities buying-spree – which it is financing with U.S. Treasuries. In other words, while China may be a net buyer of U.S. Treasuries in relation to its transactions with the U.S., on a global basis, China is spending its U.S. dollar holdings at least as fast as it is accumulating them. Does this look like China is “trapped”?

The second important point about China’s focus on short-term Treasuries is that this does very little to help the U.S. fund its gigantic, out-of-control deficits. The focus by China (and most other foreign buyers) on short-term Treasuries means that not only is the U.S. being forced to dump the largest glut of new Treasuries in history on this already-saturated market, but it is also being forced to try to “roll-over” additional, huge amounts each month as the short-term Treasuries mature.

Does this support the ludicrous assertion by FT (and others) that China “is helping Washington fund its growing budget deficit”?

How exactly will the U.S. “fund” a deficit certain to exceed $2 TRILLION (just in the current fiscal-year) with an outflow of more than$200 billion so far this year?

The ultimate rebuttal to the nonsense of the propagandists is to simply note what is happening in markets. Since the U.S. bond-bubble hit its peak late last year, U.S. Treasuries have already plunged a sickening 30% (see “U.S. Bond Bubble Bursts – bye-bye Equities Rally”).

Meanwhile, the U.S. dollar just hit its lowest level of the year. A look at this horrific chart suggests that the plunge of the dollar is much closer to the beginning than the end.

It is not China which is “trapped”. It is the U.S. government. Trapped by years of lies and statistical “padding” of its declining economy. Trapped by years of grossly over-spending. Trapped by the self-destructive machinations of the U.S. financial crime syndicate, which runs the U.S. government in all but name.

When China runs out of things to buy with its U.S. Treasuries, it will stop accumulating them – period! Instead, it will channel its huge budget surpluses into infrastructure development and other internal uses: for a huge economy which is still in the infancy of its development.