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HomeChina Wants Inflation Protection
Posted by Larry Doyle on August 6th, 2009 1:35 PM |
Will China continue to fund the U.S. deficit? What would happen to interest rates if China exited our U.S. Treasury market? Where would the United States attract the necessary funds? This dilemma has been one of the most widely debated topics in financial markets.
On the heels of the U.S.-China economic summit held last week in Washington, a story is now seeping into the market that at the behest of the Chinese, the U.S. Treasury will increase issuance of Treasury Inflation Protected Securities (TIPS). The Wall Street Journal reports, U.S., in Nod to China,to Sell More TIPS. This story gives us a lot of food for thought, including:
1. how quickly do the Chinese think inflation may rear its ugly head?
2. do the Chinese have a lack of confidence in Ben Bernanke specifically or the Federal Reserve in general?
3. how high do the Chinese think inflation may rise?
4. will we continue to witness Chinese officials calling for a move away from the U.S. dollar as the international reserve currency?
5. could we envision the U. S. Treasury executing the sale of TIPS on a private placement basis to the Chinese?
Who knows how this scenario will play out. For our purposes, the fact that our largest creditor is looking for inflation protection speaks volumes.
If the Chinese are concerned about inflation, then I am as well.
LD
What is China Saying? Sustainability and Indirect Bidding
Posted by Larry Doyle on July 29th, 2009 9:47 AM |
Reading through the financial tea leaves this morning, I am struck by two developments yesterday. In the midst of the U.S.-Chinese economic summit in Washington, little surprise that Chinese diplomats voiced concern about the U.S. fiscal deficit. The Wall Street Journal highlighted this topic in reporting Chinese Convey Concern on Growing U.S. Debt:
A show of unity from the U.S. and China at the end of a high-profile two-day conference was overshadowed by continuing Chinese concerns about the U.S.’s growing pile of debt.
The U.S.-China Strategic and Economic Dialogue, a forum designed to foster closer cooperation, closed on a similar note to that set at the start by President Barack Obama, who stressed the countries'”mutual interests.”
The two powers vowed to maintain efforts to pull the global economy out of recession and shore up financial markets. They also agreed on a plan to create more-balanced global growth in the future.
But like a banker visiting an overextended borrower, Chinese economic leaders repeatedly conveyed to their U.S. hosts the importance of managing the U.S. debt. Chinese Vice Premier Wang Qishan, in talks with Treasury Secretary Timothy Geithner and other officials, urged the U.S. to protect the value of the dollar.
“As a major reserve currency-issuing country in the world, the U.S. should balance and properly handle the impact of the dollar’s supply,” Mr. Wang said through an interpreter Tuesday.
China’s Finance Minister Xie Xuren said the delegation “expressed the view that credible steps should be taken to prevent fiscal risks and to ensure sustainability” and that “high attention should be given to fiscal deficits.” He said Mr. Geithner “stated clearly” that the U.S. is placing “a lot of importance” on the deficit.
What exactly do the Chinese mean by sustainability? Clearly, they are emphasizing the need for America to lessen its deficit, which will likely surpass $2 trillion this year alone. (more…)
Chinese Stimulus Superiority or Just Another Bubble?
Posted by Larry Doyle on July 27th, 2009 8:48 AM |
Is China leading the global economy out of the severe economic recession or is it setting the table for another leg down by creating another bubble? Is the United States economy beholden to developments in the People’s Republic of China? Let’s look eastward and navigate the Chinese economic landscape.
Recall that China has recently become our largest creditor. Additionally, China’s economic stimulus enacted and largely disbursed is already three to four times the size of the United States stimulus as a percentage of GDP. (U.S. stimulus of $700 billion is approximately 5% of GDP. China’s stimulus of approximately $600 billion is the equivalent of 20% of their overall GDP of $3 trillion) From China’s perspective, it is nice to have an enormous surplus and a government controlled economy.
Let’s review some of the inner workings within the Chinese stimulus and the current view of the Chinese economy and markets. From Stratfor Global Intelligence, we learn:
1. fully one fourth of the Chinese stimulus is targeted at helping the province of Sichuan recover from a massive earthquake in May 2008.
2. the bulk of the Chinese stimulus is focused on infrastructure with little assistance for faltering export based industries.
3. loan growth has exploded in the first half of the year. This has to be a positive, correct? Stratfor is very concerned and writes:
China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991).
