Posts Tagged ‘china’

Chinese Debtors Offer Fingers to Loan Sharks

Monday, November 7th, 2011

November 7, 2011: Loan sharks have been a problem in the Western World for centuries. From traditional Vegas sharks to payday lenders, the poor have been subject to atrocities by creditors for years, despite government intervention. The situation today is no better for China’s small entrepreneurs. Many businessmen have been forced into bankruptcy recently as local credit has been tightening. Not able to withstand public humiliation, some choose suicide, while others find themselves under the burden of creditors and “tattooed thugs.”

According to a recent Businessweek article, Zhong Mong, a Chinese pharmacy owner, offered his fingers to a group of private lenders because if they repossessed one of his stores, it would be impossible to pay back another 130 small local creditors, many of whom are local friends and neighbors. Zhong had borrowed 30 million yuan or $4.7 million at rates as high as 7% per month to expand his franchise!

Similar to the U.S., small and medium sized businesses account for 80% of jobs in greater China, but these businesses always find it difficult to obtain local bank financing. Other forms of financing are often much more expensive, leading to complications and often default. Since April, at least 90 CEOs have fled Zhong’s city of Wenzhou for the same reason. The 400,000 businesses in the city are facing higher costs because of inflation and soaring black market interest rates because of the sudden credit squeeze. Imagine how fast a business must grow to pay Zhong’s 7% monthly interest…


Black market interest rates have doubled this year, growing faster than local profits. Informal lending has given rise to real estate developers driving prices ever higher, leading to more inflation. Similar problems have also surfaced in the industrial province of Guangdong, to the South.

Wenzhou is home to 9 million Chinese and produces 90% of China’s eyeglasses and lighters. Many residents of Wenzhou take out bank loans at 1% per month and lend out money at 2%+ per month, pocketing the difference. China’s official lending rate is only 6.56%, compared to rates between 20-40% that small businesses are charged here.

Local suicides have prompted Premier Wen to visit the city and pledge to raise bonds to help finance smaller businesses, even if NPLs are higher. Unfortunately for Zhong, it may be too late. He will probably lose his business and will be hired as a paid manager. He and his wife will probably have nothing left.

Occupy Main Street, Restructure America

Sunday, November 6th, 2011

November 6, 2011: It has been almost 4 years since the United States and the entire Western World has been mired in this recessionary state. What has happened should not be a surprise to anyone. After scrambling for an ever higher quality of life, sending labor-intensive industries overseas, and losing more than 2.5 million manufacturing jobs and more than 850,000 professional service and information sector jobs to outsourcing, we foolishly blame our government and the top 1% of our earning population for our hardships. Most Americans lack the skills and motivation to innovate, and are fit to work only in commoditized industries, yet most of our commoditized industries have been sent overseas. The government has unsuccessfully spent trillions on the economy to lessen market volatility, to reassure pensioners, to bolster bank and corporate balance sheets, and to create jobs. Over the past 10 years, spending growth for prisons has risen at a rate 6x the rate of spending on education because this society simply does not value education as much as it should. The truth of the matter is, we are all to blame. After inflating real estate and securities prices through leverage, after fighting senseless wars in pursuit of oil when we have enough natural gas reserves to last 200 years, and after allowing an entire generation of our citizens to lose their values of hard work and integrity, we ALL are to blame.

Instead of pushing our children to embrace globalization, we have allowed them to grow up isolated from the rest of the world. Instead of encouraging them to be productive and to earn their own keep from a young age, we have allowed them to spend hours watching brainless television and to lose themselves in drugs and alcoholism in communities where families aren’t the norm and divorce rates are greater than 70%. Instead of building secure homes, we have a bred a completely confused generation just asking to be taken advantage of by the rest of the world.

We need to OCCUPY MAIN ST.; we need to restructure America, the American lifestyle, and the American mind before it’s too late. We need to instill passion for innovation and entrepreneurship, we need to teach our children practical skills and make sure that they are proficient in math and science, we need to encourage competition, and we need to instill the values of hard work and integrity into our youth so they can grow up to be proud and self-sufficient.  No able bodied person should feel entitled to anything material in life without providing value or giving back to society.

Today, there are 45 million Americans on food stamps.



