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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

The China Currency Debate Heats Up

On March 15, 2010, in Currencies, by Tim

The war of words between the U.S. and China regarding the Chinese currency appears to be entering a new, more serious phase, particularly in light of developments on Taiwan arms sales, visits with the Dalai Lama, and Google’s imminent departure from the country.

Hopefully neither side will be reading Ambrose Evans-Pritchard’s latest thoughts on the matter as this could just push one or both sides over the edge.

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Within a month the US Treasury must rule whether China is a “currency manipulator”, triggering sanctions under US law. This has been finessed before, but we are in a new world now with America’s U6 unemployment at 16.8pc.

“It’s going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we’re not going to get anywhere,” said Paul Krugman, this year’s Nobel economist.

It looks as though Krugman is taking a stand on the China currency issue, citing it as a “significant drag on the global economy” in commentary yesterday.

(more…)

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Cracking Down on Bank Bonuses (in China)

On March 11, 2010, in Asia, Banks, by Tim

Well, it’s about time they started reining in those banking bonuses in China and it couldn’t come at a better time after more than a trillion dollars in new lending last year and recent concerns that credit markets have become overheated.

An AP report in the Miami Herald details just how out-of-control the situation had become and what drastic steps are being taken by the Chinese government.

China has tightened controls on pay for its top bankers, joining global efforts to try to limit financial risks by linking longer-term performance more closely to compensation.
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China’s top bankers are paid modestly by Western standards but receive many times the salary of the average Chinese worker, which has fueled public anger. Top banking and insurance executives are appointed by the ruling Communist Party.

The chairman of China’s biggest commercial lender, Industrial & Commercial Bank of China Ltd. was paid 1.6 million yuan ($235,000) in 2008, while Citigroup CEO Vikram Pandit received $38.2 million that year.

Last April, the government ordered top Chinese bank and insurance executives to take a pay cut to promote economic fairness.

The Wall Street Journal also ran a story($) on this today in which, for the print edition, they had the pictures of the six top banking CEOs atop each of their names, titles, and 2008 pay.

With compensation ranging from $220,761 for Xiao Gang, Chairman of the Bank of China, to $235,849 for Jiang Jianging, Chairman of ICBC as noted above, I thought for a second I was reading The Onion.

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Rising Inflation and House Prices in China

On March 11, 2010, in Asia, Economy, Housing, by Tim

China Daily reports that consumer prices rose to a 16-month high in February, up 2.7 percent from a year ago, while producer prices are now rising at a 5.4 percent annual rate. This follows reports yesterday that, despite recent efforts to cool their housing market, property values saw year-over-year gains of 10.7 percent last month.
IMAGE Food prices rose more than six percent from year ago levels and, while some economists say inflation will cool in the months ahead due to more favorable annual comparison, it should be clear that some of the recent $1+ trillion in government sponsored credit creation is now starting to show up in the prices of things other than housing and copper.

It doesn’t look as though this is helping the housing market cool off:

Facing ever-rising housing prices in China, only 18 percent of mothers told a recent survey they were willing to let their daughters marry men who only rent their homes.

Apparently, in a country where the male-to-female ratio is already higher than normal due to the “one child policy”, men are at a distinct disadvantage with their potential mother-in-law if they are not already, or soon-to-be, homeowners.

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China on Gold – Stating the Obvious

On March 9, 2010, in Commodities, Currencies, by Tim

Reuters reports on comments made by China’s top foreign exchange manager at the annual gathering of the National People’s Congress in Beijing on the subject of gold purchases.

Yi Gang, head of the State Administration of Foreign Exchange, said that while gold was “not a bad asset,” it would never become a big part of China’s overall investment portfolio.“The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices,” Yi said at a news conference on the sidelines of China’s annual parliament.
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China’s $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fueled speculation the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and the international price is too high.

“It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion,” Yi said. “It would just increase the level of gold (in China’s reserves) to about 2 percent from the current 1 percent.”

They’re damned if they do and damned if they don’t and the numbers involved are not likely to get any better before they get worse.

Absent a dip in the price of gold back down below $1,000 an ounce (at which time, they’ll probably snap up that 191 tonnes of IMF gold), they’ll probably just keep adding to their gold reserves quietly and, as they did last summer, announce long afterward that they have made substantial additions to their holdings.

(more…)

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A Rising Standard of Living Cures Many Ills

On March 4, 2010, in Asia, by Tim

The one thing about the Chinese economy that makes them hard to bet against over the long term is the simple fact that they’re moving up off of such a low base when it comes to developing a robust consumer class, the latest evidence of such coming in this USA Today story about rising auto sales and the nation’s growing fascination with private transportation.

Ahead of the lunar new year holiday that rates as this nation’s biggest party, buyers packed the Huaxiang car market in southwest Beijing. Some wanted to drive home a new car in a physical sign of their success in the soon-ending Year of the Ox; others wanted to trade up before the new Year of the Tiger that began Feb. 14.

Lu Guozhi, 50, a retired railway official, helps a friend shop for a car. They eye a Geely CK sedan, a popular Chinese brand, which comes with an attractive price tag — 39,800 yuan, or about $5,800 U.S. — and qualifies for a government tax break for smaller-engine cars. “I’d prefer a BMW, but I’ll never be able to afford one,” says Lu, who bought his first car a year ago. The Geely’s “exterior looks good, and it doesn’t use much fuel.”

Slightly more than a decade since China’s auto market took off, it’s at an enviable place: It overtook the U.S. last year as the world’s largest auto market. The upheaval ended more than a century of dominance by Detroit’s auto industry.

You can have a lot of booms and busts and both businesses and the government can make lots of costly mistakes, however, when you’ve still got decades of rising standards of living ahead of you, that is one very strong wind at your back.

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Steve Keen on Max Keiser

On February 27, 2010, in Asia, Commodities, Economy, Housing, by Tim

Max Keiser and and Stacy Herbert talk about a number of topics including Charlie Munger’s must-read commentary from earlier in the week “Basically, It’s Over” and then Steve Keen is interviewed starting at about the 12 minute mark.

The discussion about the impact of the China slowdown on the Australian economy is well worth a close listen since you don’t hear too much about it these days. It seems the economy down under is still viewed as some sort of a miracle system that escaped recession back in 2008-2009 and has only blue skies ahead.

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