And that is the good news. Much of this loan surge — by some reports, perhaps as much as half — is being lost to scams, corruption and simply using the money to play the various Chinese stock markets. The Shanghai Composite Index, for example, is up 50 percent since its lows in November 2008 — an otherwise inexplicable development considering the steady stream of bad economic news that has trickled out of Beijing in recent months.
As I think of this analysis, I immediately wonder if China is creating a semblance of a bubble in their economy and in their stock market. Arjun Divecha, portfolio manager of Berkeley, CA based GMO, holds similar concerns. In an interview published in Barron’s this weekend, Divecha was aksed about his concerns in China and specifically Chinese lending. He asserts:
“I believe a lot of the money is not going into productive investment. What we are hearing anecdotally is that a lot is being lent by the banks, which remember, are government-owned. Who are they lending to? For the most part, this money is going to state-owned enterprises, which are not particularly efficient companies.
We know they are buying real estate, and they are doing all kinds of things we don’t think in the long run is particularly productive investment.
Barron’s asks Divecha what will be the consequences in China of this stimulus plan? He responds:
“Two things are likely to happen. First, longer term, if the banks don’t have a problem with bad loans now, they will almost certainly have a lot more bad loans two or three years from now. Second, from a short term point of view, at some point the government is going to get really worried about having too much credit-creation; that leads to a credit bubble, just like you had in this country and everywhere else. As a result, they will start to withdraw liquidity by tightening the gates on the money. I don’t know when that will be. But I worry that it is coming.
A fair amount of the stimulus money has found its way into the real estate and stock markets because China has a closed economy. So there is no way for money to leave the country. The stock market and real estate have had huge spikes. So when that liquidity is withdrawn, it seems inevitable that the stock market will take it badly.
Is the United States likely to suffer a similar consequence? I am very concerned.
For further analysis of China and all the emerging markets, please review my interview last evening with Dr. Paulo Vieira da Cunha on No Quarter Radio’s Sense on Cents with Larry Doyle. Dr. Vieira da Cunha is a former Brazilian central banker and currently works at Tandem Global Partners in New York. He is also a visiting scholar at Columbia and serves as a consultant to the International Monetary Fund. He provided riveting insights and perspectives not commonly found in financial periodicals or the financial media.
LD
Related Commentary
Rise of Emerging Markets Triggers Alarms
by Dominic Elliott and Elizabeth Pfeuti
Wall Street Journal; July 27, 2009
Let’s Get Some Chinese: A Review of Economic Activity in China
Posted by Larry Doyle on May 13th, 2009 11:59 AM |
China’s stock market closed today at the highest level since August ’08. Is that an indication that China is ready to resume its economic expansion and can literally pull the global economy right along with it? Well, let’s check out a number of items on the menu:
1. The Baltic Dry Index has rebounded over the last few weeks. The BDI is extremely volatile. It plummeted approximately 95% from its high in early 2008, rebounded strongly earlier this year only to suffer a setback in March as our equity market started to regain its legs. The recent rebound in the BDI is again credited to increased shipping activity of commodities into China. Prices of commodities (copper, oil, iron ore) have been very highly correlated with the BDI as a result.
So far, so good . . . let’s try some more items on the menu.
2. How about Chinese lending activity? Is the well directed Chinese stimulus precipitating an increase in activity by non-governmental borrowers? The FT reports, China Cuts Lending Amid Asset Bubble Fears.
I will give those in charge of China’s fiscal stimulus and government programs credit. As this article highlights, these authorities have real concerns about inflation and irresponsible lending practices.
The FT reports:
Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.
That led to fears among regulators that money was being funnelled illegally into the stock market and handed out to state-sponsored stimulus projects of dubious commercial value that could become non-performing assets.
Some regulators also worried about the potential for rampant inflation. Those fears were somewhat eased by price measurements released on Monday showing China remained in deflationary territory in April for the third consecutive month.
Wow! Can you imagine if a regulator in our country had the integrity to voice concerns about government funds being utilized illegally or fraudulently?
This item did not taste so good in regard to leading the global economy to greener pastures, but I commend the Chinese for addressing potential pitfalls in their programs.
3. Away from the government stimulus, the Chinese economy remains largely dependent on exports. Let’s take a taste! Again, our friends at the FT provide some spice, Slide In Chinese Exports Will Hit Growth Strategy:
The FT reports,
Chinese exports fell steeply in April for a sixth month in succession, suggesting that the worst might not be over for the world’s third largest economy.