The number of very poor Americans (those at less than 50% of the official poverty level) has risen to 6.7%, or to 20.5 million.  This is the highest percentage of the population since 1993.  At least 2.2 million more Americans, a 30% rise since 2000, live in neighborhoods where the poverty rate is 40% or higher. Last year, 2.6 million more Americans descended into poverty, which was the largest increase since 1959.  In 2000, 11.3% of all Americans were living in poverty; today 15.1% of Americans are living in poverty. The poverty rate for children living in the U.S. has increased to 22%. There are 314 counties in the U.S. where at least 30% of the children are facing food insecurity. More than 20 million U.S. children rely on school meal programs to keep from going hungry. In 2010, 42% of all single mothers in the U.S. were on food stamps. More than 50 million Americans are now on Medicaid. One out of every six Americans is enrolled in at least one government anti-poverty program. I agree that we should help the poor and that compassion is a virtue, but shouldn’t these people help themselves as well? What specifically has caused their plight? Is only the government to blame? Are only the rich to blame? No, of course not.


Inflation adjusted wages have not grown since 1999, the S&P 500 is at 1998 levels, and real estate prices are at 2002 levels.  It is up to us to realize what caused the “lost decade” and avoid a “lost century.”

Why has this happened? By the 1970s, the average American was 20x richer than the average Chinese person. Today, it is only 5x. The Western world rose to power because “they had laws and rules invented by reason.” Our institutions, our basic freedoms and property rights, our discipline, and our motivation to work hard created $130 trillion of wealth in the Western World. Unfortunately, we have lost our work ethic and our intellectual drive. The average Korean works 1,000 hours more per year than the average German. The Chinese soon will have filed more intellectual property patents than the Germans. This is the END of the great divergence between the West and the East. There is little that differentiates us from the rest in a world that is being forced to understand the idea of resource scarcity more than ever before.

In 1776, Adam Smith, in The Wealth of Nations, explained how the East lagged behind because it lacked capitalism and property laws. Niall Ferguson explains how in addition to this, Competition, Applied Science, Property Rights, Modern Medicine, the Consumer Society, and Work Ethic propelled the West into prosperity:

[youtube]http://www.youtube.com/watch?v=xpnFeyMGUs8[/youtube]

This video link by Niall Ferguson shows why the Western world may lag behind as emerging market nations continue to gain in global wealth.

I am sick and tired of watching Occupy Wall Street protests. Stupidity should not be tolerated; we should educate the rest and Occupy Main Street. I asked a protester two weeks ago why he was protesting, and he could not give me a straight answer. His parents unfortunately didn’t teach him the values of hard work and self respect. It reminds me of the guy in this video asking for “millionaires & billionaires” to pay for his college tuition: [youtube]http://www.youtube.com/watch?v=wrPGoPFRUdc&feature=share[/youtube]

Contrast that young man with this young Asian immigrant, who hasn’t been able to set up his business properly in 2 weeks because of the protesters blocking access to his food cart:

[youtube]http://www.youtube.com/watch?v=ZxaUgI0Ascw&feature=related[/youtube]

I can’t believe I would ever say this, but even Ari Gold knows better: [youtube]http://www.youtube.com/watch?v=3Ajh8zKPMXc[/youtube]

Saudi Day of Rage – Fri., March 11th

Thursday, March 10th, 2011

We have seen riots in Tunisia, Algeria, Egypt, Libya, Bahrain…and now Saudi Arabia?  All of these countries have fallen victim to internal unrest because of both their lack of basic freedoms, and wealth disparity between the rich and the poor.  All of the countries above are known to be wealthy oil nations, but more than 20% of the youth in each are unemployed.  Grain prices in these areas have more than tripled, and food inflation is causing unrest.  Shiites in Saudi Arabia have also claimed discrimination, as almost all senior businessmen and officials are Sunni Muslims, despite qualifications and experience.  This has helped drive Brent crude prices to as high as $118, crippling both emerging and developing economies.  Some are calling for a “day of rage” on March 11th, while others claim it will be delayed…

According to CNN, protesters in Saudi Arabia called for a “day of rage” Friday, though longtime observers of the kingdom remained skeptical that it would make a major impact. ”I don’t think any protests that happen tomorrow will be destabilizing to the country,” said Christopher Boucek, a Saudi expert with the Carnegie Endowment for International Peace.

Prominent blogger Ahmed Al-Omran said the Saudi government remains unresponsive to the streets. ”I don’t think they’re really in touch with the people,” he said. Still, he said, Friday’s planned protests could set the tone in Saudi Arabia for the next few months.

The Saudi government prohibits all kinds of public demonstrations. But more than 100 Shiite demonstrators defied that ban and rallied Wednesday in the eastern city of Qatif, calling on authorities to release Shiite prisoners. A sprinkling of women were among the protesters, said Ibrahim Al-Mugaiteeb, president of the Human Rights First Society. Police kept a watchful eye but did not intervene, he said. Earlier, Saudi authorities had authorized its security forces to “take all measures against anyone who tries to break the law and cause disorder.”

