Generally speaking, Americans have no understanding of what real pollution is, since it has been so reduced in this country over the last four decades. It’s amusing (and sad) to hear young people fret about the modest inconveniences that the media hype as Threats To The World. Such ignorance is dangerous, but that’s a story we won’t dwell on now.
Of course, it’s a different story in China, whose cities’ air is among the dirtiest in the world, and whose water is undrinkable. The AP sums up the situation in that country as we approach the time of the Olympics:
China is home to 16 of the 20 worst cities for air quality. Three-quarters of the water flowing through urban areas is unsuitable for drinking or fishing.
We’ve previously noted the serious problem of safe water in China (here and here, for example). These are problems that America has not known for a long time. As for fragrant, compelling air, how many Americans can recall the Elizabeth, NJ or Pittsburgh or other industrial locales of fifty years ago?
The list of measures that China is taking to make the Olympic Village a Potemkin Village of cleanliness is pretty impressive, and a reminder of the kind of government China is blessed with:
– half of Beijing’s 3.3 million vehicles will be pulled off the roads
– polluting factories will be shuttered
– chemical plants, power stations and foundries left open have to cut emissions by 30 percent
– construction in the capital will be halted
– vehicles will be allowed on the roads every other day depending on registration numbers
– 300,000 heavy polluting vehicles…were banned beginning July 1
– factory shutdowns in the city and five surrounding provinces
So Communist China is shutting down much of its industry in five provinces in order to create nice visuals on TV and avoid the spectacle of wheezing or collapsing athletes. That seems like quite a story in itself, a sizable political story, a lesson about the use of raw political power to broadcast an atypical, distorted image of life in China’s capital. (We’re not criticizing China’s decision to make Beijing look good for the Olympics, by the way, only that this substantial backstory remains largely unreported.)
In that context, it is interesting to note that this AP story was filed by Stephen Wade, a sports writer, not a political reporter. We’ll have to wait and see whether the news anchors of the networks see fit to report this story themselves, or whether they’re just too busy following President Obama around to even notice.
The WSJ has a report demonstrating that neither political party is doing the fundamental job of protecting US sovereignty — for that matter, neither Democrats nor Republicans have explained clearly what the stakes are for this country if we continue to import 70% of our oil (as well as trillions in other merchandise) and in return continue to export trillions in dollars and government debt:
high energy prices hurt Americans in three ways. Only the first and most obvious one, the effect of high gas prices on voters’ economic health, gets much attention. The second way high oil prices hurt is by adding to the country’s lack of economic independence. In much the same way the country has been borrowing money from China to pay for more Chinese imports, it increasingly is borrowing money from oil producers to buy more of their oil.
A new report from UniCredit Markets & Investment Banking summarizes the problem nicely: “Due to soaring oil prices, the U.S. current account deficit” — that is, the broadest measure of the nation’s trade deficit — “has doubled since 2001. This excess consumption has been financed by huge capital inflows from Emerging Asia and oil-exporting countries.”
At the same time, oil producers are joining other foreigners in buying the U.S. Treasury bonds that finance the federal government’s budget deficit. Between 2004 and 2007, the report notes, foreigners bought 80% of all newly issued Treasury bills…
A new analysis by McKinsey Global Institute notes that Russia, which seems increasingly less in sync with American foreign-policy aims, has “emerged as a major global financial player” because of oil money; it had $811 billion in foreign investment assets available at the end of 2007.
But it isn’t just big Russia that has new money to invest around the globe, increasing its influence. The McKinsey report notes that the smaller exporting countries of Algeria, Iran, Libya, Nigeria and Venezuela also are gaining global financial clout…these five countries are emerging as significant investors in foreign markets. They accounted for nearly one-quarter of net capital outflows from oil exporters in 2007.
It is way past time for the US to get serious about the trillions of dollars that flow to the oil exporting countries (not to mention China as well). Boone Pickens has one suggestion that is interesting to ponder, and there are plenty of ideas out there. However, neither the current administration, nor its opposition, have adequately presented the seriousness of the current situation to the American people.
It is often said that appearing on the cover of Sports Illustrated is the kiss of death for a team’s or an athlete’s future prospects. One can only wish that this item — featuring the scary $200 a barrel number — in the WSJ might have the same effect in the financial world:
Oil’s historic ascent from $100 to nearly $150 a barrel in just six months is lending weight to a far grimmer prediction: Crude could reach $200 a barrel by the end of the year.
We know we’re a broken record on this subject, but this is a bubble of epic proportions for which a correction is long overdue. There is a pretty significant probability that the restrictive monetary policies that are necessary (particularly in places like China and India) to tame inflation will in their turn create a deflationary global environment, once the commodity bubbles burst. We’ve already seen bubbles like Shanghai 6000 popped and now a distant memory, even though only a few months have passed since the peak. So it may be with oil. But of course it never feels that way while you’re inside the bubble, does it?
While the US Congress dithers over expanding oil drilling and spends its time trying to investigate and regulate speculators and sue OPEC, our friends on the other side of the globe are buying lots of oil and creating new vehicles for investment and speculation. WSJ:
In an effort to tap the global surge in commodities investing and China’s growing role in determining the world’s prices for petroleum and other raw materials, Hong Kong plans a new exchange that will trade fuel-oil contracts. The new Hong Kong Mercantile Exchange, set to open as soon as the first quarter of next year, will sell U.S. dollar-denominated contracts for delivery of fuel oil to mainland China…
the market must draw investor and corporate interest from big commodities markets in New York and elsewhere and their growing after-hours electronic trading services. Previous efforts in Hong Kong and elsewhere stumbled owing to lack of interest.
“Previous efforts in Hong Kong and elsewhere stumbled owing to lack of interest.” Hmmm. Why do we get the feeling that they might have no problem attracting a certain number and kind of investor this time around?
The sizzling growth of China and India is one reason often cited for high price of oil. But something may be wrong with that picture, since some signs point to a dramatic slowdown in those countries. China’s and India’s stock markets have shed over $2 trillion in value this year. WSJ:
The U.S. economic slowdown threatens to dent export growth for both countries. High commodity prices and mounting inflation are an even bigger threat. On Friday, a key measure of Indian inflation, the wholesale price index, jumped to 11% for the week ending June 7, sending the Sensex down 3.4%. China’s consumer-price index for May grew 7.7% year on year, according to China’s national bureau of statistics…
This situation poses a dilemma for policy makers. The typical response to higher inflation is tighter credit, but that would slow growth. Policy makers could allow their currencies to strengthen faster to stem import inflation — but that could hurt exports. Beijing last week took steps to allow highly regulated domestic fuel prices to rise, which could cut into corporate profit margins and squeeze consumers.
