James Lewis

U.S. and China: Protectionist Straws Piling Up

So Far the Trade War has been very very weak. The Mercantilist abuses that have emanated have been huge and the world has reacted very weakly. This sends a very weak message to beijing. It really is time for the deficit countries to illustrate their true determination to reduce their trade account. After all is this really protectionsim or simple international trade balancing.

Tariffs need to be used to reduce trade in 10% of the trade between China and USA. This will serve as a very clear message that the USA has every intention to balance its trade. If the USA is not brave enough to act with leadership, then they will pay very dearly and will give up huge economic and eventually military power to China.

Those that belive conflict is not the answer to resolving issues does not appreciate the determination of China to become the economic and military superpower. Protectionsim is the only way, a large escalation followed by new agreements to balance trade is far better than a slow escalation. After all the slow escalation does not serve the purpose of forcing China into balancing trade. It juts gives them more time to assess the best way to harm US companies operating in trade zones in China.

It would be a very good time for USA and other western manufacturers to start pulling out their technology from the free trade zones. If there was a huge escalation China would start to confiscate anything that would benefit them.

Jim Rogers on the Next 10 Years

If there is not a very significant war, then there will be room for both the USA and China to hold significant corridors of power. Of course the rise of China has been and is at the expense of the USA both in financial and power terms. But I am sure the USA did not think it would hold such immense monopoly power on world affairs forever.

Those that predict China will become the sole superpower are wrong unless of course there is a very significant war that China wins. I am not sure if there is such thing as victory in wars between big countries anymore however.

Of course China has given a glowing example on how a developing country can develop financially and economically. So lets be clear that other countries like Brazil are going to also over time develop and take away the acceleration of financial gain and power from China as well.

I think though that globalisation will contract significantly and domestic agendas will trump idealogical free trade trade actions. So even if China develops its power base, it will only benefit them domestically. Protectionism will see that power corridors are created. China may be able to make inroads in countries such as Africa and poorer asian countries. In order to develop technology and acquire resources. But I doubt they will be able to develop new markets to sell their goods. And certainly will lose open access to European, Indian, and USA markets.

Those that think China can achieve its imperial goals probably do not understand the enormity of its internal problems.

US Dollar: "I'm Not Dead Yet!"

If the USA lost its status as the reserve currrency of the world. It would monetise all of its debt, pay off the surplus countries. And develop a new currency. In the meantime it would build huge stocks of commodities, other foreign currencies so it would have backing for the new currency.

I think the world needs its head checking if they think they can displace the USA power like this. The meetings are very real, the plan to trade commodities in another currency is very real as a plan 'b' scneario.

But lets be clear, the USD will only lose its reserve status if the USA decides its in their best interest.

The Time for Diversification Away from the Dollar Is Upon Us

Lets trade oil in chinese RMB then.
Oh that won't work, the RMB can only be purchased in airports at 7% below its value.

Better still lets trade in oil, everytime you want some petrol; you have to bring some gold bullion to the petrol station. But make sure you cut the right weight.

That's it - the Russian Ruble. Open, politically secure, trusted currency from an open, trusted government.

O.K. O.K - I get it, lets trade oil in the Japanese Yen. Because the Japanese haven't had/do not have any system problems. And their banking system has not been bankcrupt/is bankcrupt for the last 20 years.

Sorry for being dumb - lets price it in a basket of the above currencies. This will help to diverisfy risk, because 4 bad currencies is better than 1.

- Absolute madness -

Cap-and-Trade Is Not Like the Space Race

I question how the USA truly feels about changing its source of energy away from oil. After it has spent the last 60 years building up reserves of oil. How many wars has it had for oil security. And now we are talking about changing consumption patterns of oil

Scary....

Is There Really a Global 'Cabal' Aiming to Dump the Dollar?

For the Independent to run the story it will have a lot of structural truth in it. But lets be clear the timeframe is long term, not short term. China have to be seen by their 'allies' as supporting the demise of the USD, but believe me they will not be happy with how this is unfolding.