Last week, about 24 protesters were detained in Qatif as they denounced “the prolonged detention” of nine Shiite prisoners held without trial for more than 14 years, Amnesty International said. Police kicked and used batons to beat three protesters in what was an apparent peaceful demonstration, Amnesty said in a statement. ”The Saudi Arabian authorities have a duty to ensure freedom of assembly and are obliged under international law to allow peaceful protests to take place,” said Philip Luther, deputy director of the human rights group’s Middle East and North Africa program. ”They must act immediately to end this outrageous restriction on the right to legitimate protest.” There was no immediate reaction from the Saudi government to the Amnesty statement.

The protests in the majority Sunni kingdom have followed similar demands across the Arab world for more freedom and democracy. Rights activists have been advocating the right to protest for months in the kingdom but they have been denied permission to assemble. Lately, grass-roots ferment mirroring the unrest across the Middle East and North Africa has emerged, with a Facebook group calling for days of rage and Shiites taking to the streets. Activists have been calling for reform and the release of people jailed without charge or trial.

Amnesty said the recent detentions came a week after a prominent Shiite cleric, Sheikh Tawfiq Jaber Ibrahim al-’Amr was arrested after a sermon calling for reforms in Saudi Arabia. He was released without charge Sunday. Most of the protesters are believed to be held in a police station in Dhahran, an eastern city. Among them are activists who have protested arrests and discrimination against the minority Shiites.

“The Saudi authorities must investigate reports of beatings of protesters by security forces. They should also ensure that those detained are either charged with recognizable offences and tried fairly or released,” Luther said. ”While in detention they must be protected from torture and other ill-treatment and given regular access to their family, lawyers and medical staff.”

The Shiite activists in “prolonged detention” have been held in connection with the deadly 1996 bombing of a U.S. military complex in Khobar in which 20 people were killed and hundreds injured. ”According to reports, they were interrogated, tortured and denied access to lawyers together with the opportunity to challenge the legality of their detention,” Amnesty said.

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will work until April 2011. Feel free to e-mail thomas.r[at]leverageacademy.com with questions.


Oil Should Spike Higher Following Saudi Riots and Nigerian Elections in April – Report Attached

Thursday, March 10th, 2011

The following special report on oil (LA Blog Only, leverageacademy.com/blog) discusses the oil market, providing reasons to be bullish  on the commodity given unrest in the Middle East, Nigerian elections in April, and rising domestic consumption in oil producing countries, including Venezuela, Nigeria, and Iran.  According to the article, the rise of oil prices could easily cause the next recession.   In 2010, soft commodities outperformed energy, but that will certainly change given the political headwinds abroad and continued monetary easing in the developed world.  Therefore, the Bernanke “Put,” combined with political unrest will be to blame for continued sharp price increases in the energy commodity sector.

Emerging market demand, especially in China, which now consumes nearly 10mm barrels of oil per day, will also be driving the demand side of the equation.  Money supply in China was also up 19.7% in 2010, because of the rapid credit growth the country has experienced over the past 2 years.

On the supply side, Middle Eastern youth continue to riot, causing political unrest across the globe.  In Egypt, Libya, Morocco, Saudi Arabia, Tunisia, and Bahrain, youth unemployment is over 20%, which is a severe concern, given the oil wealth of these nations.  The Iran crisis could also re-emerge as the country continues to develop nuclear weapons.  As Iran is mostly Shiite, it poses a great threat to its Sunni neighbors, including Saudi Arabia.  Major risks in the area include that the Straights of Hormuz and Malacca could be blocked in the Middle East if major riots break out.  These two passages account for 32 million barrels of crude transport per day.  The Straight of Hormuz alone carries 33% of oil transport by sea.  Furthermore, one should question how much Saudi Arabia can increase supply, as the country overstated its oil reserves by nearly 300 billion gallons in 2010.  Even if it does increase supply, how will this supply be transported to the West if passages are blocked?

There has not been one year in recent history where Nigerian elections have not posed a threat to the country’s oil supply.  Elections are often bloody, and there is no reason for the upcoming 2011 elections being held in April to be different.

To make things worse, the IEA increased its oil demand forecast by 1.6%.

On December 6th, Brent futures were traded in backwardation for the first time in two years, which means that futures with shorter maturities are more expensive than those with longer maturities (similar to an inverse yield curve).  Backwardation occurs in tight markets, whereas contango occurs when there is oversupply.

What will be the effect of these changes in the oil supply/demand equation?  Well, an increase in oil price tends to affect the economy with a time lag of at least 4-6 months.  An increase an oil price of $10 would cause GDP to fall by 25 bps and S&P earnings to fall by $3.00.