It was only last October that the Shanghai market was at 6000. Now it is less than half that. It is said that the stock market looks ahead 6-9 months. Maybe future growth in these two economies is going to be even less than the high single digits currently forecast. Sometimes the market is wrong; but sometimes it is right too. We’ll just have to wait and see if the gloom-meisters are correct.
The other day, Saudi Arabia indicated it would pump more oil and probably sell it at reduced prices. The market ignored the news and oil prices barely moved at all. Today it’s China’s turn to be ignored, even as it announced an 18% increase in domestic gas and diesel prices. The market shrugged again. WSJ:
Light, sweet crude for July delivery recently traded $2.52, or 1.8%, lower at $134.16 on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded $2.52 lower at $133.92 a gallon.
China will increase fuel prices on Friday, according to a Chinese news service. While most of China’s neighbors have reduced subsidies in the last few weeks, China was seen as capable of weathering the recent upswing in energy costs without raising prices. Higher prices are seen reducing consumption, which would be especially worrisome in the giant Chinese market, traders said.
“This is enough to scare the market,” said Ray Carbone, president of Paramount Options. “This is not what people who are long want to hear.”
“This is enough to scare the market” — hardly; a 1.8% reduction in oil prices is scant evidence of the market being “scared.” (And, given recent history, the market will likely decide in coming days to be concerned about some other miscellaneous matter that will once again send prices to fresh records.) China is often touted as perhaps the main reason that oil prices are stratospheric. But now its demand growth will attenuate, even as more supply is brought onstream. Given events such as these, the “supply and demand” argument for the persistent $135 price of oil is getting a little tiresome as a complete explanation for the phenomenon. Perhaps something else is at work.
The Economist has a piece full of interesting facts. The question is whether its central premise, posed in the italicized paragraph below, is correct.
Over half of the world’s infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat.
Such investment will help support economic growth this year as America’s economy stalls—and for many years to come.…
Morgan Stanley predicts that emerging economies will spend $22 trillion (in today’s prices) on infrastructure over the next ten years, of which China will account for 43%. China is already spending around 12% of its GDP on infrastructure. Indeed, China has spent more (in real terms) in the past five years than in the whole of the 20th century. Last year Brazil launched a four-year plan to spend $300 billion to modernise its road network, power plants and ports. The Indian government’s latest five-year plan has ambitiously pencilled in nearly $500 billion in infrastructure projects. Russia, the Gulf states and other oil exporters are all pouring part of their higher oil revenues into fixed investment.
Good infrastructure has always played a leading role in economic development, from the roads and aqueducts of ancient Rome to Britain’s railway boom in the mid-19th century. But never before has infrastructure spending been so large as a share of world GDP. This is partly because more countries are now industrialising than ever before, but also because China and others are investing at a much brisker pace than rich economies ever did. Even at the peak of Britain’s railway mania in the 1840s, total infrastructure investment was only around 5% of GDP.
“Never before has infrastructure spending been so large a share of world GDP.” Is that a good thing or a bad thing? The Economist and some analysts assume it is a good thing, and perhaps makes world GDP more stable in the face of slowdowns in the EU and US. But what iron law says that that is true? Perhaps spending so hugely on infrastructure turns out to produce wasted and idle productive capacity in the face of a big downturn in final demand.
Is it not also possible and plausible that the great trade and growth among developing countries is a more fragile thing? China’s exports appear to be holding up quite nicely so far (up 28%, year over year), but doesn’t it remain to be yet seen if the great progress in the developing world is truly self-sustaining? For example, is it not true that by historical measures, a significant correction is long overdue?
To those who say that nothing like that is apparent on the horizon, we respond: everyone thought the good times were here to stay in internet stocks, housing prices, commodities of all sorts, subprime mortgages, and LBO loan syndication almost up to the very moment that they went over the cliff. It is when articles like the one above seem so unquestioning of their basic premise that we wonder most just what lies around the corner. (For example, if everyone saw the future so clearly and correctly, every energy dependent company in the US would have hedged almost all of their fuel needs a year ago.)
Demand for oil is tanking, but for some reason that fact seems completely disconnected from price. We continue to be wrong about the euphoria that continues to grip the oil market. WSJ:
The IEA…said it sees world oil demand growing just 0.9%, or 800,000 barrels a day this year in a market of 86 million barrels a day. The original forecast last July was for growth of 2.18 million barrels a day…
In the U.S…Americans drove 11 billion fewer miles in March versus the same month a year ago – the sharpest monthly drop since the government began collecting such data in 1942 and the first contraction in that month since the 1979 Iranian revolution. That…was well before pump prices reached a nationwide average of $4 a gallon last week. At current prices, some economists say fuel expenditures as a percentage of workers’ take-home pay is now as high as it was during the oil shocks of the 1970s…
the IEA has dropped its forecast for China’s oil demand this year to 5.5%…from 6.1% last July. It cautioned that Chinese consumption may get an extra kick later this year as areas of the country are rebuilt following the devastating earthquake…
the biggest drop in gasoline demand is coming from the developed world. In Japan, brokerage Sanford C. Bernstein Ltd. says passenger car miles were down between 3% and 5% in 2007 – roughly the same amount that bus and rail miles were up. Businesses are axing work days, travel and opting for teleconferencing to beat high oil costs.
The International Air Transport Association, which represents 230 airlines globally, says premium travel for business and first-class services suffered its biggest drop in five years in March and that economy travel growth slowed to less than 1% at the end of the first quarter…
Meanwhile, Saudi Arabia is dealing with its second worst PR disaster of this decade by holding an oil conference of producers and consumers on June 22. It’s hard to believe that this is going to work, given the previous self-serving and cynical statements of OPEC members.
(Finally, a question: is it in fact immoral for the Democrats in Congress not to allow drilling in ANWR and other places, when the foolish policy of a lack of such E&P activities, as well as biofuels mandates, have arguably resulted in the poverty and even death of children around the world?)
Since the 18th century, American combat deaths have totalled about 650,000 — in a way a surprising number. Who would have thought that you could build a nation of 300 million people and keep it free and self governing for three centuries at such a price?
Please don’t misunderstand us. We’re not trying to minimize the losses; we understand, for example, that each of the 269 men from Newton, Massachusetts who died in WWII was a tragedy of heartbreak and grief to their families and friends. And combat deaths are but a fraction of total casualties in all of America’s conflicts. But it is really amazing what these proud few have procured for the many with their sacrifice. As the man said, “the United States is blessed to have such citizens.” Truly.
