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The Slowdown in China

On December 5, 2011, in Asia, Housing, by Tim

Worrisome signs have been emerging from China in recent weeks that all is not well. Home prices have been notching modest declines of a fraction of a percent over each of the last three months (though this may be one case where the government’s data is manipulated even more than usual) and the manufacturing sector saw a modest contraction in November for the first time since 2009.

Today, the Chinese services sector notched its weakest growth in three months and, after the central bank loosened bank reserve requirements last week after two years of tightening, policymakers fret that slowing growth could lead to social unrest. Amid daily calls by pundits for a “hard landing”, the LA Times reports that the planned economy is in trouble.

According to an official New China News Agency report published Saturday, China’s top security chief warned provincial officials to brace for unrest if financial conditions continue to deteriorate.

Zhou Yongkang, a member of China’s nine-person Politburo Standing Committee, said the country should focus on developing better social management -– a euphemism for control aimed at stamping out opposition and unrest.

“The Party and the government have always paid a lot of attention to social management … but it still cannot keep up with the changes in economic and social development,” Zhou reportedly said, using typically dense party jargon.

“Faced with the negative impact of the market economy, we still have not established a complete social-management system,” Zhou continued. “How to establish a social management with Chinese characteristics to suit the socialistic market economic system in China is the most pressing task we face today.”

With the labor market now showing some distress as the number of strikes and other protests escalates, income inequality is an increasingly important issue to workers with increasingly idle hands and this is not good news for the government.

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Obama and China, Good Cops and Bad Cops

On November 14, 2011, in Asia, Currencies, by Tim

You’d think that there’s at least a little bit of a “Good Cop, Bad Cop” dynamic going on right now when President Obama talks to the Chinese about letting their currency strengthen at a faster pace. Of course, Obama is the good cop here with just about every GOP presidential hopeful playing the alternate role and one can easily imagine Chinese President Hu Jintao being told over the weekend, “Hey, I’m about the best friend you’re ever going to have in Washington. How about a little appreciation, currency-wise?”

As Hu made clear yesterday, from the perspective of the Chinese, they had no part in making any of the rules in the current global monetary system and feel little compulsion to play by them. Mindful of the Japan experience in the late-1980s when strong currency appreciation led to massive asset bubbles and two lost decades, they’re not likely to simply comply with the wishes of the West when it comes to their currency.

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Seven Billion and Counting

On November 1, 2011, in Asia, Europe, by Tim

Oh Dear. It looks like Europe is falling apart again as the Greeks and Germans again bicker about money. I’d be curious to know if, throughout history, there have ever been any successful marriages between people from these two countries as they seem to be about as far apart as you can get on how to spend money. My recent trip back to Pennsylvania reminded me of my family’s German-Italian ancestry that has some pretty big cultural divides, but the Greeks apparently take spendthriftiness to a completely different level.

Anyway, look for our collective money troubles to get worse before they get better as global population continues to grow, yesterday marking an important milestone of 7 billion.

There are many more interesting ways to look at this subject including this neat graphic at The Economist and many more YouTube videos since people starting talking about this a year ago in preparation for the big 7 billion event.

This graphics overload from National Geographic was particularly good.

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A Gold Car in India? Why Not?

On September 20, 2011, in Asia, by Tim

A few years ago the world learned of Saddam Hussein’s gold toilets and, of course, gold plated AK-47s have been around for some time. Now comes news from Commodity Online in India that Tata Motors has produced a gold-plated car worth a reported $5 million.

Ironically, the vehicle above is Tata Nano, a model designed specifically to bring low cost transportation to the masses in Indian. Now they’ve gone and made it unaffordable again…

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Just Another Day at the Office for Gold

On September 7, 2011, in Asia, Commodities, by Tim

There’s been lots of gold news already this morning, not the least of which was the $70 plunge in price that the mainstream media says is due to profit taking, a rotation back into equities, and the looming margin rate hike by the Shanghai metals exchange that many think will be followed by a similar move at CME Group here in the U.S.

Of course, the Swiss pegging their currency to the euro (or, more properly, putting a limit on how high it will be allowed to rise versus the euro by printing up however much local currency is necessary to buy euros) has complicated matters for investors as one reliable safe have has now been removed from the market.

You’d think this might buoy the gold price, but apparently not.

The Chinese are probably eying the the developing correction as are Indian festival buyers, confident that buying opportunities have been short and shallow, that is, since the world’s paper money began what, increasingly, appears to be a death spiral a few years ago.

But, the most interesting gold news today comes from Kazakhstan, where, according to this Reuters report via Mineweb, the government just announced it will buy all domestic gold production for at least the next three or four years.

Kazakhstan’s central bank said on Wednesday it would be buying up the Central Asian nation’s entire gold bullion output until at least 2014-15 to ease its exposure to the sagging dollar.

The bank decided last month that it would start buying up the entire gold bullion output from domestic producers on Jan. 1, 2012 to augment its gold reserves.

“In the next two or three years we will certainly be buying up the entire (gold output) volume,” National Bank Governor Grigory Marchenko told a news conference.
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The gold assets of Kazakhstan’s central bank have grown by 29.5 percent since the end of last year to stand at $4.0 billion as of August 31, amounting to 11.1 percent of the country’s net gold and foreign currency reserves.

Kazakhstan, Central Asia’s largest economy and oil producer, produced 21.4 tonnes of gold, including 9.7 tonnes of refined gold, in January-July of this year. It plans to boost gold output to 33 tonnes this year from 20 tonnes in 2010.

Given the dim prospects for policymakers to extricate the world from its current financial difficulties, many of which are rooted in the excess creation of money and credit for about the last 30 years, it’s hard to view the current correction in the gold price as anything other than a buying opportunity, even at these currently loft prices.

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Breaking Free from the U.S. Dollar

On August 8, 2011, in Asia, Currencies, by Tim

Amid all the headlines about the U.S. debt ceiling, European sovereign debt, and the U.S. credit downgrade over the last few days, was this Financial Times commentary by Yu Yongdin, a former member of the monetary policy committee of the Chinese central bank:

China can break free of the dollar trap

Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the US is that after Tuesday’s debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar.

China is worried about the possibility of a US default for obvious reasons. As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses. Even after this week’s debt deal, however, the risk remains that US debt will continue to grow to the point where its government is left with no option but to inflate the burden away.
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If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumours are that the US might return to quantitative easing) China must realise that it can no longer invest in the paper assets of the developed world.

The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.

Someday, the Chinese (and the Japanese) will surely catch on – maybe today is that day…

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