According to the IEA, 4.1% of GDP was spent on oil consumption in 2010.  A sustained price above $100 would mean that the percentage would increase to 5%.  Oil at $120 would mean a percentage increase to 6%, which would be devastating.

Special Report Oil March 2011

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


China’s Renminbi Heads for Floating Exchange Rate

Saturday, January 15th, 2011

It was announced earlier this week that China has launched its Yuan for free trade in the open market. China has managed to keep the value of the Yuan, also know as the Renminbi, at a depreciated value, which some analysts argue is undervalued by up to 40%. The Bank of China’s decision to move towards a floating exchange rate, though still tightly controlled, offers hope to those who believe China’s weak currency policy is the root cause of the global economic imbalance. The gradual inflation of the Renminbi may help take away China’s disproportionate advantage in export goods and bring jobs back to the US.

Call it liberalization by a thousand cuts.

 

The Bank of China, one of the country’s main state-owned lenders, is now allowing American firms to trade in renminbi, another step in China’s effort to position the renminbi on the world stage.

 

In July, China started a renminbi settlement system for cross-border trade in Hong Kong, but it placed limits on how much currency could be exchanged.

 

Currency trading in the renminbi was already possible at other banks, but the move by a state-owned lender signals a shift in official policy.

 

The Chinese central bank bowed to international pressure last summer and agreed to make its currency more flexible; the renminbi is now allowed to move as much as 0.5 percent each day. At the same time, the country is cautiously pursuing a strategy of making the renminbi into an international exchange currency.

 

“China sees the global financial system as too U.S.-centric and dollar dependent,”’ said Robert Minikin, senior currency strategist at Standard Chartered in Hong Kong. “That created issues during the financial crisis.”

 

Now, he said, the country is trying to take a step away from that dependence. “Conditions are in place for sustained yuan appreciation against the U.S. dollar,’’ he said, predicting that it would increase by 6 percent this year, to 6.20 renminbi per dollar.

 

With a forecast for high inflation in the expanding Chinese economy, an appreciating currency could help the country dampen so-called imported inflation by making foreign goods less expensive.

 

With the Bank of China move, China is promoting the renminbi to Americans at a time when loose monetary policy on the part of the United States Federal Reserve has some concerned that the dollar’s value will continue to decline.

 

The Bank of China said in an announcement on the Web site of its New York branch that trading firms and individuals could now open accounts in renminbi, buying the currency from and selling it to the bank.

 

While the limits on personal accounts are $4,000 a day and $20,000 a year worth of renminbi, and those accounts are largely for the purposes of exchange and remittance, the bank is also soliciting business from trading firms.

 

China’s decision to keep the renminbi effectively pegged against the dollar at an exchange rate that favors its exports has long been a source of contention between Washington and Beijing. China’s trade surplus with the United States was $181 billion last year, a 26 percent increase from the previous year, The imbalance is likely to put further pressure on the exchange rate.

 

That said, the renminbi hit a new high of 6.6128 against the dollar on Wednesday, an auspicious prelude to a visit to Washington next week by China’s president, Hu Jintao.

 

Separately, the city of Shanghai said it was creating a new investment window, allowing qualified private equity firms to buy renminbi and invest in mainland companies. Reuters reported that the pilot project could grow to be worth $3 billion.

M2 Reaches $8.8 Trillion in the U.S., a Record!

Friday, November 19th, 2010

Monetary stimulus has driven M2 to $8.8 trillion for the first time in history, an inflationary signal….In response, Silver is currently at $26.80 per ounce, down from the peak of $29.00.  Most don’t realize that the commodity was trading at only $$18 in August; a poor man’s play on inflation. Futures are also moving sharply to the downside, in anticipation of Bernanke’s speech in Frankfurt today, defending monetary easing.


According to Zero Hedge, seasonally adjusted M2 has just surpassed $8.8 trillion for the first time, hitting a record $8,802.2 billion, a jump of $16 billion on a SA basis. This is the 17th out of 18 consecutive weeks that M2 has increased. On a non-seasonally adjusted basis, M2 also jumped to a record high, hitting $8,765 billion, a jump of $56.9 billion W/W, and an increase if just over $100 billion in the past two weeks alone.

While the jump itself is not surprising as it comes in anticipation, and realization, of QE2 (we would love to have the semantic and highly theoretical debate of whether or not the Fed “prints money” but will focus on the practical for now), the last week’s components of the M2 change were odd to say the least. In the past week we saw both the biggest drop in commercial banks savings deposits in 2010 ($61.3 billion) and the biggest jump in demand deposits ($57.6 billion).