It’s hard not to notice today the prices that some unfree parts of the world have been paying recently. They say that deaths in Burma, with its corrupt, totalitarian regime, could easily exceed 100,000. China has had 15 million homes destroyed and 80,000 dead, including 10,000 children in rickety, substandard schools, perhaps due to “official negligence, and possibly corruption” in the Communist government. The price paid for freedom is large; apparently, the price paid for the lack of freedom can be larger still.
Since last summer, when subprime and other excesses caused the credit markets to seize up, the Fed (and other central banks) have injected well over a trillion dollars of liquidity into the financial system. But the period that began with the Bear Stearns conference call last August and peaked around the time of the bailout of Bear Stearns in March appears to be largely over.
The credit crisis produced a very strange world, with evident deflation in certain markets like housing, and runaway inflation in commodities prices due to adding the flood of liquidity from central banks to the already huge and unsustainable unrecycled dollar balances in oil and trade surplus nations. Traders, speculators and investors all hopped on the bandwagon for the free ride being offered by the world’s central banks. Now some sense a change of direction. Trader Todd Harrison in IBD describes “our wishbone world with hyperinflation on one side and watershed deflation on the other,” and makes a few predictions:
I was a commodity bull since 2003, offering that energy and metals would share the leadership baton until energy overtook the financials as the top weighted sector in the S&P. I pulled back those horns into the end of last year, a premature evacuation ripe with opportunity cost. The thought process was predicated on the notion that we arrived at the crossroads of our wishbone world with hyperinflation on one side and watershed deflation on the other.
The government decided to dance with the devil we know (inflation) rather than the devil we don’t (deflation). This affected the dynamic by socializing risk and injecting more than one trillion dollars into the marketplace. The ramifications of these policies will profoundly affect our future, but by design, they pushed out the collective comeuppance…
Toward the end of last week, I began building short-side exposure in the energy realm. Catching cusps is a dangerous proposition, whether it’s grasping at a falling knife or getting in the way of parabolic frolic…
The bull case for energy is loud and proud as a function of the price action. There are supply constraints, emerging market needs, incremental demand from China (following the earthquake), pressure on the U.S. dollar (the price of socialization), unreliable alternative sources, psychology (furthered by a recent Goldman Sachs (GS) report) and perhaps the biggest risk, in my view, the potential for geopolitical tension in Iran.
On the other side of that ride, we have political agendas into the election, incessant (unconfirmed) chatter that margins on crude futures will be raised, faltering demand by an already strapped U.S. consumer and the unfortunate truth that all roads will ultimately lead to debt destruction through deflation…
my expectation is that the dollar (and volatility levels) will lift as equities and energy slip in sync. I say this with a conscious nod that the Bernanke Swap has replaced the Greenspan Put as the backbone of perceived security. Nobody is bigger than the market. That’s a lesson I may soon learn but it’s one that our esteemed Federal Reserve Chairman Bernanke likely will as well.
It appears pretty obvious to us that the liquidity party has to come to an end relatively soon, with inflation emerging as a big problem around the world. For example, inflation is at a two decade high in Saudi Arabia, it is at 8% in India, and it is 8.5% in China, whose leadership has made control of inflation a top priority.
Since inflation is always and everywhere a monetary phenomenon, we should expect to see tighter monetary and credit policies around the globe. It’s hard to see that governments really have another choice. Such policies are notably inconsistent with the effervescent bull markets we have seen in commodities over the last years, which have gotten extraordinarily long in the tooth, by the way. Of course timing of such discontinuities, or cusps, as Mr. Harrison put it, is always a risky business. Still, the main question looking ahead appears to be this: how bad will the hangover be after the punchbowl is taken away?
Paul Krugman says that the stratospheric price of oil is based on fundamentals, and that we would know it is not if, among other things, there were hoarding. Oddly enough, there is in fact some evidence of hoarding, about which Mr. Krugman appears unaware.
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
Meanwhile, Barton Biggs (who is often a little early on things) says that oil is in a “manic” period and that an interesting trade is to go long the financials and go short “energy and the whole materials sector.” Who is right? We don’t know.
A piece of Morgan Stanley research shows that Emerging Market countries now export roughly as much to each other as they do to the EU and US. A central economic question of our time is whether this seemingly greater independence of the EM countries from the the US and EU means a real “decoupling” has happened. No one really knows the answer to this question, which is indeed perhaps the central economic question of our times, because of its implications for the global economy over the next five years at least.
If a decoupling really has occurred, the EM countries can feed on each other for good growth while the West languishes in recession or near recession for a while. This would give continued support to the boom in commodities and oil, which otherwise appears extremely long in the tooth.
As you know, we are very skeptical of the “decoupling” thesis. China’s rather dodgy numbers and other irregularities raise the issue of what happens if growth should slow and people start turning over the rocks to see what has been covered up during this ultra-long, ultra-rare period of hypergrowth. Moreover, China may be a model of transparency and good corporate practice compared to some of the other EM countries.
The Morgan Stanley chart above includes not only China but Argentina, Brazil, Chile, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Thailand, and Turkey — so there is plenty of room for mischief, cooked books, bad loans, and all the rest, which tend to get revealed, to further ill effect, during periods of recession and economic duress. All the projections of a continued super-boom in commodities and oil are premised, to one extent or another, on the decoupling hypothesis. We don’t believe it. We shall just have to see who is right.
“America’s workers should build America’s defense,” announces the Clinton campaign commercial below. But nothing is quite as simple as it seems.
The Clinton campaign in Indiana is featuring an ad (via Gateway Pundit) of a plant that was closed in 2003. The jobs were outsourced to China, and Clinton blames the Bush administration. Run of the mill trade policy ad, you say. Not quite.
The Magnequench plant that was closed was not making waffle irons. The plant apparently manufactured 80% or more of the sintered NdFeB magnets that are used in the US military’s smart bomb guidance systems. Sounds sinister, yes? And an even better ad for the Clinton campaign. But it gets more complicated. All the transactions that resulted in ownership of the plant by Chinese interests occurred during the Clinton administration.
In 1995, according to ABC, “China National Non-Ferrous Metals…and San Huan New Material High-Tech Inc…joined with other interests to purchase the Anderson, Ind.-based Magnequench…The two Chinese companies were headed by the husbands of the first and second daughters of then-Chinese leader Deng Xiaoping.” The 1995 transaction was approved by CFIUS, the responsible government agency. Then, in 2000, Magnequench bought the factory that appears in the campaign ad. So it would appear that if there is an issue about the transfer of sensitive technology to China, it occurred before George Bush was President, rendering some of Senator Clinton’s claims in the ad moot or ridiculous.
