Haunting's economics blog

...a dinner withChinese Vice Premier Wang Qishan

In contrast to Chinese isolationism, Mr. Qishan noted that whenever China has been open, it has prospered. More than 1,000 years ago, China was an open and active trader. Then the country closed up and became internally focused. At the end of that period, they discovered that the world had passed them by. By opening up, the country's leaders realized that they could benefit from the advances the world had made.

Click to expand...

We will be hearing a lot more from Wang now that he has been introduced. Between him and Paulson and all the deals that had been announced that worth tens of billion, what is not clearly reported is this - many are taking the view that Bernanke and Paulson are running out of option to arrest the economic problem facing the USA, that is, the threat of stagflation. Have they ever considered the possibility of the help coming from the Chinese? Yes, how about a Chinese bailing out? With US$1.7 trillion surplus in their coffer, the Chinese are well positioned to extend a helping hand here. If that's not enough, how about adding another trillion from the Middle East Oil cartel?

At this point while the news on the US financial front is bleak, but, ruling them out... I think, is probably not a good idea.

Check it out here. Two oil shocks, two recession. This time, it will be quite a miracle if a recession can be avoided. In fact, at this stage, whether there is an official acknowledgment of a recession or not, frankly is not that important. What matters is how soon the USA is able to dig itself out of the hole. Other than a recession, of course there's other worry the world has to contend with, for example, how is the USA going to cut down its debt? How are they going to pay back their debt to the creditors?

How about a devaluation of the US$?

Someone else's opinion and I think it makes sense - it will be a battle between the market vs the vested interests and the power that be... who you gonna bet?

The US does not want confidence in the USD to collapse because it needs to run a budget deficit to compensate the loss of spending from the private sector. Lest the world forgets, it was the pullback in private sector spending from last year’s crisis that led to the world recession and shrinkage in world trade via a global shortage of USD liquidity. Last night, US officials indicated that during US Treasury Secretary Timothy Geithner’s visit to China, he will discuss how to boost China consumer spending and US consumer savings.

The message will be simple.Threatening the USD will critically undermine the hard fought efforts to stabilize the world from the crisis.

China wants a stable currency for trade and investment purposes. A lower USD would erode the value of its USD assets. On the other hand, a higher USD would lead to a higher trade-weighted exchange rate via currency depreciation in its major trading partners. A higher euro against yuan would also raise complaints from a restive Eurozone. China indicated a couple of days ago that it is tackling trade woes challenging its economy via a stable yuan and boosting trade finance.

Eurozone officials do not want euro to strengthen above 1.40 because appreciation would tighten monetary conditions and offset the hard-fought easing put in place by the ECB. On the other hand, they do not like euro falling below 1.25 either because it could stress Eastern Europe, which in turn, would put strain on western
European banks.

As for Japan, the unwelcome sharp yen appreciation from the unwinding of carry trades during the global crisis has led to economic hardships. All in all, America does not want a USD crisis, Japan does not want more JPY appreciation, and China and Eurozone want stable exchange rates. The only issue now is whether the market is listening.

...the Chinese have a “very sophisticated understanding” of the situation... ha!

Report #1

Report #2

Like this!

RG's comment "used" to be good. But not now. There's too much looking back without actually and critically analysing the situation back and then.

Back then, there was a global meltdown.
Back then, there was a credit freeze, all international trades came to a stop still.
Back then, Japan, S. Korea's export plunged by more than 80% and everyone was panicking.

Back then, without the benefit of hindsight, everyone was fearing that was it - the really big****isgonnahitthefan!

That's why RIO made that deal with Chinalco.

That's why the bankers were pressing hard on OZL because back then, risk and capital were at a premium! A PREMIUM!

Without Chinalco's deal, RIO would not have recovered.

Without MM, OZL would have gone under. And most of its investors would have got nothing! Zilch!

Now, almost daily I am reading about craps such as pillaging of OZ land, etc. It's a lot BS and unrealistic rants coming from a bunch of so called "experts" hiding behind national interest telling their average readers China is robbing Australia clean.

It is not true! Without the exports of commodity to China, Australia would have been in deep **** by now. It would have endured two quarterly recessions by now and there is still no end in sight.

Without China's trade, there is nothing to talk about in Oz economy! Get a grip!

China bought up 50.8% of RIO's iron ore last year. If they are pissed off because of the blocking of the deal in the name of national interest (btw it's only 18%, and not a take over) and decided to switch over to Vale as a form of retaliation... watch RIO sink!

