TRANSCRIPT: Global rebalancing act of 21st Century
drains dollars and frays nerves but what is the
new currency regime to be? Growth of money in
China fuels inflation and fears of hard landing;
Chinese markets hiccup...
Sinomania! Volume I Webisode 40, November 20,
2007
Currency Crisis! Will China Dump the Dollar?
Money Everywhere but Markets Hiccup…
"WE ARE WORRIED"
At the start of the last century China stuck
with silver while Japan and the United States
among others based their finances on a gold standard.
The U.S. was then the upstart new superpower and
it took decades to sort out global currencies
as the British pound sterling faded and Germany
and China after it suffered from spectacular inflation.
At face value the situation in today's currency
markets looks a lot like the mid to late 1980s
when U.S. policy deliberately decimated the dollar
in response to its trade and government deficits.
Add to that the blame Japan strategy and the forced
appreciation of the Yen and you can see how many
think the solution is for China to rapidly change
the value of its currency.
And so we hear louder calls for Yuan appreciation
from the United States - Treasury Secretary Paulson
speaking from Africa, and Europe with French Finance
Minister Christine Lagarde echoing calls from
Jean-Claude Trichet, head of the European Central
Bank, for China to inflate its paper money.
But while central bankers and politicians of
the G-7, G-10, and G-20, ramp up the rhetoric
to show markets they are concerned, reality is
exchange rates appear to have a logic of their
own not necessarily driven by trade balances or
imbalances.
Globalization has reached such new heights and
interconnectedness that it is not currently clear
whether the world is "decoupling" from dependence
on the USA or "rebalancing" by encouraging if
not creating a "slowdown" in the American economy
in order for "emerging markets" that is poorer
countries of the world to catch up even faster.
One thing is clear China and oil exporters are
benefiting the most from the first decade of the
21st Century draining dollars and increasingly
Euros and Yen. China's trade surplus with the
USA has grown almost sixty percent since the start
of the year. The EU is an even bigger export market
for China. Meanwhile the foreign exchange reserves,
primarily denominated in US dollars, of oil exporters
from OPEC to Russia have swelled for the past
five years.
Both are now seriously concerned about the fate
of the US dollar and actively seeking diversification
away from US dollar currency pegs. Speaking in
Singapore at a business conference, Chinese Prime
Minister Wen Jiabao said "we are worried" adding
his voice to others in China's top leadership
for divestment out of Greenbacks.
Chinese ministers will be meeting this month
and next with their European and American counterparts
in what will certainly be a contentious if unproductive
conversation on their intertwined units of money.
This past weekend, for only the third time in
its near 50 year history the Organization of Petroleum
Exporting Countries or OPEC gathered heads of
state in Saudi Arabia to discuss direction as
the dollar decline alarms its financiers.
The ministerial meeting was held behind closed
door and I've not found any disclosure yet of
what was said. Oil production was not a topic
that will be discussed in another meeting scheduled
later.
One note of possible interest regarding China,
OPEC Secretary-General Abdalla Salem El-Badri
was in China only two weeks ago and met with officials
of China's national government and said that the
group can meet China's energy needs. The most
recent figures on China's oil imports show that
Saudi Arabia is now the number one supplier accounting
for over 18% of Chinese crude imports at over
3 million barrels per day, twice the amount Saudi
Arabia exports to the USA.
MONEY MONEY MONEY
The growth of money supply in China appears out
of control according to otherwise more sober analysts
in Hong Kong fueling inflation and leading to
general fears that Beijing will be forced to put
on the brakes to reign in China's growth sometime
in the second half of 2008 at just the moment
when the United States economy is supposed to
bottom out.
The M2 money supply expanded at over 18% and
inflation at six and a half percent last month,
an 11-year high. Food inflation is the biggest
problem running at almost 18% with prices for
meat up near 40%. This is a very serious concern
as high food prices are a traditional source of
unhappiness among Chinese with their governments.
There are widespread reports of deliberate but
selective curbs in bank lending particularly in
real estate although the China Banking Regulatory
Commission officially denies any credit freeze
is underway.
Real estate investment is said to be in surplus
or excess capacity. One indicator, prices of land
are breaking new records. A Singapore developer
recently paid 20,000 Yuan per square meter (or
about $1,000 a square foot) for land in the New
Jiangwan Town area of Yangpu district in Shanghai,
a new center of gentrification. That puts Shanghai
land values almost on a par with London or New
York City.
MARKETS HICCUP
The Shanghai Composite Index continues to slide
ending down every day since our last show to close
November 19 at 5,269.82. All markets have under
performed over the last few days with few small
exceptions. The CSI 300 Index ended down again
today to close at 4,994.416. Even with declines,
however, it has tripled in the past year. Shanghai
B shares are up a fraction to 330.353 after three
days of declines and the story is the same for
ShenZhen Bs closing November 19 at 708.931.
The individual investor program that was the
hope of Hong Kong remains delayed and a Credit
Suisse analyst now says it won't be implemented
until the second quarter of 2008. The China Securities
and Banking Regulatory Commissions disagree over
the scope of the program. The Hang Seng reacted
negatively to this news but most analysts still
expect the market to absorb potentially billions
from individual Chinese investors and the anticipation
to inflate Hong Kong's economy.
For viewers in the USA and Canada this week,
Happy Thanksgiving!