But is there a legitimate national security angle to the story in the first place? Former Magnequench vice president Andy Albers says no, via ABC. “‘Nothing was done by Magnequench that aided the Chinese military program or hurt the U.S. military program,’ says Albers, who adds that Clinton’s focus on his former company ‘concerns me because it doesn’t address the main issue, which is how to make U.S. companies more competitive globally at’s the question we should be asking, that’s what we should be addressing. We should not be twisting the truth about that this is a national security issue, because it’s not a national security issue, it’s about global competitiveness’.” Former counsel to Congressman Duncan Hunter, Jeff Green, agrees that the matter is not a national security issue: “‘I think it’s more accurate to say that all the technology and production of these Neo magnets comes from overseas,’ he says, including Japan, Finland, Germany and China.”
So either both the Bush and Clinton administrations are to blame, or neither one did anything wrong. It’s a bit hard to say at the moment, but it appears from the news reports that, on a micro level, the system apparently functioned normally, although there are dissenting voices on left and right alike. However, on a macro level, the picture looks a little different, and raises the question as to whether the procedures in place at the CFIUS arm of the Treasury Department are adequate in a world that changes rapidly. At first blush, they do not appear to be.
One obvious question: does CFIUS track purchases or consolidations that occur after it has approved the sale of a company? For example, there are apparently sources for the Neo magnets in Japan, Finland and Germany, as well as in China. But what if a Chinese company or companies were to subsequently purchase those operations in Japan, Finland, and Germany? Would we ever know? Before it was too late to do anything about it? How? The current transactional approach of CFIUS, even as modified by FINSA, looks sort of like Hart-Scott-Rodino procedures for defense related industries. CFIUS procedures do not seem to take into consideration certain plausible or likely future events which could render its decisions unwise in retrospect. This would appear to bear looking into.
89 year old author, investment adviser, and former professor Peter Bernstein’s three “classics” from the 1960’s are being reissued this year with introductions from Paul Samuelson, Paul Volcker and Arthur Levitt, which itself is a certain testimonial to the man. His 1996 book, Against the Gods: The Remarkable Story of Risk, won a number of awards and was well reviewed in both the popular and academic press. He was interviewed in the WSJ on the current outlook, and sees protracted problems:
You don’t get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion…
When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That’s part of the problem going forward. You don’t have a high-growth exit from this, as you’ve had from other kinds of crises. We won’t have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn’t turn up. Or like a U, a flat U. The reason for that is that people aren’t going to get caught in this bind again. They will tell themselves, “I’m too smart to do that again.” And everyone else is going to be saying the same thing…
I’m a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don’t think we are going to feel that way going forward…
If China goes into a recession, God knows…Before, it was investment that made the V at the bottom of the business cycle. I don’t see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won’t do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.
We quote Mr. Bernstein because he sees a number of the same risks we do, and he too does not know how it will all turn out. It is fervently to be hoped that Asia picks up the slack and its growth is not derailed by the slowdowns present in the US and coming shortly to the Eurozone. But it is not at all clear that this can happen in a region so highly dependent on exports for its growth. It is certainly possible that we are nearer to the end than the beginning of the “one-shot adjustment” boost to non-inflationary growth from China and the other nations similarly situated. We’ll keep our fingers crossed that it really will be different this time.
We asked the question: can the developing world maintain its economic growth in the teeth of a slowdown in the West. Signs point to no, as India’s story has changed significantly from what it was only a few months ago. WSJ:
Growth in India’s gross domestic product has averaged just shy of 9% for the past five years. It reached 9.6% in the fiscal year that ended March 31, 2007. The government forecasts that the economy grew 8.7% in the fiscal year that ended last month. But as the global slump and rising inflation take their toll, it is becoming clear that the rapid expansion was due in part to benign conditions that boosted emerging markets everywhere — and that India remains vulnerable to economic cycles. Some forecasters now say GDP may grow just 7% or a tad higher this year and maybe even next.
The difference between 7% and 9% expansion may not sound like much, especially when some countries, including the U.S., are struggling to show any growth at all. But it will make an important difference to India. “Seven percent is a good rate — it’s not stagnation — but India’s economy needs to grow at 9% to 10% for some years to wipe out the deficit of previous growth rates,” says Ashok Jha, a former finance secretary and now president of Hyundai Motor Co.’s Indian unit.
Expectations for growth are so high that anything less than a rip-roaring performance could stall the forward momentum of the recent expansion. A slowdown also would render India less able to take up the slack in the global economy caused by the problems in the U.S. and Europe. India has become a hot destination for U.S. goods. The U.S. Commerce Department says India as a market for U.S. exports is expanding at a rate of 75% a year…
employment grew 2.6% a year from fiscal 2000 to fiscal 2005. But the labor force grew by 2.8% over the same period. The result: The unemployment rate rose to 8.3% from 7.3% during the period. With growth slowing, India’s benchmark stock index is down 19% so far this year. Property prices are softening, too. Sales of scooters and motorbikes dropped by almost 8% in the 12 months that ended March 31, after climbing 11% the previous 12 months
Like China, India is fighting inflation, which is over 5%, but it already has softening sales and a high unemployment rate. So India’s policy choices are not good, and definitely do not favor high growth now. Gee, maybe it’s not different this time after all.
Momentum traders have blithely ignored last week’s accord by the G7 powers, which described “sharp fluctuations in major currencies” as a threat to economic and financial stability. The euro has surged to fresh records this week, touching $1.5982 against the dollar and £0.8098 against sterling yesterday…
Otmar Issing, the ECB’s former ‘High Priest’, said the single currency had started well but could face a “disastrous outcome” if the eurozone failed to embrace a flexible market system. “The ’single-size’ monetary policy would simply not fit at all. In such a scenario, the single currency would risk straining cohesion ” he warned in a new book, ‘The Euro’.
This is already occurring. North and South have diverged further. While Germany and Holland have prospered under the strong euro, most of southern Europe and Ireland is in trouble. Current account deficits have reached 9.2pc of GDP in Spain and may touch 15pc in Greece. The European Commission’s economists fear that the loss of competitiveness against Germany over the last decade may have passed the point of no return. At best, these countries face years of belt-tightening as their property booms deflate…
A key reason for the 30pc rise in the euro against the dollar over the last two years has been the move by Asia central banks and Mid-East wealth funds to parking huge sums of newly acquired wealth in European bonds as an alternative to the dollar.
BNP Paribas said Asian surplus countries and commodity exporters have accumulated $1,160bn in reserves over the last year alone. US Treasury data shows that only 19pc of this was invested in dollar assets. This is a sharp break with past practice. A large chunk of the money was invested in euro-zone securities. The question is whether China, Saudi Arabia, and others, have now reached euro saturation.
