Replies to post #1699 on The Rising Influence of Rising Affluence

[DewDiligence]

Economists Boost China Growth Forecast

http://online.wsj.com/article/SB10001424052748704462704575591381199269608.html

›NOVEMBER 4, 2010
By AARON BACK

BEIJING—The World Bank raised its forecast for China's gross domestic product growth this year, and said China should allow greater exchange rate flexibility to deter capital inflows and promote economic restructuring.

In its quarterly update on the Chinese economy Wednesday, the World Bank raised its forecast for China's GDP growth in 2010 to 10% from a previous forecast of 9.5% due to the Chinese economy's better-than-expected performance.

It urged China to raise interest rates further, and cautioned that China faces challenges from increasing international liquidity inflows.

"More exchange rate flexibility may help in deterring capital inflows, although the recent experience in other large emerging markets shows that flexible exchange rates by themselves may not deter such inflows sufficiently," the World Bank said in the report.

"With regard to the level of the exchange rate, a strong currency helps reduce inflation pressures by lowering the price of imports and toning down demand. It also helps rebalance China's pattern of growth toward more services and consumption and less industry and investment."

Over time, changes to the exchange rate regime will make monetary policy more independent and allow Beijing to deal with the country's increasing divergence with the U.S.'s cyclical-growth pattern, the World Bank added.

World Bank lead China economist Ardo Hansson said at a news briefing that China should target the yuan's value against a basket of currencies rather than one bilateral exchange rate, and that some signs in recent yuan exchange-rate fluctuations suggest China may be targeting a basket.

In the third quarter, China's GDP rose 9.6% from a year earlier, a high growth rate by global standards but slower than the 10.3% expansion in the second quarter, as Beijing withdrew stimulus and introduced measures to cool sectors such as the property market.

The World Bank cut its forecast for this year's rise in the consumer price index to 3% from 3.7% previously. However, it raised the forecast for China's CPI next year to a 3.3% rise from its previously predicted 2.8%.

Speaking at a news briefing, World Bank senior China economist Louis Kuijs said an inflation rate of 3% to 5% is "not necessarily alarming" for China since some of the inflation is fueled by needed adjustments, such as higher wages and electricity prices.

Still, inflation risks "cannot be ruled out," and China faces serious risk of an asset price bubble, the World Bank said. China should continue to raise interest rates in order to "normalize the overall monetary stance," it added.

China's consumer price index rose 3.6% from a year earlier in September, exceeding the government's target of 3% average inflation for all of 2010.

The World Bank also raised its forecast for China's current account surplus, the broadest measure of its trade balance, in 2010 to US$320 billion from US$260 billion in a previous forecast.

Mr. Kuijs said the underlying trends causing global economic imbalances haven't changed. "When the world economy got into crisis it seemed that some of the global imbalances were being reduced," he said. "Now that we are returning to more normalized circumstances, we are seeing that the underlying trends have not gone away. That is partly because the overall setting, including the policy setting, has not changed all that much."

China's current account surplus was $126.5 billion in the first half of 2010, down 6% from a year earlier. However, the decline was mainly due to surging imports in the first quarter. The current account surplus in the second quarter rose 35% from a year earlier to $72.9 billion.

The World Bank predicted China's end-2010 foreign-exchange reserves will total $2.765 trillion, higher than the previously forecast $2.705 trillion.

China's foreign-exchange reserves rose to $2.648 trillion at the end of September from $2.454 trillion at the end of June, the largest-ever quarterly gain. Analysts said strong monthly trade surpluses and hot money inflows accounted for a significant part of the rise, as did the falling value of the U.S. dollar, which boosted the dollar value of reserves denominated in other currencies.‹

[bladerunner1717]

"Don't get an MBA. Study agriculture or mining."--Jim Rogers (a paraphrase):


Fed's Bernanke `Doesn't Understand' Economics, Jim Rogers Says
By Simon Clark and Stephen Morris - Nov 5, 2010 3:33 AM PT



Nov. 5 (Bloomberg) -- Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney, talks about Federal Reserve monetary policy and the impact quantitative easing measures may have Treasuries. Flanagan speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings.

“Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

The Fed said on Nov. 3 it will buy an additional $600 billion of Treasuries through June, in a bid to reduce unemployment and avert deflation. While Bernanke’s near-zero rates and $1.7 trillion in asset purchases helped end the recession, the Fed said progress has been “disappointingly slow” in bringing down joblessness that is close to a 26-year high.

“Debasing your currency has never worked,” Rogers said.

David W. Skidmore, a spokesman for the central bank in Washington, didn’t respond to a message seeking comment.

Bernanke’s View

Bernanke, 56, a former Princeton University economics professor who was appointed as Fed chairman by President George Bush in 2005, is a long-term scholar of the Great Depression. He has argued that the central bank’s blunders helped worsen the financial crisis that began in 1929.