And watch Australia sink into recession in the next quarter and possibly many quarters after that.

This is what "national interest" will do for Australia and every Australian.

Get a grip!

... Deficits Threaten Financial Stability

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” - Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

** coming so soon? Just as I was saying the rising yield spread is a sign that the market is forcing a brake on to his runaway QE train. His next move will determine if the current rallying equity/commodity market would continue. If the Chinese were to play ball, watch the US$ rebound to take away the punch bowl. Interesting time.

Long live the deal! More.

Fingers cross now and let's hope someone go tell the Chinese it's all just business and nothing personal. There's no need to retaliate by not buying from RIO, etc. The 195m break fee is not chicken feed by any standard... so, it's all okay, friend again?

...and play nice?

As a follow up to my earlier view on the US$/DXY index, here's the chart. What's next?

1) expect a pause after the succession of gaps, but if the rebound were to continue, there's a every chance that the other competing, riskier assets such as equity and commodities will be in for some "adjustment".

2) the local equity market in the last few days kind of remind me of those halcyon days where everyone is feeling and acting like a winner... no shorts, all longs, sure bet and can't lose?

Quite a strong contrarian signal, I reckon.

Wither the green shoot?

More than a jilted lover's spat?

...and the heat is on!

"For Chinalco, the one-time failure in international trade will soon fade. Yet for Rio Tinto, it will take years to overcome the lost honesty and tainted image," it added... this quote from Xinhua is troubling. If I am running RIO I won't take that lightly. But since I am not, I will watch with interest on how the Chinese will play out their "revenge of a jilted lover". The show is on, have fun.

...the reaction!

But reports out of China yesterday suggested private Chinese steelmakers have gone against CISA by inking annual contracts with Brazilian iron ore giant Vale. Tying up almost 10 per cent of China's expected imports, Vale has agreed to supply more than 50million tonnes of iron ore in 2009 to more than 38 small Chinese steel mills, according to a report in the Beijing News yesterday...

Chinese lessons for Chinalco...

...a key reason the Chinalco deal failed was that Chinalco forgot the traditional Chinese way of doing business. When westerners, like myself, begin doing business in China, they are told to let relationships mature and take it step by step. Don’t try and achieve the whole deal in a few meetings...

I hope he is talking sense here, expecting Chinalco to spend 20 b as a white knight giving up what a usual major share holder is entitled to if they were to be any corporation other than Chinese.

In any case, to the Chinese, the RIO board has always had the choice of not shaking hand with Chinalco when the deal was being negotiated at the beginning. Unfortunately they did. And that's why Chinalco is so pissed and is now asking for a RIO board overhaul and is accusing RIO as "dishonourable".

To openly use the word dishonourable in describing RIO's board, I think carries a lot of negative implications. How they will play out only time will tell. I see many are rushing to buy RIO to get into the rights issue of 28.80... well, it sure looks cheap but, here's a scenario/question: let's say RIO/BHP now jointly produces 40% of the iron ores but the Chinese are intentionally cutting back their long term contractual purchases with them, instead they opt for Vale because they see Vale as a more honourable supplier than RIO, what would that do to RIO/BHP? And their stock price?

If the Japanese and S.Korean are unable to absorb all their production, will they be forced to flog it cheap in the spot market?

The Chinese has spent the last few months hoarding all kind of commodities, esp the iron ore. With the steel industry right now facing consolidation, one can expect their future demand for iron ore be much reduced with the purchasing authority more concentrated, making them probably the largest force behind the demand side of the equation, with RIO/BHP the largest force behind the supplier side, who will have more clout in determining future iron ore pricing?

Which side of the contestant has more to lose?

Just wait and see, the next two quarters, dont' be too surprise if you see an Aussie recession coming your way, fast and furious. If I am Krudd, I will definitely reconsider any suggestion of an early election. Most definitely.

Talking China...

I only agree with this: The Chinalco-Rio deal would have been a piece of major integration of our two economies... the rest, I am not so sure.

Because?

Because some of the assumptions made is not exactly reflective of what is happening within the Chinese business community as well as within the Chinese leadership.

If you question this observation, you can check out one of the headlines readily available in the NET, like these two:

China ready to cut steel output if ore talks fail

BHP, Rio may face China sanctions on ore deal

They are going for broke and they are not going to play nice, seems to be what is being reported. May be the Chinese are just posturing, who knows?