We noted the stresses in the eurozone a few years ago, and they seem to be getting worse. The European Central Bank recently revealed, for example, that foreign direct investment (FDI) into the eurozone has contracted by €269bn over the last two years. It’s getting hard to keep track of all the stresses in the financial system.
You remember Shanghai 6000, don’t you? It was only a few months ago, as we observed the other day. How time flies. Now there’s a 50% off sale going on. WSJ:
The benchmark Shanghai Composite Index ended Friday’s trading down 4%, and has lost 50% from its mid-October record high of 6124.04. Despite this, analysts at Bespoke Investment Group estimate the forward price-to-earnings ratio of the index at 20.90, which ranks second among 13 major world indexes, trailing only the tech-heavy U.S. Nasdaq Composite Index…
the Shanghai index is further from its 52-week high than 21 other major world equity markets. “I don’t know that the froth is still there, but whether it’s inexpensive enough to step back in, well, the Chinese government is still trying to slow the economy to a certain extent,” says Malcolm Polley, president and chief investment officer at Stewart Capital Advisors. “The danger is that it slows a bit too much and in that case, I think you still have to worry about valuation.”
For what it’s worth, we think that the slowdown in the US will migrate to Europe and beyond, and that the combined consumer spending sluggishness will slow China’s overall exports, much as has already happened to its exports to the US. In turn, this slowdown in the developing world will translate into some curtailment of grand infrastructure spending and capacity expansion, as the countries that have been growing 9-11% in recent years confront a world they have not experienced in a long time — where there is little need for such capacity expansions and the foreign exchange isn’t piling up like it used to. And then the bank loans run into trouble, and the usual things of a recession transpire, like commodity prices reverting to the mean, and so forth. No one has repealed the business cycle to our knowledge. But of course we’ve been saying this for quite a while and it hasn’t happened yet. So it really may be different this time around. But that’s really not what the half price sale in the Shanghai stock market would appear to foretell.
China just became the second largest exporter in the world. London Times:
Another stellar performance by China, which recorded a 26 per cent rise in its merchandise exports to $1.2 trillion, enabled it to surge ahead of the US to be ranked the world’s second biggest exporter and is breathing down the neck of top-placed Germany…
In 2007, buoyed by strong performances by dynamic emerging economies such as China. India, Brazil, and Russia, world merchandise trade in value terms increased by 15 per cent to $13.6 trillion (£6.8 trillion). Emerging countries accounted for more than half of the world’s trade growth last year…
global merchandise trade is forecast to rise by 4.5 per cent this year, against last year’s 5.5 per cent. But the WTO gave warning that a stronger slowdown in global economic growth “could cut trade much more sharply, to significantly less” than the projected level of 4.5 per cent.
Of course it would be quite a trick if China could continue to grow its exports at 26% when global merchandise trade will probably expand at less than 4.5% this year.
The WSJ declares that “China has next to no chance of experiencing a traditional recession,” which is a couple of quarters of a decline in GDP. Well, that settles that then.
Domestic economists for years considered 8% to 9% the economy’s “normal” growth rate, but have started to raise those estimates to about 10%. The Chinese Academy of Social Sciences last year put the nation’s potential annual growth rate in a range of 9.5% to 10.7%. That is also in line with the average 9.8% annual rate since economic changes began in 1978.
With that kind of momentum, China has next to no chance of experiencing a traditional recession, defined as a decline in economic activity. But there are still fears that a global slowdown could pull China’s rate of growth well below its potential, or below the level needed to create sufficient jobs — what some economists call a growth recession. “For China, below 8% growth should be considered a recession,” said Li Zhikun, an economist at China Jianyin Investment Securities in Beijing.
The Asian Development Bank warned recently that in a worst-case scenario — a harsh global slowdown combined with high domestic inflation and a collapse in financial markets — China’s growth could drop to as low as 7% this year. But even a much less drastic slowdown could imperil the government’s targets for creating new jobs for its swelling urban population. Chinese officials project they need to add 10 million jobs a year to keep pace with the expansion of the work force.
Maybe this is all true, and that things really are different this time, and China can grow handily when its exports slow substantially. Maybe the quality of China’s GDP numbers and its bank loans are better than some skeptics think. Maybe and maybe not.
The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House’s decision to set aside, possibly indefinitely, the free trade agreement negotiated with Colombia by the Bush administration. On economic grounds, there’s no reason to reject the agreement. Colombia’s exports already enter the U.S. market duty free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs — up to 35 percent on autos, 15 percent on tractors and 10 percent on computers — most of which would ultimately go to zero under the agreement.
The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool exports about $50 million annually of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20 percent tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere. (Why does Colombia want the agreement? Answer: Congress has to renew Colombia’s present duty-free status periodically. The agreement would make it permanent.)
Yet, it’s politically convenient to oppose the trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot.com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.
If, as we suspect, the trajectory of imports from developing nations such as China is declining as the evidence suggests, it would be the about the worst possible time to hamstring US exports to those countries. We’ll just have to wait and see what the politicians do, however.
China is attracting hot money as its currency appreciates, $100 billion or so in the first quarter alone. Meanwhile, China is now contemplating what happens when exports to America slow. Peoples Daily:
“China is seeing an even stronger capital inflow now, despite some nations suffering a credit crunch,” Fan Gang, a member of the central bank’s monetary policy committee, said. China’s foreign exchange reserves, the world’s largest, increased by $153.9 billion in the first quarter, compared with $135.7 billion during the same period a year ago. But less than one third of the gain could be attributed to its $41.4 billion trade surplus during the same three-month period…the renminbi’s appreciation compared with the US dollar is also attracting speculators, Fan said. “The capital inflow will add up to excessive liquidity and worsen inflation.”
China is now battling its worst inflation in more than a decade. In February, the nation’s consumer price inflation increased 8.7 percent, the highest in 11 years. The government has adopted a slew of measures, such as credit control and temporary price intervention, trying to reduce inflation to about 4.8 percent this year. Meanwhile, the government has sought another remedy by allowing the currency to appreciate faster. Its value increased 4.2 percent in the first quarter alone…
A serious US recession and an ensuring slowdown of China’s exports to the nation could cost as much as 1 percentage point of China’s GDP growth, Fan estimated. Currently, the US market absorbs 23 percent of China’s total exports, while fast-growing East Asian economies receive about 30 percent.