He has responded with the most-aggressive expansion of the Fed’s power in its history, cutting interest rates, making Federal Reserve loans available to investment firms for the first time since the 1930s and lowering the rates at which banks can borrow from the Fed.

Rogers said the Fed was “throwing petrol on the fire” of surging commodity prices, which rose to a two-year high today. He urged students to scrap career plans for Wall Street or the City, London’s financial district, and to study agriculture and mining instead.

“The power is shifting again from the financial centers to the producers of real goods,” he said. “The place to be is in commodities, raw materials, natural resources.”

“Don’t go to Harvard Business School,” he said. “If you want to make fortunes and come back and donate large sums of money to Balliol you’re not going to do it if you get an MBA.”

‘Horrible Disaster’

He declined to comment on the performance of his own investments in commodities.

Rogers, who described the U.S. as the most indebted country in history, said quantitative easing had been a “horrible disaster.”

“It didn’t work the first time, it’s not going to work the second time,” he said in an interview with Bloomberg News. “It’s adding up staggering amounts of debt, staggering amounts of debased currencies. It’s going to cause more distortions, and we’re going to have more currency turmoil.”

The U.S. and U.K. governments’ taxpayer-sponsored bailouts of troubled banks were “unbelievable economics” and “terrible morality,” he said.

Rogers studied at Balliol in the 1960s and coxed Oxford to victory in the 1966 boat race against Cambridge University. Balliol, founded 747 years ago, educated British prime ministers including Harold Macmillan and writers such as Graham Greene.

“I’m here to sell books,” said Rogers, who lives in Singapore. “My little girls need royalties,” he added, referring to his two daughters, who are both younger than eight and were in the audience.

Rogers traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include “Adventure Capitalist” (Random House/Wiley) and “Investment Biker.”


Bladerunner

[DewDiligence]

For China, Hard Assets Yay, T-Bonds Nay

http://online.barrons.com/article/SB50001424052970203281504575590290564950892.html

›NOVEMBER 6, 2010
By LESLIE P. NORTON

This year, for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds.

China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of U.S. government debt ranged as high as $100 billion a year.

Why does China now have such a voracious appetite for hard assets? The most frequently cited reason is its need to feed its rapidly expanding industrial base. True enough. But it's also important to see China's reduction in Treasury purchases and its sharp increase in hard-asset deals as part of its currency strategy. It's widely accepted that the Chinese currency, the yuan, is undervalued against the dollar, perhaps by as much as 40%. Based on moves made in the past few years, it seems likely that Chinese officials will let the yuan, which is pegged to the dollar, rise by 2% to 3% against the greenback each year.

In the face of such a weak dollar, it doesn't make much sense to keep investing heavily in Treasuries or any other dollar-based asset. The annual interest payments can easily be outweighed by the loss in the dollar's value. There are serious concerns in Beijing, too, about the creditworthiness of U.S. debt. The smarter bet is to invest in assets that are likely to hold their value, or even increase in value, as the dollar continues its slide.

Iron ore in Sierra Leone. Mines in South Africa. Coal and gas in Australia. Oil in Brazil and Venezuela. Even Canada's timber industry is reviving as a result of demand from China. Just last week, China jacked up estimates for how much uranium it will need for nuclear power plants.

The recent move by the Federal Reserve to start buying $600 billion of government bonds, known as QE2, will only hasten China's rush for hard assets. Because it amounts to printing money, "QE2 makes the dollar even less attractive," notes Jim Lennon, head of commodities at Macquarie Bank in London. "It's certainly a policy orientation of China to diversify, and they are buying commodities as a strategic investment, and opportunistically."

China's preference for hard assets over Treasuries, taken by itself, is sure to put upward pressure on U.S. interest rates and make U.S. economic growth somewhat more difficult than it would be if China went back to its previous policy of buying heftier amounts of U.S. government debt each year. Lately, however, any "China effect" has been overwhelmed by Treasury purchases by the Federal Reserve.

For its part, China must maintain a balance between investing wisely and making sure the U.S. remains economically healthy enough to absorb Chinese exports. That consideration will become less important as China further expands its own domestic market and becomes less reliant on exports.

China has been accumulating hard assets at a rapid clip for several years. Among this year's biggest deals, CNOOC (ticker: CEO), China's largest offshore oil producer and one of its most powerful state-owned companies, is spending $2.2 billion for shale acreage in the U.S. owned by Chesapeake Energy (CHK) and $3.1 for 50% of a unit of Argentina's Bridas Energy. State Grid Corp. of China plowed $1 billion into Chilean copper deposits. Sinopec (SNP) coughed up $4.6 billion for 9% of ConocoPhilips (COP)—and another $7.1 billion for 40% of Repsol's (REP) Brazilian unit.

