Global View: China's Currency, Europe's Next Crisis, Iron Ore Contracts

|
Includes: CNY, CYB, FEU, FEZ, FXE, FXI, IEV, PGJ, RIO
by: Enzio von Pfeil

Recap of Enzio's appearance on CNBC Worldwide Exchange, Wednesday, March 31, 2010, 4-5 p.m. Hong Kong Time

Show Notes

Q: The value of the Chinese Yuan remains a contentious issue. Do you expect any changes in the value of the Yuan and when? Would cheaper imports help to drive domestic consumption in China?

Enzio: The issue is contentious from a political as well as an empirical perspective:

  • America has replaced Japan with China as her whipping boy, and
  • Empirically, the whole basis upon which currencies are “valued” is highly contentious

As suggested in my recent book on Trade Myths, China would have a deficit if you removed all of the very successful activities of Multinational Corporations from her purported trade ”surplus”.

Q: We've recently seen some interest rises in India and Malaysia. Are you expecting more rises around Asia? Who do you expect to raise interest rates next?

Enzio: Yes, that is because the Economic Time® is morphing into an excess demand for goods out here in Asia; indeed, this is why Central Banks are tightening.

  • Thus, my guess is that the region’s Central Banks will continue seeking to create an “excess demand for money” via further tightening.
  • Whether this leads to “proper” (demand-pull) inflation remains to be seen, however; deflationary forces remain very strong.
Q: Do you think we will see any more debt crises in Europe?

Enzio: Most definitely. Portugal and Spain already are in the queue.

Europe’s fundamental issue, next to labour market rigidity and pugnacious taxation of the working population, is that debt defaults were never addressed when the Euro was established. This means that the Europeans never put procedures in place concerning how to deal with such disasters. One result is that defaulting countries can hold the virtuous savers and fiscally abstemious to ransom – with all sorts of sophistic arguments.

Q: Have you got any comments on the iron ore negotiations going on in China and the shift to shorter term supply contracts?

Enzio: I don’t know about such things. But going on an editorial in yesterday’s paper, it seems as if only the biggest buyers have the most clout when it comes to buying iron ore, so I wonder whether Beijing is going to re-visit the whole matter of how iron-ore contracts are priced in the first place.

After that, shifting to shorter-term supply contracts should be more of a logical conclusion than a “first step”.

Q: Have you got any comments on the recent report that Rio Tinto (RTP) will employ Kissinger to help them in China? How would someone as controversial as Kissinger be able to assist?

Enzio: Again, I have no value-added knowledge of Dr. Kissinger’s appointment. All that this appointment suggests is that Rio Tinto wants some “big guns” in there to help in their relationship particularly with China. I would have thought that given his connections, he will be able to smooth further bumps out. But in light of the recent ruling, it seems as if Beijing needs to re-visit just how iron ore contracts fundamentally are to be priced.

Q: Are there other points you would like to raise?

Enzio: It’s looking like we are going to have inflation in the East and deflation in the West. That has all sorts of currency implications going forward, now that the Economic Clock® keeps signaling better times ahead for us in the East.