Finding out that major trading partners are going to stop accepting USD for trading will only cause a huge acceleration of new USD being printed in order to monetise debt.

NOW THE USA HAS THE PERFECT REASON TO PRINT ANOTHER 2 TRILLION USD.

The IMF Warns About Surplus Countries, Global Imbalances

The problem of course with China overcapacity issue is that they believe if they steal market share using 'destructive pricing' and monopolise the markets they are fighting in. Then there is not infact an overcapacity issue.

In a fair world, with countries sharing global trade, China is creating overcapacity in every sector they compete in. However in the world China is working towards where they have monopoly on every sector, there is no such thing as overcapacity. Holding monopoly market share justifies any subsidisation they have undergone. When you hold the entire monopoly on trade, current day profit really does not matter. As in the future you hold the power to increase prices as you have no competitors, thus the present 'loss leader' guarantees future monopoly market abuse and with it profit.

This is very much a prevelent strategy in corporate strategy in China. It's not new. The point here is that subsidising taking market share is possible because of high savings rate. Cost destruction is also possible as the artificially low wage rates have act as a cost input subsidy. Not to mention the circumvention of enviroment costs. This is not to mention the huge cashflow positon China is in as a result of the trade surplus. China has the cashflow to keep this 'market share domination program going'

The ONLY way that China can be stopped from achieving a monopoly is a 'harmonisation of trade' through import tariffs, penatlies or other protectionist policies. Of course the problem is that China is fending this off by hitting foreign companies that operate in China everytime the west tries to harmonise trade levels.
The west needs to come to terms with the fact that a lot of their investments in China are going to have to be put on the line if they want trade harmonised.

The west needs to get its banking solvency issues sorted and then there needs to be an escalation of trade protectionism. It has to be very deep and statistically significant. China will only play ball when they realise they have more to lose (as all trade surplus countries do with manufacturing orientated economies) than the west. Western companies operating in China have to also brace themself for losses.

Of course the nuclear issues on Iran/North Korea do not make this easy. Maybe Europe needs to stop hiding behind Amercica and start to strongly voice their opinion and strongly enforce protectionsim.

I think that one of three things will happen here:

1. There will be a slow escalation of protectionsim, in which case China will slowly but surely realise their monopolistic goals.

2. There will be a huge escalation of protectionsim, in which case the West will one again gain some power in trade negotiations.

3. The West will carry on wimping out of a confrontation in which case China will very quickly realise their goals and become more and more financially powerful. More and more powerful in every sphere.

From what I can see, the USA is moving towards an alliance with Brazil and suggests that they are doing so based on the fact they are planning to undergo plan 2 and escalate protectionsim on a huge scale. Europe response to China's desire for more voting rights at the IMF was particularly hostile and they are many penalty trade tariff requests against China making their way to brussels. (especially as France is starting to leverage off its position) So I think we could see an escalation there as well. In Brazil there is also a lot of protectionist suits making their way to the government heads. Shoes not to mention one. We very much could see an alliance between the USA and its western partners.

All very interesting. I question though if China starts to receive a lot of external hostility and shrinking of trade. Will they inact more wasteful investment policies and inflate their domestic asset markets further. Japan after all used its dominant trade surplus to justify blowing up its incredible asset bubble. Could China justify blowing up its asset bubble on patriotic protectionsim basis.
I THINK SO

No Signs of Recovery for China's Exporters

There is a need for companies to buy 2-3 month inventory cycles, because cash flow is so bad. After all there is very little trade finance in western countries now. All the credit has been going to banks to boost asset prices in order to move the banking system out of insolvency. The Chinese are also less happy with producing huge stock without signifcant deposits because of the huge losses some factories took as a result of foreign companies going bankcrupt and not paying for their produced goods. As well as this foreign companies are scared to pay for large amount of goods just in case the chinese factory bosses take the money and run off. (lots of stories on Hong Kong/Taiwan bosses doing this)

If manufacturing has not shown to pick up in Aug/Sept/Oct for Xmas buying then it will show the true depth to the inventory problem the shops in the west have. This will be very negative as no substantial inventory building will occur until feb-march 2010.