It is such an odd economic time. China is getting billions in hot money betting on its currency’s appreciating — and the appreciating currency lowers China’s great competitive advantage. Meanwhile, the financial wizards continue to play oil (at $112) as the anti-dollar, while oil prices will eventually crimp demand and may make a US recession worse. So the currencies move one way, while the fundamentals move the other. Such disconnects are finite.
The IMF report that we discussed below has a lot of interesting information. For example, the chart above shows that the current booms in oil, aluminum, copper and foodstuffs are in some cases multiples of their previous price escalations, and the duration of the current boom has been significantly longer than in past economic cycles — no doubt in large measure due to the rise of China and the BRIC-like nations. There is also no doubt that, at least judging by historical standards, a correction of significant magnitude and duration is overdue.
The IMF has released a nearly 300 page report on prospects for world economic growth that raises some of the same questions we wrote about the other day, including whether the de-coupling of the developing world from the US and Europe is real this time around. No one knows the answer to that question. Here are some excerpts from the IMF Report:
Although Chapter 3 shows that the particular dynamics of the housing market in the United States are not matched by those in other countries, it also shows that housing may now play a more marked role in the business cycle more broadly — as the nature of mortgage financing has changed and as valuations have increased almost everywhere over the past 10 years.
The second potential vulnerability is, of course, commodity prices. Chapter 5 examines the role of commodity prices in contributing to the strong performance of many emerging and developing economies in recent years. It is striking how the surging tide of commodity prices over the past five years has lifted almost all commodity-based boats around the world. Although there is some reason to believe that the countries exporting commodities are now better able than in the past to withstand a serious downturn, we continue to urge caution: commodity prices have fallen, on average, by 30 percent during significant global slowdowns over the past 30 years.
All eyes now turn to the world’s leading emerging economies. They have come of economic age in the past half-decade— diversifying their exports, strengthening their domestic economies, and improving their policy frameworks. It is conceivable that their strong momentum, together with some timely policy adjustments, can sustain both their domestic demand and the global economy. At this moment, however, these emerging economies find themselves beset not by impending recession, but rather by inflation pressures. In particular, the financial dynamics of dollar depreciation and increasing financial market uncertainty have combined with continuing strong demand growth in the emerging economies and sluggish supply responses by commodity producers in such a way as to keep upward pressure on food and energy prices despite the darkening clouds over the global economy. Therefore, at the very time when preparations for countercyclical measures would seem to be warranted, leading emerging economies find themselves trying hard to take the edge off inflation…
The overall balance of risks to the short-term global growth outlook remains tilted to the downside. The IMF staff now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 — equivalent to a global recession…
What explains the resilience of the emerging and developing economies? Will they be able to effectively decouple from the substantial slowdown — and possible recession — in the advanced economies in 2008? There are two main sources of support for these economies: strong growth momentum from the productivity gains from their continuing integration into the global economy and stabilization gains from improved macroeconomic policy frameworks. What is important is not just how these factors have evolved in individual countries, but also how they have interacted across countries to change the dynamics of global growth.
there have been two important shifts in the growth dynamic of the global economy. The first is that growth in global activity over the past five years has been dominated by the emerging and developing economies — China has accounted for about one-quarter of global growth; Brazil, China, India, and Russia for almost one-half; and all the emerging and developing economies together for about two-thirds, compared with about one-half in the 1970s. Growth in these economies also is more resource-intensive, given their patterns of production and consumption (see Chapter 5 of the September 2006 World Economic Outlook). One consequence of these trends is that the increasing demand for key commodities such as oil, metals, and foodstuffs is now driven by growth in these economies — they account for more than 90 percent of the rise in consumption of oil products and metals and 80 percent of the rise in consumption of grains since 2002 (with biofuels representing most of the remainder).
This has contributed to the sustained strong increase in commodity prices observed over the past year, despite moderating growth in the advanced economies, and has been an important factor behind the strong recent performance of commodity-exporting countries in Africa and Latin America, as well as oil exporters in the Middle East. The second, related shift is the growing importance of emerging and developing economies in the structure of global trade. These economies now account for about one-third of global trade and more than one-half of the total increase in import volumes since 2000. Moreover, the pattern of trade has changed. Almost one-half of exports from emerging and developing economies is now directed toward other such economies, with rising intraregional trade within emerging Asia most notable…As a result, the advanced economy business cycle may play a less-dominant role in driving swings in activity for the emerging and developing economies,
We have a couple of takeaways from this excerpt of the report. First, if China (and the BRIC-like countries) have not achieved the decoupling that the IMF clearly hopes has happened, there are nasty implications for world GDP growth. As the report says: “China has accounted for about one-quarter of global growth; Brazil, China, India, and Russia for almost one-half; and all the emerging and developing economies together for about two-thirds.”
Second, what will happen to commodity prices this time around? The IMF warns: “commodity prices have fallen, on average, by 30 percent during significant global slowdowns over the past 30 years.” Will it happen again this time?
How self-sustaining has developing nation growth become? This is one of the most interesting economic and political questions of our times. We’re going to find out the answer (or answers) pretty soon.
The US is more or less in a recession. Europe isn’t far behind in growth dropping to de minimis levels — and that’s without factoring in the strains, sure to increase, between the Club Med countries and Germany and others regarding monetary and fiscal policies in the Eurozone. The Middle East can of course continue its outsized expansion as long as the oil bubble remains intact, but its history and traditions have not to date demonstrated that that region has developed the attributes to sustain indigenous economic growth, including innovation, labor force participation, or other characteristics that are typical among affluent economies.
It is unknown, as of this writing, whether the BRIC countries, and in particular China, can sustain their phenomenal growth rates in the current global environment. (We tend to believe not, as you know, and some of the evidence is beginning to point our way.) No less an official source than the Peoples Daily has said that China is 70% dependent on foreign trade for its growth, so we shall soon see just how self-sustaining the Chinese economy has become during its remarkable transformation of recent years.
General Electric has a large exposure to GDP growth rates in the developing world. (BTW, it only covers 63% of its CP with bank lines.) Its orders were up 8% in the quarter, though earnings disappointed. Its “infrastructure” segment, the company’s largest, had $15 billion in sales was 23% higher than a year ago, principally due to orders from Asia and Latin America. The company would appear to be a good window into trends in the developing countries, so from now on, we’ll be watching it a little more closely to see if it sheds any light on the question of just how self-sustaining developing nations growth has become — when the consumers of the US and Europe slow down their spending.