The total value of Chinese exports fell 22.6 per cent to $91.9bn (£60.2bn) last month compared with the same month a year earlier – a faster rate of decline than the 17.1 per cent year-on-year drop in March.
Why are Chinese exports falling? Well, please review our first post this morning which highlighted that domestic retail sales here fell by .4% after a decline of over 1% last month. If American consumers aren’t buying, Chinese producers aren’t exporting.
4. LD, it is only a matter of time, though, before the American consumer returns to his old ways of spending and the Chinese exporters will be happy, right? Let’s go for the fortune cookie and see what it says: U.S. Lawmakers In Threat To Raise Tariffs On China.
Congress is raising this threat given rising unemployment here at home and concerns that China manipulates its currency. Will this tariff fly? Perhaps.
The FT reports:
a group of lawmakers from manufacturing-dominated states are determined to give it another try and some analysts think the US recession could help build support this time. The charge in the Senate will be led by Debbie Stabenow, a Democrat from Michigan, and Jim Bunning, a Republican from Kentucky. In the House, it will be pushed by Tim Ryan, a Democrat from Ohio, and Tim Murphy, a Republican from Pennsylvania.
Whether these tariffs are the right maneuver or not, increased protectionsist measures are not one way streets. If we are looking to grow our own economy without being dependent on the American consumer, we will need global trade lines to be open.
So, what did you think of our sampler?
To me it was more sour than sweet. In my opinion, our future/fortune remains decidedly mixed at best.
LD
For more in depth BDI analysis, check out Baltic Dry Index and Commodity Graphs
G-20: Commitments, Comments, Questions!!
Posted by Larry Doyle on April 2nd, 2009 1:14 PM |
British Prime Minister Gordon Brown just delivered a statement highlighting the results of the G-20 conference in London. There must have been a lot of work done behind the scenes over the last few months because it’s hard to imagine there was a lot of debate over issues within a 36 hour time frame at this conference. I will grant the world’s political leaders their due as it is most important at times like these to convey a strong, uniform front.
Let’s review the objectives and commitments, each followed by questions and/or comments that I have:
1. Address countries providing tax havens.
My question: who will police?
2. Develop a Financial Accounting Stability Board to regulate currently unregulated financial entities, primarily hedge funds.
My questions: how will it be staffed, operated, and judgments adjudicated? (I don’t like FASB as the acronym to be confused with Federal Accounting Standards Board)
3. Develop global policies and outline to address compensation
My questions: who and how will this be implemented? how will it be regulated? will there be punishments for those not participating?
4. Develop a global systemic risk oversight body.
My Question: who and how? (more…)
China Ups the Ante
Posted by Larry Doyle on March 23rd, 2009 11:12 PM |
In ten days, the leaders of the G-20 will meet for the most highly anticipated financial conference since Bretton Woods in 1944. In a bold and aggressive move prior to this conference, China’s central bank called today for the replacement of the U.S. dollar as the international reserve currency.
I have written about the tension in U.S.-Chinese relations over the last few months. The essence of this tension is captured in the Prisoner’s Dilemma and A Question of Honor.
Make no mistake: the timing, tone, and substance of this message so close to the start of the G-20 is another major shot across our bow. The ramifications for a change in this international reserve currency are enormous, both politically and economically. Check out current, worthwhile discussions on this topic collected from a variety of sources at Memeorandum.com. In addition, I recommend reading the following article from the Financial Times:
China calls for new reserve currency
By Jamil Anderlini in Beijing
Published: March 23 2009 12:16 | Last updated: March 24 2009 00:06China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. (more…)
A Question of Honor
Posted by Larry Doyle on March 13th, 2009 1:00 PM |
On January 31st, I wrote a lighthearted piece, Know Your Customer, about my personal experience with an Asian counterparty. The lesson I learned from that experience back in the late 1980’s was that business dealings in Asia are ultimately “a question of honor.” Are you honorable in your manner? Are you honorable in your engagement? Are you honorable on a going forward basis? Are you honorable in both word and deed? Obviously in a meaningful relationship, this code of honor must run both ways.
Our relationship with the People’s Republic of China hinges on American consumers’ purchase of Chinese exports and ongoing Chinese purchase of U.S. government debt. As I just highlighted in my most recent piece, Chinese exports fell 26% in February 2009. Numbers like that will make any government uneasy. During challenging economic periods, the tenuous nature of any economic relationship is captured in understanding the nuances of the Prisoner’s Dilemma. (more…)