Of course its my view governments worldwide understand that we still have at least 5 months of inventory to sell. And retail sales/production will be low until then. After all this is why the fiscal stimulus/monetary policy initiatives are being co-ordinated to run to end of first quarter 2010.

In China so much infrastructure is being built that the job situation has improved. Retail/Entertainment spending has also been very strong in Shanghai. And it is very apparent that a lot of money has been made (out of asset appreciation/credit expansion/fiscal spending) over the past 6 months. There are a great deal of new ferarris/Lamborghinis wizzing on the road. And the amount of women showing off their $2000 handbags is quite unbelievable.

I can tell you the upper middle class, higher classes are all doing very well.

Post-Holiday Chinese Market: Five Key Factors, Part 1

Hello Susan,

You stated 'Chinese banks raised the foreign currency deposit rates while held the local currency rates steady in September.'
This was after saying that there seemed to be 'hot money' outflows.

Are you saying that banks reacted to the hot money outflows by increasing foreign currency deposit. Is watching the foreign currency deposit rates for large increases a good way to guage if there is a rush of 'hot money exiting' china.

Thanks

James

Floating Rate Mortgage in Hong Kong Is Setting Up a U.S. Style Housing Market Crash

If Andy Xie is right, we are all in a lot of trouble.
Andy Xie is very smart, but he is a bubble chaser.

The fact everyone is borrowing short to finance huge houses on variable rate deals is worrying. But the first 1% of interest rate rises will be absorbed if they are getting 4% net yield. And if the REAL economy (is there such thing in Hong Kong - LOL) is doing well (hopefully a pre-requisite for rate rises in USA) then rental income should rise and rental vacancy levels should drop.

If the real economy does not improve and the last 5 years of world economic growth (upto 2008) is unsustainable and can not be repeated again. Then we are potentially sitting on a mess that will take decades to work through. The whole world may have to be run like Japan, just to keep toxic balance sheets under control.

Hard Call....but short term I would like to borrow at 1%, rent at 4%.
And collect a nice capital gain as more mainland money is laundered through Hong Kong into property. The sad truth is, to make money through asset appreciation on the backdrop of the problems in the system. Playing short term is the only real way to manage risk. After all we all know, the only reason why most assets are not in the toilet is because the G20 governments have agreed to inflate them.

What to Do if Japan Blows Up

I hope Japan is not going to blow up!
I want to go on holiday there...

CAF: If Money Flows into Mainland China, It's Where You'll Want to Be

Lots of confusion.

People looking at western markets look for inflows from the Chinese Government trade surplus that is being collated in the chinese soveriegn fund.

People looking at Chinese market looking at inflows from foreign investors through the QF11 program.

Hong Kong investors looking at the illegal flows from the mainland into Hong Kong through the various underground channels.

Who's right?

I belive the Chinese market is fundamentally driven by the excess liquidity in the banking system that has built up due to the giganitc reserves built up and not sterlilised, the huge QE program the goverrnment has been involved in and not to mention the enourmous capital that has emanated from loan growth. It really has nothing to do with the QF11 programs. After all the western banks have very little disposable income on their balance sheets as they are just about reaching solvency.

If one is looking at Chinese market, one really needs to take a look at domestic policies, earnings, liquidity issues and valuations. Trying to work out what the western banks are going to do is useless. They are not calling the shots, this of course is what the chinese government wants.

In terms of premiums, the yuan is not freely convertible so there is no arbitrage analysis that can be done. The Hong Kong listed chinese stocks are priced in HKD, Shanghai listed in RMB, US listed in USD. There is inherent currency risk as the RMB could resume its strengthening even through a one time maxi revaluation.
Therefore to say Shanghai stocks are expensive compared to basket of stock in HK/USA is not true. A full analysis would have to be made of the corresponding currencies. Very hard to do as the RMB FX rate is only reliant on where the government decides it is to go. Anyone that has looked at the forward RMB-USD market will be able to appreciate how arcane future movements are.