Whether or not this is due to the recently adopted unlimited guarantee by the FDIC on demand deposits is unclear, however as the chart below shows this is certainly a very odd move, and is indicative that there has been a notable readjustment in the bank deposit base. The surge in demand deposits brings the total to $536.2 billion, an increase of $94 billion from the beginning of the year. And despits the drop, savings deposits are also markedly higher compared to the start of the year: at $4,336.7 billion, $337.8 billion higher than at the end of 2009. Whether this is a pull driven transfer, as banks need to replenish their deposit basis is also unknown. We will keep a close eye on this, as such a major reallocation of bank deposit liquidity has not occured in over a year.

In other news, according to Zero Hedge, “Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, Bernanke considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China’s fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. As Albert Edwards summarized, the global game of chicken will continue until either China’s or America’s population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

Some choice quotes from Bernanke’s speech:

On how the US’s slower growth rate is threatening America compared to the rest of the world:

Since the second quarter of this year, GDP growth has moderated to around 2 percent at an annual rate, less than the Federal Reserve’s estimates of U.S. potential growth and insufficient to meaningfully reduce unemployment.  The U.S. unemployment rate (the solid black line) has stagnated for about eighteen months near 10 percent of the labor force, up from about 5 percent before the crisis; the increase of 5 percentage points in the U.S. unemployment rate is roughly double that seen in the euro area, the United Kingdom, Japan, or Canada.

Of particular concern is the substantial increase in the share of unemployed workers who have been without work for six months or more (the dashed red line in figure 4). Long-term unemployment not only imposes extreme hardship on jobless people and their families, but, by eroding these workers’ skills and weakening their attachment to the labor force, it may also convert what might otherwise be temporary cyclical unemployment into much more intractable long-term structural unemployment. In addition, persistently high unemployment, through its adverse effects on household income and confidence, could threaten the strength and sustainability of the recovery.

On the USD exchange rate:

The foreign exchange value of the dollar has fluctuated considerably during the course of the crisis, driven by a range of factors. A significant portion of these fluctuations has reflected changes in investor risk aversion, with the dollar tending to appreciate when risk aversion is high. In particular, much of the decline over the summer in the foreign exchange value of the dollar reflected an unwinding of the increase in the dollar’s value in the spring associated with the European sovereign debt crisis. The dollar’s role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years.

On Bernanke’s view that despite hopes for decoupling, the US is still the most critical driving force and should be allowed to get whatever it desires. If that means an export-led boost (and a low USD) so be it.

Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

Bernanke’s direct attack on China:

Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.

On Bernanke’s virtuoso performance on the the world’s smallest violin:

The current system leads to uneven burdens of adjustment among countries, with those countries that allow substantial flexibility in their exchange rates bearing the greatest burden (for example, in having to make potentially large and rapid adjustments in the scale of export-oriented industries) and those that resist appreciation bearing the least.

And a direct confirmation of Edwards’ assumption that by allowing commodity price super inflation, Bernanke is in essence forcing China to revalue as the chairman knows that while the US may be expericing surging food prices, China is getting that too, and then some.

Third, countries that maintain undervalued currencies may themselves face important costs at the national level, including a reduced ability to use independent monetary policies to stabilize their economies and the risks associated with excessive or volatile capital inflows. The latter can be managed to some extent with a variety of tools, including various forms of capital controls, but such approaches can be difficult to implement or lead to microeconomic distortions. The high levels of reserves associated with currency undervaluation may also imply significant fiscal costs if the liabilities issued to sterilize reserves bear interest rates that exceed those on the reserve assets themselves. Perhaps most important, the ultimate purpose of economic growth is to deliver higher living standards at home; thus, eventually, the benefits of shifting productive resources to satisfying domestic needs must outweigh the development benefits of continued reliance on export-led growth.

Bernanke’s conclusion for how to spank China:

it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy.

And by global economy, Bernanke of course means banker interests. Also, where he talks about other stuff, all Bernanke really means is that China should unpeg already goddamit, so that the $5 trillion in debt that has to be rolled in 2 years can start getting inflated already, cause we are cutting it close, and only China is staying in the way. Next up: China’s response. Might be time to stock up on Rare Earth Minerals again.”

Full Bernank speech.