When China can't buy the business, it buys the underlying commodity. China's Sinofert, after weighing and dropping a bid for Potash Corp. (POT) to counter BHP Billiton's hostile offer, announced last week that it would buy $2.2 billion of the key fertilizer ingredient from Canpotex, the monopoly whose three members include Potash.

Chinas's investments in hard assets are growing quickly. In June, even as the mainland dumped a net $15.6 billion of U.S. Treasury and agency bonds, it also bought $1.1 billion in Canadian minerals and Mozambique coal deposits. "China is upgrading its industries, and all are very heavy users of these materials," explains Lu Kang, deputy director general of the Ministry of Foreign Affairs in Beijing.

Adds He Ning, director general of the Ministry of Commerce in Beijing: "China is starting to make overseas investments as a return to the world. It's just a start." As such deals become more numerous, says He, "people will no longer pay attention."

For now, though, the hard-asset investments are making China a standout. In 2008, even as global investment flows by countries around the world fell by 15%, China's more than doubled, points out Ken Davies, a research fellow at Columbia University's Vale Center for Sustainable Investment. In 2009, when the global flows fell 43%, China's inched up by 1%. Had Chinalco's bid to increase its stake in mining giant Rio Tinto (RIO) not fallen apart, China's foreign investment in '09 would have been up by 36%. And last year, for the first time, China purchased more assets in the U.S. than the U.S. did in China, according to data information provider Dealogic.

For 2010, China's nonbond investments around the world, primarily commodities, should hit $55 billion, says Derek Scissors, a research fellow at the Heritage Foundation who keeps a database of China's investments over $100 million. The foundation's data closely tracks the official data published annually by Beijing's Ministry of Commerce.

At the same time, China's net purchases of U.S. Treasury securities are likely to fall to $55 billion this year from about $100 billion last year, says Joe Quinlan, chief market strategist at U.S. Trust. "They're just drowning in dollars," says Quinlan. "QE2 will make them even less likely to want U.S. paper."

Much of China's hard-asset investing is by state-owned companies as part of Beijing's industrial strategy; as state-owned operations, they bear an implicit government guarantee. They often take minority stakes because all the check-writing makes people nervous. Says Michael Perkinson, the China expert at Veracity Worldwide, a risk-management consultancy: "Chinese companies are committed to being very deliberate." After CNOOC's 2003 takeover bid for Unocal was thwarted by Capitol Hill, "They feel they've been burned."

Some of the investments are made by China Investment Corp. and the State Administration of Foreign Exchange Investment Co., both sovereign-wealth funds that are charged with diversifying China's $2.5 trillion in foreign-exchange reserves. After the values of big stakes in Blackstone and Morgan Stanley slid during the financial crisis, CIC reevaluated its strategy, investing last year in commodity companies like Hong Kong's Noble Group, Russia's Nobel Oil, and Canada's South Gobi Energy Resources.

In 2001, Beijing launched its "zou chuqu" edict for Chinese companies to "go global"—to develop world-class brands, diversify import sources, expand export markets, boost competitiveness and reduce low-return currency reserves. The U.S. was the perfect destination: China had massive amounts of dollars and the U.S. had plenty of the types of resources that China needs. Lenovo (0992.Hong Kong), for example, acquired a world-class PC manufacturer from IBM. Relates Andy Rothman, a former U.S. diplomat and the top China analyst at CLSA Asia-Pacific Markets: "It was frustrating to them that they were driving the growth in demand for resources but didn't have a seat at the table."

Then came the Unocal debacle in 2005, when CNOOC withdrew a buyout offer after organized opposition from Congress. Reeling, China began a hunt for assets elsewhere around the globe. But Western multinationals had most of the resources tied up. "The problem is the existing monopoly system is very hard to break down," says Fan Gang, a prominent Beijing economist and former advisor to China's central bank. "Being a latecomer is not easy. We were very late, and very cornered."

That drove China to some of the riskier parts of the globe. It pushed heavily into resource-rich Africa. Beijing pronounced 2006 "The Year of Africa" and began buying up resources there.

It wooed leaders of countries the West might find unsavory. "In China, there is no concept of a failed state. The Chinese way is to stoke the pace of development," says Jin Linbo, a senior fellow at the influential China Institute of International Studies in Beijing.

In many African countries, where investment plummeted after the end of the Cold War, China's interest was hugely appreciated. China offered, in addition to direct investment, a mix of cheap loans and infrastructure improvements, export credits, and regular visits by top brass from the mainland.