I would say that I woudl happily pay 10-15% more for stocks in Shanghai quoted in RMB if my investment time horizion was more than 3 years and I thought now was a good time to buy. (Note I am not saying buy Chinese stocks here)

The best one can do right now is sit tight and watch what the chinese government has to say over the next couple of weeks. This will dictate price movements short (and maybe medium term).

Japan: Possible Culprit to Drive U.S. Interest Rates Higher

The FED can buy all the treasury notes it needs to if Japan/China stop buying. Financing is not the issue, the effect on the dollar is. As things stand so much wealth worldwide was destroyed that deflation is still a threat. Especially if we get a double-dip in the price of assets and all the associated selling that will occur due to solvency/tier capital requirements. I think from here no one is going to make any sudden moves in the interntional debt markets. Except the FED, US consumer will slowly but surely through direct/indirect means take over the role of financier to the US government.

Some have argued this will mis-allocate capital away from productive means. But this is not true, as a lot of this capital was used to buy useless goods from China and help swell their trade surplus. Of course the USA made money on the recycling of this money as it re-entered the USA by the export nations by selling manufactured financial products (with pretty good profit margins). But keeping the money in savings and by association helping the US to finance its government spending does not have to be a total waste. After all the government could do the smart thing and subsidise more industry to develop manufacturing at home. Which in turn could help ease the employment problem. So there is a lot of good that can be done by the increased savings going into treasuries.

Those that think the dollar is going to weaken/gold is going to rise are in for a big surpise. The USA is not in the weak position everyone seems to think. The USA has gone through re-structuring many times and will find it no problem to adjust its policies. It's all relative, all that needs to happen is an emerging market blowup and the dollar will become the central banks darling again.

Why - there is no alternative. Regardles what the gold bugs keep telling you as they try to sell you gold at 1000.

Julian Robertson Is Warning Us

The lesson here is as follows:

It takes 100 years to develop a large economy. The only way that it can be done quickly is by wasting excessive amounts of capital. The quicker the development, the more the waste in the capital allocation process. The quicker the development the more inbalances that will exist.

The only way to cirumvent time in development is using excess capital. Excess Capital can only be generated for development by an excess of investment and by creating trade surpluses. This has been used many times in the past by many countries. But excess investment is almost always value destroying. Also creating excess trade surplus can only be done by excess production and holding down domestic consumption. It is these two principles that cause so much pain after they have peaked.

Economic planners seem to believe that a consumption based economy is negative because their views are that to win you need to trade unfairly and buidl up reserves, They see this as their weapon of development. In fact by taking this path, the weapon is given to the countries they purchase the goods.

The only true way to develop a country so it is sustainable is to look inward, to develop organically internally. You have to win the inner game before winning the outer game.

China should have started to develop the internal economy around 2004. Instead of buying the USA manfactured goods (financial products), they should have sold down reserves. Increased the yuan gradually and spread the wealth. They should have made internal investments in the health care sector back in 2004. Their view was build reserves as fast as possible so when the music stops china has the most money. But actually they missed this opportunity buying USA manufactured goods (financial products) instead.

Where do we go from here...very obvious.
When a country realises that it has to create internal growth as external growth no longer exists. And realises the internal economy is not developed due to economic and more important wage differential inbalances. The immediate jerk reaction is to inflate asset prices to create wealth affect/domestic consumption. It has been done many many times. But actually this just makes the inbalances worse as this is just another form of investment. It does not spread wealth, it concentrates the wealth more in upper middle/upper classes.