But there are ways to tell if they really mean business - judge them by their actions. Watch If they will hold true with their threats by not compromising on the iron ore price discount and their next official reaction to RIO/BHP's venture.

The bad here is this, if and when it becomes "official", they won't be backing down or holding back due to face saving reason. When that happens, it will be a lose-lose situation all round. Bad!

China's protests don't add up?

May be I am too cynical to embrace the arguments presented by this expert, it sounded a little too close to high school debate. For example, the argument that the new low cost production would surely mean good cheap supply to China and the other iron ore consumers; and that the premise and promise by RIO/BHP on their honour that they will sell the ore separately, etc... I can almost "visualise" the snickering from the Chinese when they read about this.

I am not sure if he still can remember the rapid rise of iron ore in the previous few years? I can't. I can only remember the last rise was 66% (offer from Vale) while BHP insisted a further 18%(?) to raise it to 84%? Does it sound like with a lower cost, BHP will be more generous this time? Well, never can tell, according to the argument presented, this is a very natural thing to happen and why not? (Let's have a group hug everyone! )

As a result of the steep rise in price, a few small Chinese steel mills were sent to the wall coz frankly not many profit making organisation can survive such vicious price rise consecutively over a few years.

With regard to shipping cost, etc... in the last few months, the Chinese have been spending big buying up cheap second hand ships around the world. If they are still at it, the amount should be exceeding billion by now. They are now a proud owner of not less than 70 over such ships and if I have to guess, these ships will be used to carry bulk commodities throughout the globe back to China. The point here is this - no one can really rule out they won't be cutting some kind of deal with Vale in retaliation to RIO (not Australia if the hints given were to be credible).

Anyway, to cut it short... I think it is very hard to argue with such logical and sensible arguments since by all accounts, the Chinese have been totally emo and irrational in their behaviour all these while. So let's assume when they come back to their senses, they can see why this RIO/BHP joint venture is a good thing for them.

And that goes for Japan too. Ha!

The score - exper:1, Haunting:0

Yes, I have been thinking the same lately.

With a reversal in Treasuries likely on the cards, we may see a flight back into financial assets and a pullback in both equities and commodites this coming wk.

I will watch closely.

... a glimpse at history, still in the making... with a set of new players. Will Bernanke make any difference?

The amazing shrinking US$... coming to your neighbourhood soon

The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S...

Russia, the world’s biggest energy supplier, wants to start selling oil to China in rubles, said Deputy Prime Minister...

Russia’s biggest oil company. Energy sales in rubles are a “strategic” issue for Russia, he said, adding that oil exports to China over the next 20 years will surpass $100 billion.

That is one way of bypassing the usage of US$ as a medium of exchange and trade. That is also one way of not playing by the US rules and not paying them a "money" tax.

Does Australia have a similar courage to cut a deal with China? And save us some heartburn and some hard earned money?

If!

Is IPL still a good bet for long? Read this and find out more....

Mosaic Co., North America’s second-largest fertilizer maker, slumped the most since March 2 after German rival K+S AG said it expects a “further significant reduction in revenues and earnings” this year, citing continued “extraordinary weak demand” for potash fertilizers.

Mosaic tumbled 9.7 percent to $46.25. Potash Corp. of Saskatchewan Inc., the world’s largest maker of its namesake crop nutrient, slipped 11 percent to $95.59.

In another news a few weeks back, the Russian supply was reported to be facing poor demand too.

Time for caution with this one, I reckon.

The lesson from RIO

What lesson? The only thing that makes sense at the end of this fracas is to take stock of the winners, losers and the bad blood.

So who are the real winners in the Rio-Chinalco fallout?

In my view, there're only two broad groups - bulk of the Rio share holders from UK, especially the big investment funds. And BHP. These are the real winners.

The losers?

Not Chinalco exactly but then they can't say they have won either, can they? The got their break fee but not sure if that's enough to pay for the lost pride.

In my view, the real losers are the WA people, the workers made redundant because of the streamlining of the joint operation. And the contractors or subcontractors that provide services and supportive work to both Rio and BHP.

Taking it further, the loss of revenue in the WA state coffer due to the merger and the welfare unemployment support to this large number of jobless workers is like rubbing salt into wound. It will definitely hurt.

To take it further again, from an Australian "national interest" angle, what do we get as a result?