Industrial & Commercial Bank of China (1398.Hong Kong)—bought 20% of Standard Bank, the continent's largest financial institution. China financed the presidential palace in Sudan. It built soccer stadiums. "If you are a typical multinational, you do a one-shot deal. China will build a port, a refinery. China is investing big time in what counts for Africa," says V. Shankar, CEO for Middle East, Africa, Europe and the Americas for Standard Chartered, the London-based banking company.

Even noncontroversial nations welcomed the People's Republic. Botswana's president famously said: "I find that the Chinese treat us as equals. The West treats us as former subjects." All that the mainland asks for, in turn, is that the countries cut ties with Taiwan.

Consider the case of Kosmos Energy's stake in a massive offshore field in Ghana, which state-owned Ghana National Petroleum Corp. and CNOOC offered to buy for $5 billion. Exxon Mobil (XOM) withdrew a $4 billion offer in August, amid signs that Accra favored the Chinese-backed bid. The next month, China Export-Import Bank loaned Ghana $10.4 billion for infrastructure projects; China Development Bank offered another $3 billion loan to develop Ghana's oil and gas sector. Last week, Texas-based Kosmos, which is backed by Warburg Pincus and Blackstone, rejected the CNOOC offer as too low. But observers believe the CNOOC group will keep pursuing it.

China built pipelines across Kazakhstan and Uzbekistan, and began mining for copper south of Kabul. It hopes to build roads and pipelines through Pakistan and Afghanistan. That has U.S. officials seething. "The Chinese are not particularly concerned about the regime they deal with. They are oligopoly buyers who drive up prices all around the world. In U.S. trade policy, we need to think about the way China is directing its state-owned companies," says one top U.S. diplomat in Asia.

Less controversially, China invested heavily in Australia, where it is such a large presence that Australia's Foreign Investment Review Board recommends that Chinese ownership stakes stay below 50%. In Australia, Chinese acquirers accounted for 40% of 2009's inbound mining transactions. The mainland has committed to buying 20 years worth of natural gas from Chevron's $37 billion project on Australia's Barrow Island. It already owns 9% of Rio Tinto and has tried to buy more; after that effort failed, it detained a Rio Tinto executive in China for alleged bribery.

Beijing's new five-year plan, to be adopted early next year, will focus on more sustainable growth: higher consumption, lower dependence on exports, increased wages in the interior, more efficient energy consumption. That might "slow" demand for resources, says Scissors of the Heritage Foundation, "but they will still have a deficit in commodities and primary products and will invest to protect supply."

In coming years, China will face more competition for resources from other rapidly developing nations, all of them industrializing and huge owners of dollars. Of the total $8.1 trillion in foreign exchange reserves held by countries in 2009, more than 60% was held by 11 Asian countries., according to Christopher McNally of the East West Center.

"The financial crisis of 2008 encouraged people to make investments in hard assets as opposed to U.S. Treasuries," says Colin Banfield, head of Asian mergers and acquisitions for Citigroup in Hong Kong. "There's a desire to spend reserves on actual businesses rather than holding the currency."

Thanks to its resource purchases in Africa, "China has leapfrogged India by a quarter mile," says Shankar of Standard Chartered.

The appreciating yuan also means buying abroad will be easier. CLSA Asia-Pacific Markets says that a rate of five yuan to the dollar, versus 6.65 today, would reduce "economic distortions," and help create a consumer economy: China's market would suddenly become 33% larger. At that rate, CLSA predicts, China's "reserve accumulation and consequently its official purchases of U.S. Treasuries will slow to a tiny fraction of the current pace." Manufacturing in China gets less attractive; factories in the U.S. become more alluring.

Already the world's second-largest economy, the mainland is expected to have more than 350 million middle-class households in the next decade. Imagine what that means for future commodities prices.

China is now the world's largest consumer of copper, tin, steel, coal, aluminum and seaborne iron ore, and the second largest consumer of oil. And investors are betting on an array of companies they think will benefit. At T. Rowe Price, that includes companies like Freeport McMoran Copper & Gold (FCX), the largest publicly traded copper producer, Peabody Energy (BTU) and Joy Global (JOYG).

"The reality of the situation is everything you touch in commodities is affected" by China's hearty appetite, says Rick de los Reyes, who follows the materials industry for T. Rowe Price.

"In some ways, China has the most perfect information, because much of what's driving commodity prices higher is Chinese demand," says Shawn Driscoll, an energy specialist at T. Rowe Price and keen observer of the mainland's movements around the globe. "The Chinese government knows what their needs are long-term. From my perspective, they are the most informed buyer."

For the U.S. Treasury market, that may not be such a good thing.‹

[DewDiligence]

4Q10 US GDP adjusted for inventories grew 7.1% YoY, the highest rate in any quarter since the 1980’s:

http://online.barrons.com/article/SB50001424052970203876704576102173534833038.html

I think you can put to rest the idea of a "double dip" recession.