Quantitative Easing II: A Video Tale of Mr. Ben Bernanke

Thursday, November 18th, 2010

Today, Ben Bernanke defended his second economic stimulus package, using monetary easing to lower interest rates and spur both spending and lending.  The first $2 trillion package apparently wasn’t enough, so now another avalanche of capital will flow into the United States economy and abroad.  When criticized by China and other East Asian economies now being flooded with excess capital flows, Bernanke claimed that both growth and trade are not balanced and that emerging market currency pegs were to blame.  Now begin the currency wars between the mature and emerging economies…can anyone actually win?  Bernanke claims that emerging market growth will be stimulated as the developed nations recover; therefore, a weaker U.S. currency could be better for everyone.  Only time, our inflation rate, and the price of gold will tell. (Paulson’s gold fund has certainly been on a tear…)

.
This video should provide some humor to the current situation.  The section on Mr. Dudley’s role at Goldman Sachs is pretty revealing…

[youtube]http://www.youtube.com/watch?v=PTUY16CkS-k[/youtube]

According to Bloomberg, “Federal Reserve Chairman Ben Bernanke, took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in prepared remarks to a conference later today in Frankfurt. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics including Republican members of Congress have said it risks fueling inflation and asset bubbles.

“Globally, both growth and trade are unbalanced,” Bernanke said, with economies growing at different rates. “Because a strong expansion in the emerging-market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

Group of 20

While Bernanke didn’t identify China, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Obama attacked China’s policy of undervaluing its currency.

Bernanke said that the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

International Panel

The Fed released the text of Bernanke’s speech in Washington ahead of the address scheduled for at 11:15 a.m. Frankfurt time at a European Central Bank conference on monetary policy. He will then speak on a panel at 11:45 a.m. with ECB President Trichet, International Monetary Fund Managing Director Kahn and Brazil central bank President Meirelles.

In the panel discussion, Bernanke will say that “financial conditions eased notably in anticipation” of the Fed’s stimulus announcement, “suggesting that this policy will be effective in promoting recovery,” according to a text released by the Fed.

It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

Global Call

In the speech, Bernanke called on policy makers around the world to “work together to achieve a mutually beneficial outcome — namely, a robust global economic expansion that is balanced, sustainable and less prone to crises.”

German Finance Minister Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster-growing economies such as Brazil, Meirelles said in October.

Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

Jobless Rate

America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

China’s Criticism

China’s vice foreign minister, Mr. Tiankai, said Nov. 5 that “many countries are worried about the impact of the policy on their economies,” echoing concerns raised across Asia over stronger currencies and possible asset-price inflation.

Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

The comments echo views of Obama administration officials including Treasury Secretary Geithner, who said Oct. 6 that “it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems.”

Depression Lesson

Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.””

China Censorship Laws Go Overboard, Ongoing Dispute with Google, Inc.

Sunday, May 9th, 2010

China’s “Great Firewall” has been around for too long.  It blocks websites for various sensitive topics and has been forcing U.S. based Google to abide by its censorship laws.   Many believe that the views of the Chinese government with respect to censorship  should be reassessed, especially after the country’s recent altercation with Google over what began as a mining incident in Vietnam (more details below).

The country screens through thousands of blogs and articles a day to hide literature regarding democracy, the treatment of the Dalai Lama, and other topics.

Officials now require a photo ID to create a domestic website.  The influence of online media is greater than ever, as internet users in the country have jumped from 30 million to over 400 million from 2000 to 2009.

According to the NYT, “Google, fresh off a dispute with China over censorship and intrusion from hackers, says it has identified cyber-attacks aimed at silencing critics of a controversial, Chinese-backed bauxite mining project in Vietnam.

In attacks it described as similar to but less sophisticated than those at the core of its spat with China, Google said malicious software was used to infect “potentially tens of thousands of computers,” broadly targeting Vietnamese speaking computer users around the world.

Infected machines had been used to spy on their owners and to attack blogs containing messages of political dissent, wrote Neel Mehta of the company’s security team in a post late Tuesday on Google’s online security blog.

McAfee, the computer security firm, said in a separate blog posting that it believed “the perpetrators may have political motivations and may have some allegiance to the government of the Socialist Republic of Vietnam.”

It added: “This incident underscores that not every attack is motivated by data theft or money. This is likely the latest example of hacktivism and politically motivated cyberattacks, which are on the rise.”

Google said that while the malware itself was not especially sophisticated, “it has nonetheless been used for damaging purposes.”

“Specifically, these attacks have tried to squelch opposition to bauxite mining efforts in Vietnam, an important and emotionally charged issue in the country.”

Bauxite is a key mineral in making aluminum and one of Vietnam’s most valuable natural resources. Plans by the Vietnamese government to exploit bauxite in the Central Highlands region, in partnership with a Chinese state-run company, have generated much local criticism, including from a well-known war hero, Gen. Vo Nguyen Giap.

General Giap and other opponents say the project will be ruinous to the environment, displace ethnic minority populations and threaten the south-east Asian country’s national security with an influx of Chinese workers and economic leverage.