China’s exports to the US are up only 5% this year, marking a sharp departure from their 25%+ recent growth rate. This astonishing bit of news is buried within this WSJ report on China’s economy and exports (which topped $1 trillion last year and grew at a 25% clip last year):
China’s quarterly trade surplus shrank for the first time in three years…The trade surplus in goods, the amount by which exports exceed imports, was $41.42 billion for the first three months of 2008, China’s Customs agency said Friday. That’s roughly 11% smaller than the $46.44 billion surplus for the same period of 2007. Imports for the three-month period surged 28.6% to $264.48 billion, while exports grew a less rapid 21.4% to $305.9 billion — with growth in exports to the U.S. especially slow…
Shipments to the U.S. are up just 5.4% so far this year, reflecting both weaker demand there and the rise in the Chinese yuan against the dollar. The yuan has however continued to depreciate against the euro – making Chinese goods cheaper for Europeans – and exports to the European Union are up 24.2%.
The US accounts for almost a third of China’s exports ($322 billion in 2007). That’s up from $50 billion in 1997, a growth rate of 22% over the period, which accelerated to 26% in the last five years. The abrupt slowdown in Chinese exports to the US is quite significant in our view, and heralds a likely slowdown in China’s growth within the next year that is greater than most observers currently foresee.
We should also add that the still robust growth in China’s exports to the EU are likely to show a slowdown in the next year or so, as growth in Eurozone GDP retreats from its relatively healthy 2.8% and 2.6% levels of the last two years to the forecast growth of 1.4% and 1.2% this year and next.
Long cycle expenditures such as infrastructure project spending and the like tend to lag the cycle in spending on consumer goods, so just maybe we are not so wrong after all about the economic problems in China that may lie just over the horizon. (There is no reason to build new factories in anticipation of 25% growth if growth becomes modest, after all — and the bank loans to such projects would have their own problems, etc.) Furthermore, in such an environment, the insane bubble that has enveloped commodity prices — in part due to the development projects of the BRIC countries — seems a fragile thing indeed.
China’s A share market, which has had some spectacular results until recently, and includes large US investment banks among its successful fund managers, has been said to be in a “bubble.” (We have discussed elements of this previously.) Indeed, according to this piece in the FT, 70% of its investors apparently believe they have invested in a bubble, but according to the author, Jake Lynch of Macquarie, they are wrong:
A recent survey of Chinese A-share investors found that 70 per cent believed they were investing in a bubble, matching the perception of most foreign observers. The A-share market has been cited, according to a standard calculation, as trading at a price/earning ratios of 70 times. Even worse, 30 per cent of earnings are alleged to come from investment income (that is, stock trading) – in effect, a giant Ponzi scheme.
Combine the above with a reputation for questionable accounting practices and the threat of $1,300bn of previously non-tradable shares becoming unlocked in the next two years, and it is no wonder that the A-share market is now off about 36 per cent away from its highs.
So is this correction just the first leg of the great unwinding? Not likely. In fact, it is hard to find evidence of a bubble at all. Take valuations: the benchmark CSI 300 index is now trading at 23 times 2008 consensus earnings forecasts. This is not cheap, but it is far from what we think of as bubble valuations and below its 10 year average of 30 times…
consensus forecasts predict 32 per cent earnings growth this year. While 32 per cent seems like an aggressive number given the global slowdown, 7 percentage points come from a one-off tax break and a 25 per cent pre-tax growth rate may be achievable with a mid-teens nominal GDP growth rate – particularly when banks, oil and commodities are the main drivers…
a quick glance at the A shares that have been unlocked since 2006 show that only 10 per cent were actually sold into the market In fact, over 75 per cent of the shares being unlocked belong to the government. That they would be sold down en masse is highly unlikely. A much more likely scenario is the one that the government itself gives – that it will control the issuance of supply to continue to foster a healthily developing market.
Indeed, the increase of share supply is critical for a sustainable market. A-shares have historically traded at high valuations because China’s ratio of free-float market capitalisation to both GDP and savings remains far below other emerging and developed countries. In other words, there is not enough ‘supply’ of shares relative to high ‘demand’ from savers…
Time will tell if China’s “banks, oil and commodities” are the place to be in 2008, and whether the old argument of “not enough supply” of common stock to meet investors’ demands has any merit this time around. We have our opinion, but as we’ve said, we’re probably wrong.
We’re probably wrong. We’ve been wrong often and for a long time about a serious hiccup in China’s amazing growth story. But something seems different this time. The slowing of American consumption of Chinese goods, the appreciation of the yuan, China’s high domestic inflation, and the crash of the Shanghai market, all point towards a significantly slower growth environment in China, and at reduced margins for businesses. It is also an environment in which inflation takes the traditional stimulatory measure of loose monetary policy off the table. So options for correcting the decline in growth are somewhat limited in the short term.
Suppose growth slows in China beyond the modest decreases currently forecast. Will the world start caring about China’s allegedly cooked books and its “dodgy” Foreign Direct Investment numbers? Could there be a new bad debt banking crisis of the severity that some have foreseen? Could there become more stories about foreclosures and bankruptcies than about tales of amazing growth and prosperity? What would be the impact, if any, of these unpleasant developments in the year of the Beijing Olympics?
Suppose you were a senior government official in China and feared the social unrest that might occur if it were revealed that the Cinderella economy of recent years, now faltering, was built in some important measure on a foundation of corruption, cronyism, and outright misstatements of the country’s financial condition. Suppose you knew that these stories were likely to start to unfold over the next few months, as the hidden problems could no longer be easily concealed behind hyper-growth and good times. Might you not crack down hard where you could today, and intimidate reporters and jail dissidents in a kind of pre-emptive move (or is all that just about Tibet and Xinjiang)? We’re probably wrong about China’s economic situation and all these other matters as well. But just suppose…
Wei Gu of Reuters writes in the IHT that “China banks could face credit crisis of their own,” a topic that has been pretty quiet since the big Chinese bank bailouts of a couple of years ago, in response to a mountain of bad debt that had accumulated by 2006:
risks are growing of a credit crisis with Chinese characteristics. A crisis like that could rock global markets, because China has been one of the few bright spots in the world economy. With memories still fresh of Beijing’s having injected more than $260 billion into its banks while shifting bad loans off their books, another huge bailout may become necessary if loose lending practices are not halted.