China needs to increase wages over every sector

China in the short term needs to subsidise the extra cost of employment by eradicating PAYE tax so's not to destroy manufacturuers. But at the same time make it harder for companies to fire workers by upholding employee rights (only way to do this is by opening employment rights bureaus in every industrial zone) At the same time develop service/agricutlure sectors to rtake up slack of employment emnating from low added value manufacturing bankcruptcies.

China needs to develop tax collection and go after the billions of USD that the rich have not paid tax on. This is very easy to do as it is sitting in real estate and in Hong Kong. This money then needs to be used to subisidise increase of wages. This is a direct transfer of wealth from rich-poor. With the effect of stimulating domestic demand through increasing disposable income of the poor.

China needs to slowly stop buying USA manufactured financial products in a way that does not cause spiral effect for both countries. An idea would be to buy USA manufactured goods, which would be good for the dollar (hence good for the chinese)
They can earn duties + VAT on all USA manufactured goods which will far better than value destroying earnings of making goods they are not proficient at making. This will not destroy the domestic producers as consumption will have increased significantly due to wage increases. Lets also be clear that by not buying USA manufactured goods, China has to buy USA manufactured financial products due to the holdings of usd in the trade surpluses. They have to buy something with the USD. Buying natural resources is not a diversification process as the cost of the natural resources is worth more than the resources. Value destroying again.

Proectionsim for domestic producers is hurting China because of the follow through process above. China can not mitigate its inbalances and its huge holdings of USD. In fact doing so only hurts China.

The above spreads wealth, creates more employment opportunities, mitigates social risk and acts to resolve internal imbalances. It is very short sighted for China to seek revenge for the disgsuting way it has been treated in the past by ther West. Instead they should build strength from within.

After all, with 1.3 billion people, they can ill afford enemies.

Julian Robertson Is Warning Us

If the Chinese stopped buying treasuries, the USA would stop buying Chinese goods. This would allow domestic savings to increase, the savings would then be put into treasury bonds by the banks holding the savings. The FED would increase purchases of Treasuries.

It is not armageddon, it is a far prettier picture than what is happening now. But the transition is where the problem lies.

During the transition, many many negative consequences can arise and the situation would prove very difficult to manage. Those who belive the dollar will crash could be very wrong as interest rates could easily be put up to 7% to generate buying. However this would strangle the economy and knock down the price of various assets would could add further risk to the banking sector due to balance sheet/insolvency issues.

Of course the Chinese will not sell down bonds in a reckless manor. Because belive it or not, they would come off worse. Far Far worse. They do not only have economic worries in this respect, but large social issues if this is to arise.

Quick example:

China sells down bonds in a reckless manor, this in turn causes 50% of their sovereign reserves to de-value due to dropping dollar/treasury pricesd. If they lose enough money on their reserves, their entire subsidised sponsored reserve building activites will become loss making. In effect the huge amount of yuan they have printed as their usd reserves have increased will lose intrinsic value interntionally Without huge usd reserves the yuan is worth as much as monopoly money. Internally their banking system is in worse shape than the USA banking sector. The only difference is there is a guarantee on the banking sector due to the usd reserves they hold.

If they stop buying usd debt and cause a tail spin in the USA the USA will have to stop buying their goods. Their economy is developed and the banking systems balance sheets are all dependent on exports. All recent loans to build infrastructure will be value destroying causing yet more solvency issues at the banks. FDI would terminate straight away as the Yuan would have to rise initially as they sold off the USD reserves. This would destroy manufacturing sector as the rest of the world would be shut out from buying from China due to the increased costs of chinese goods. This would cause yet more solvency issues at the banks.

In effect the Chinese financial system would crash, all money would flood out. No one out of choice would finance any sort of deficit from China due to the bitter relationships developed through China's mercantile actions of the last 10 years. There would be no domestic economy to take the slack of the external destruction of demand due to the structural imbalance of the economy and wealth distribution.

China is not stupid, they are playing a tough hand. But Hu Jintiao knows full well; being an exceptionally smart man. That it is China who is in the most fragile position. NOT USA