The role of China in the bauxite project also has stirred up anger in a nation that still fears its bigger neighbor: Vietnam was a tributary state of China for 1,000 years and was invaded by China in 1979, and the two countries continue to joust for sovereignty in the South China Sea. ”


Australian Super Tax on Resource Producers Could Slow Down Commodities: Traders Wary

Sunday, May 9th, 2010

Australia is the largest supplier of coal and iron ore to developing nations such as China.  Government officials have been watching for the past five years as their resources have been exported to these ever-growing nations.    A resource tax was recently imposed on the largest Australian exporters of raw materials, so that Australian could benefit from the exploitation of their resources.  Unfortunately, this tax is both too high and comes at the worse time, as the western world begins to recover from the deepest recession since the 1930s.  Commodities producers have already halted projects in Australia in shock.  Talk about bad timing…as Greece falls into an abyss, other nations impose taxes to cut down production.

According to Ms. Daley of Bloomberg, “Australia will impose a 40 percent tax on the profits of resource companies like BHP Billiton Ltd. and Rio Tinto Group to pay for infrastructure, retirement and company levy changes as part of the broadest overhaul of its tax system since the Second World War.

The government, commenting on Treasury Secretary Ken Henry’s 10-year tax plan, said the tax would start in 2012 and raise A$12 billion ($11.1 billion) in the first two years. The move to better tap into the nation’s mining boom, fueled by commodities demand from China and India, comes as Prime Minister Kevin Rudd prepares for an election later this year.

“This will use super profits on resources owned by all Australians,” Rudd told reporters in Canberra, saying he’s prepared for a backlash to the measures. “This will help convert Australia’s strong economic position today into enduring prosperity.”

The changes set up a potential clash between Rudd and resources companies that make up 9 percent of the economy and last week warned that a 40 percent levy and double taxation with state royalties would threaten $108 billion worth of planned investment.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” BHP’s Chief Executive Officer Marius Kloppers said in an e-mailed statement today. The company’s effective tax rate will increase to 57 percent from 2013 from 43 percent now on its Australian earnings, it said.

Profit Cut

BHP, the world’s biggest mining company with 51 percent of its assets in Australia, will have earnings cut by 19 percent as a result of the tax, Merrill Lynch & Co. said in an April 27 report on the 40 percent tax. Rio, the world’s second-largest iron ore exporter, which has about a third of its assets in Australia, would see a 30 percent earnings cut.

The proposal may erode Australia’s “competitiveness, severely curtail investment and limit job growth,” said David Peever, Rio’s managing director for Australia.

“Altering the rules for existing multibillion dollar projects in mid stream, after large amounts of capital have already been put at risk over many years, would be the worst possible message Australia could send to investors,” Peever said in a statement.

The government today said it will compensate companies for the state royalties they have paid.

‘Highest’ Taxes

“Under the plan announced today, Australia will have the highest taxed mining industry in the world,” Minerals Council of Australia Chief Executive Officer Mitch Hooke said in an e- mailed statement. “Australia’s hard-earned reputation as a stable investment environment will be dramatically undermined.”

The government runs the risk of “taking away from Australia the strongest industry we have and the one that saved us from the global financial crisis,” said Keith De Lacy, chairman of Brisbane-based Macarthur Coal Ltd., the world’s largest producer of pulverized coal. “Always 50 percent of our net profits went into development and exploration and so much of that is going now so obviously we’ll grow slower.”

The introduction of the resource tax would cut Australia’s competitiveness, Citigroup Inc. said on April 28 before the release of the review. Mining companies’ tax burden currently stands at 35 percent, Citigroup said in its report last week.

Chinese and Indian demand for resources from Australia, the world’s biggest exporter of coal, iron ore and alumina, helped the A$1.2 trillion economy skirt recession during the global financial crisis. China is the nation’s largest resource customer.

Aging Population

Rudd’s Labor government, which has led the opposition Liberal-National coalition in opinion polls, commissioned the tax review two years ago to create a simpler and fairer system to meet the needs of a growing and aging population. One quarter of a projected population of 36 million will be aged 65 and over by 2050, increasing pressure on roads, rail, ports, schools and hospitals.

The government will use the resource tax revenue to create a A$5.6 billion infrastructure fund, cut company taxes to 28 percent in mid-2014 from the current 30 percent and boost retirement funds, now worth A$1.3 trillion. It will also give a tax concession for resource exploration, including geothermal, affecting 4,300 companies, Treasurer Wayne Swan said.

The company tax rate, reduced to 30 percent from 36 percent by the previous Liberal-National government, will be cut to 28 percent by mid-2014, with 720,000 small businesses getting a one-year head-start. The government may decrease the rate further.