What could trigger such a turnaround in the Chinese credit market? A sudden sharp slowing of the Chinese economy. That’s not as far-fetched as it might seem. Weaker overseas demand and the bursting of an asset bubble in China could result in defaults by droves of companies. Sudden deflation of a bubble can lead to fast-deteriorating asset quality, cascading in a chain reaction through the financial system…
The nonperforming loan ratio for major Chinese banks rose for the first time in two years, to 6.72 percent in the fourth quarter from 6.63 percent in the previous quarter. That level is dwarfed by the 20 percent to 50 percent nonperforming loan ratios six years ago, but the trend is worrisome. “History shows even the worst banking systems can appear decent during periods of robust GDP growth,” said Charlene Chu, a senior director at Fitch Ratings. “Fitch remains concerned Chinese banks could well be underestimating potential future credit losses.”…
The World Bank expects China to grow this year at its slowest pace since 2002. And with inflation hitting 11-year highs, the central bank needs to clamp down on lending…Caught between an appreciating yuan, weaker global demand and rising costs at home, exporters are facing the toughest time in 20 years. In the Guangdong area near Hong Kong, about 12,000 exporters are likely to go bankrupt early this year, according to the Shenzhen OEM Association, an industry group. Signs are also suggesting that loans to real estate developers may go awry. After investors got used to rising housing prices, they are suddenly falling by double digits in certain cities.
The recent sell-off in the Chinese stock market — down 25 percent in the past four months — could also hobble banks because a big chunk of their business comes from equity-related products. A fair amount of corporate lending found its way into the stock markets, and that money might have evaporated already.
China’s banks have very high stock market valuations for their size, and of course the central government is flush with foreign exchange reserves, both of which factors could mitigate a new set of debt problems for China’s banks, even if those problems were as large as the largest estimates of a couple of years ago.
But, as noted in an AP story from the middle of last year: “’The banking system is still based on collateral and the collateral is all overvalued,’ says Andy Xie, an independent economist based in Shanghai and Hong Kong. ‘If the bubble bursts, then you will have a banking crisis like Japan in 1990…The question is how China can manage after the bubble’.”
The WSJ reports that journalists who covered the unrest in Tibet have been getting death threats via visitors to a “military themed Internet bulletin board”:
Some Chinese nationalists have undertaken a campaign of harassment, including violent threats, against foreign reporters who took part in a recent trip to Lhasa, for alleged bias in their coverage of unrest in Tibet. The intimidation efforts have included hundreds of calls and text messages to the cellphones of reporters who took part in the government-arranged Lhasa trip late last month, including correspondents from The Wall Street Journal, USA Today, and the Associated Press.
The flood of threats began this past week after the cellphone numbers, Chinese names, and brief descriptions of several of the correspondents were published on a military-themed Internet bulletin board. Contributors to that site have boasted of making harassing phone calls, and posted their own violent threats. “Beat to death these unjust, conscienceless criminals,” wrote one.
The campaign is the latest escalation in a nationalist backlash against Western news coverage of the March 14 antigovernment riots in Tibet and their aftermath. The precise basis for the complaints isn’t clear, although critics have circulated a few photographs published on news Web sites that they argue were misleadingly cropped or captioned. More broadly, the anger reflects deep-seated resentment among many Chinese — fostered by decades of government propaganda — at perceived interference in China’s internal affairs by foreign governments and groups. The phone calls and text messages in recent days have ranged from relatively mundane denouncements to profane attacks on the reporters and their families to numerous threats of violence and death. (”You damned American devil, God will punish you. Tomorrow you will be hit by a car and killed.”)
Robert Kagan and Bruce Kesler have more about disturbing and somewhat surprising developments in China in this year of the Beijing Olympics, a year in which the Communist government of China might better have opted for a friendlier public relations façade. (Is gunning down monks an Olympic sport?) Better to see the truth, however.
As Kagan notes, China is “a 19th-century power, filled with nationalist pride, ambitions and resentments; consumed with questions of territorial sovereignty; hanging on repressively to old conquered lands in its interior; and threatening war against a small island country off its coast. It is also an authoritarian dictatorship.” No kidding.
The world’s fourth-largest economy has expanded by at least 10 percent for each of the past four years. Foreign direct investment in China rose 4.5 percent last year to a record of US$63 billion…Foreign direct investment has surpassed US$700 billion since China began accepting overseas’ investors money, Commerce Minister Bo Xilai said in March…
It has always been something of a mystery to me as to how China attracts such huge volumes of FDI, especially when the rate of return there isn’t very exceptional. I have, therefore, always believed that the data is dodgy. For example, when China tells you how much FDI came in a particular year, it counts the entire project cost, not just the FDI part of it.
Does this disparity between China and India, as reported by A.T. Kearney, make any sense: “China’s FDI flows are larger ($53.5 billion) and primarily capital-intensive, while Indian FDI flows are smaller ($4.3 billion) and skill-intensive, concentrated in information and technology areas.” Moreover, India’s efficiency of its invested capital is much higher than that of China. Given these factors, is it likely that FDI in China is 12x greater than that in India?
Japan Times says that Japanese investment in China is on the wane:
Japanese investment in China, which dropped in the first half of 2007, is unlikely to pick up in the near future as manufacturers scale down investments in the country, a Japanese trade organization said Thursday.
Even as overall overseas Japanese investment more than doubled in the January-June period, that to China dropped 11.2 percent from a year earlier to ¥342.8 billion in the same period, a report by the Japan External Trade Organization’s Beijing office says.
The drop comes after a sharp rise in Japanese investment in China in the first half of this decade, particularly after the country’s entry into the World Trade Organization in 2001. “Manufacturers’ initial investments to China have been all but completed, and those in the future will be for enlarging existing facilities or for sales, so a major increase in the near future is not expected,” the report says…
In contrast to the drop in Japanese investment in China, that in Southeast Asia from January to June shot up 72.8 percent from a year earlier to ¥427.5 billion, while that in India quadrupled to ¥107.3 billion…
Meanwhile, the Peoples Daily has quite a different spin: “Over the years, Japan has invested up to 39,000 projects and as much as 60.8 billion US dollars of promised capital in China, making it the second largest source of foreign capital for China. Japanese companies have flourished in various sectors, all with highly complementary industries, sound management, and significant return…Since the 1980s, Japan’s investment in China has reached three heights. Currently, it is riding its third high tide.” Somebody’s fibbing, or some important facts have been left out.
Near the beginning of this decade Foreign Direct Investment in China ran about $50 billion a year. By 2005 FDI was over $70 billion, or perhaps even more. Lee Branstetter of Carnegie Mellon and Fritz Foley of Harvard take a look at US FDI in China and find the numbers to be surprisingly small:
Many otherwise well-informed experts on international economics believe that US FDI in China is large, that US multinational enterprises (MNEs) have significantly enlarged the US-China trade deficit by shifting production aimed at the US market to Chinese affiliates, and that this production shift has undermined investment at home and in other countries. Current conventional wisdom also suggests that US MNEs are moving cutting edge R&D to China, in order to take advantage of vast legions of low cost technologically skilled workers. Our recent research, based on comprehensive surveys of US multinational activity in China, suggests t