1) now both the state and federal govt have got a much more powerful commercial entity - BHP, to deal with. In many way, this has created an entity that is probably as powerful as that of the WA state govt due to its outsize influence on the overall economy. If Marius K goes bonker like Sol T of TLS, god knows how much damage he can do this country?

2) comparing the potential benefits to be gained from the national and state angle, in terms of job employment, tax revenue, etc... it seems at this point, it's better to have Rio to be independent from BHP. Just can't see why this is a good news to Australia and to our national interest. How?

But then I am not an ATO expert. So this is just pure conjecture.

In any case, it is not case closed yet. Let's wait and see.

I agree short to mid term poo companies are under massive pressure. NUF came out with reduced earnings guidelines a couple of days ago too.

I've taken a punt that their sell offs have been overdone, and IPLs break up through 2.50 was the first time the market agreed. But, it's failed, so I'm at a bit of a loss at the moment.

Long term should be ok from these levels. But, there's every chance we could see it halve if the unemployment globally goes ave 12%.

From "the sky is falling down and gold is the only sensible investment mob"... and their pearl of wisdom. You should read about it.

... and this cautionary tale on your neighbourhood banks from this gentleman

Excerpts that you should pay more attention on...

In case you missed it a few months ago we'll say it again: Australia's property boom was bought with borrowed money. Both residential and commercial property values soared with the credit boom. If you think the banks are fine because they don't have a subprime problem, think again. The banks have a property problem, and you can find it on the asset side of the balance sheet.

The banks are rightly worried about having to borrow money in the wholesale market. National Australia Bank's CEO Cameron Clyne says, "We are reliant on the willingness of others to lend to us, domestic demand for credit significantly exceeds our capacity to save."

And this...

Of course one of the most stunning predictions this week has been that of NAB chief economist Alan Oster, who believes that house prices will fall 10 per cent (The rate debate, June 16). Given that consumer confidence is rising, it’s not what the market expects to happen.

If Oster is right, then CBA, which loaned heavily on the first home buyers' grants, will be under pressure. Clearly this is not what CBA expects to happen.

By early next year we will know who was right – and the outcome of that difference of opinion is going to play a big role in stock market levels and the share prices of banks in the coming six months.

*** and this is one of the many reasons why I have been nagging all these whilst - in times to come, the only credible source of capitals will be from those creditor nations. Of them, the most relevant and most likely one that will provide the majority FDI into this country is China, with Japan running a second. Between the two, the Chinese are the one with most interest in doing business with us.

Based on the public response to the Rio-Chinalco deal and the way the media and politicians blowing it up into some kind of anti-Chinese imperial invasion in my view - SUCKS!

If we don't want to do a deal, just take a walk. There is no need to call them names. There is no need to be cocky by accusing them pillaging this land and practising predatory acquisition, etc (can anyone still recall Chinalno was approached by Rio at first and that they were actually paying a large premium to the Rio share price at that point?...)

Look what happen now? The Chinese were feeling so hard done by that they are talking all kinds of threat and are refusing to budge in their iron ore negotiation. That's quite ok since both Rio and BHP can still sell their ore in the spot market. Next, just watch that outlet shrink when their restocking is done, whilst they maintain their squeeze by prolonging the negotiation... it's almost a sure bet that Rio and possibly BHP will be reporting a less than shining result in their next two quarters. And then you watch their share price getting a wallop. (Those who are rushing into Rio like there's no tomorrow now will probably regret what they are doing)

But that's still not so bad. What is bad is the future, the next few years if/when the global economies really settle down and when everyone can clearly see the US and the EU economies are not recovering with high growth and are going no where, and their banks are barely maintaining their solvency through state help that we, this country, is finding out our acute need of foreign capital and/or foreign direct investment (FDI); and that the usual old allies and traditional sources of capital from the US+EU are drying up and/or have become so costly that the local banks will have no choice but to slug everyone to pass on their cost to keep their margin... that is when people will begin to see and appreciate what the Chinese money is doing for this country both in terms of keeping the economy going and in avoiding a much larger scale and scope of unemployment.

That's when we will read about Krudd and Swan (if Labor is still in power) talking about good relationship and doing business with China in earnest because by then it will be so obvious to everyone where the money is...

... and let's hope by then, the Chinese and the Chinalco' bosses and backers are not in charge of China and that they have kind of forgotten how we kicked their **** and thumb our nose to them once.

- End of Rant -

ps: if and when you next see the property prices are plunging in your neighbourhood, you should know it's probably time that the flow of "traditional" money is drying up, like the Murray...