Retirement Funds

The government will also increase the amount companies have to pay into people’s retirement fund to 12 percent from 9 percent of their gross salary in mid-2019. Australia will also make it more attractive for some 8.4 million Australian workers to increase their own contributions to the pool and the changes will add A$85 billion to the A$1.34 trillion fund, Swan said.

In total, the government’s tax policy changes will add 0.7 percent a year to the nation’s economy.

Economic growth in Australia will accelerate to 3.5 percent in 2011 from 3 percent this year, and the country will continue to be among nations leading the world on raising borrowing costs, the International Monetary Fund said on April 21. Glenn Stevens, the first Group of 20 central bank governor to raise rates after the global recession, also expects Australia’s economic growth to strengthen this year.”

KKR & TPG Interested in Purchasing CICC Stake from Morgan Stanley

Monday, March 1st, 2010

Over the past three years, Morgan Stanley has had difficulty managing its stake in CICC or China International Capital Corp., one of China’s most prominent investment banks.  Recently both TPG and KKR, two of the most powerful private equity firms in the U.S. announced that they were interested in purchasing this stake from Morgan Stanley.  Other firms, including Bain and J.C. Flowers had showed interest in 2008, but valuations for too low at that point for Morgan Stanley to sell.  Morgan Stanley will now be able to start its own investment bank in China without having a conflict of interest.

According to Bloomberg’s Cathy Chan, ” TPG Capital LLP and Kohlberg Kravis Roberts & Co. are in final talks to buy Morgan Stanley’s stake in China International Capital Corp., the first Sino-foreign investment bank, for more than $1 billion, said four people with knowledge the matter.

The U.S. private equity firms plan to equally split Morgan Stanley’s 34.3 percent holding in CICC, the people said, asking not to be identified because the talks are confidential. Bain Capital LLC lost out in bidding for the stake after offering less than $1 billion, one person said.

Selling the stake will allow Morgan Stanley to build its own investment bank in China after being a shareholder in CICC for a decade without having management control. It’s the bank’s second attempt to dispose of the stake, after talks with buyout firms fell apart in early 2008 on disagreements about price. New York-based Morgan Stanley invested $35 million in CICC when it was established in 1995.

“It’s a good profit and Morgan Stanley has been seeking to build its own platform as they can’t exert influence on CICC,” said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities Co. “For the buyout funds, it’s nice choice of investment if you don’t mind being a passive investor.”

Morgan Stanley ceded management control in 2000 and CICC is now run by Levin Zhu, the son of former Chinese Premier Zhu Rongji.

China Fortune

The Chinese government allowed Morgan Stanley to invest in CICC in return for the expertise required to build China’s first investment bank. Elaine La Roche, the last Morgan Stanley- appointed head of CICC, stepped down in June 2000. The partners bickered about compensation, management and strategy and that lack of consensus worked against both firms, she said in a 2005 interview.

Wei Christianson, Morgan Stanley’s chief executive officer in China, declined to comment, as did Joshua Goldman-Brown, an outside spokesman for KKR in Hong Kong, and officials at TPG. The Wall Street Journal and Financial Times earlier reported the two buyout firms are close to acquiring the CICC stake.

Morgan Stanley signed an initial agreement in 2007 to buy a one-third stake in China Fortune Securities Co. Regulators declined to sign off on that venture, partly because Morgan Stanley already owned a stake in CICC, people with knowledge of the matter have said.

“They have to start building the business from scratch and it will take five years before they can expand beyond underwriting business if they decide to be on their own,” Liang said.

Top Underwriter

The China Securities Regulatory Commission said late 2007 that overseas-invested financial firms that had been operating for five years would be allowed to expand into brokerage services.

CICC was last year’s top manager of Chinese domestic equity offerings, rising from No. 2 in 2008, according to data compiled by Bloomberg. Domestic equity and equity-linked sales in China rose to 245.6 billion yuan ($36 billion) in 2009 from 232 billion yuan a year earlier.

Buyout firms including TPG, Bain Capital, CV Starr & Co., J.C. Flowers & Co. and General Atlantic LLC showed interest in the CICC stake in 2008, people familiar said at the time.

Goldman Sachs Group Inc. was the first Wall Street investment bank to gain approval to form a securities venture in China in 2004, followed by UBS AG.

Credit Suisse Group AG and Deutsche Bank AG ventures won approval to underwrite bond and stock sales in 2008 and 2009 respectively, while Macquarie Group Ltd. is in the process of getting regulatory approval. CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, formed its China venture in 2003.”

~I.S.