Tire Tariffs: Now Is Not The Time To Start A Trade War

With global trade already down 20% as of July, Martin Hutchinson from Money Morning explains why starting a trade war with our most important trade partner could cause catastrophic damage. If the trade dispute escalates, the US may have the most to lose. See the following post for more on this.

When U.S. President Barack Obama late Friday (Sept. 11) signed an order that imposed an additional duty of 35% on tires imported from China, it set up the potential for an old-fashioned trade war.

Currently, global trade is down only 20%. During normal times, worldwide commerce would recover on its own. But as most investors understand all too well, these aren’t normal times.

Global trade fell by 35% after last September’s financial crash. And it plunged 65% between 1929 and 1932 as a result of the Great Depression. With the worldwide economy already in a weakened state, a bare-fisted trade war between the world’s two most important trading partners – the United States and China – would be devastating.

Call it “Great Depression II: The Sequel.”

Courting Trouble
When it comes to trade wars, there are two factors that are important to understand. First, once a trade war starts, everyone tends to join in. And second, once this happens, there’s no percentage in being the only free-trading country left in a totally protectionist world.

That’s what President Obama is risking. The 35% tariff he imposed is in addition to an existing 4% import duty. His action should be met with loud protests – not just from China, but from here in the United States and from Europe, too. We must stop the dreadful downward momentum from building.

The Chinese government has replied by accusing the United States of blatant protectionism as part of a World Trade Organization (WTO) complaint. And China is also threatening to retaliate against imports of U.S. poultry and vehicles. This all sounds arcane, but it isn’t. This escalating tiff over tire tariffs has the potential to damage the global economy much more than the banking crisis ever did.

President Obama’s action comes as a result of an “anti-dumping” investigation by the International Trade Commission (ITC) of the U.S. Department of Commerce. Competitors tip off the ITC about foreign imports that are allegedly being “dumped” – that is, sold below their full costs of production. Why U.S. voters should care about dumping is an interesting question.

Dumped products are effectively being subsidized by China.
However, even if dumping mattered, the ITC is an inadequate body to investigate the alleged trade infraction. The commission has no subpoena powers in China. And it is subject to intense lobbying from advocates on only one side of the controversy.

Not surprisingly, the World Trade Organization (the proper judge of such claims) does not regard unilateral anti-dumping claims as an acceptable excuse for randomly imposing extra tariffs on imports. The whole purpose of trade agreements – several of which the United States promoted and signed – is to prevent that kind of thing.

During the 2008 presidential campaign, there was considerable debate about whether then-U.S. Sen. Obama was a protectionist.

Candidate Obama cheered union audiences by announcing that he wanted to renegotiate the North American Free Trade Agreement (NAFTA). But then his economic spokesman, Austan D. Goolsbee, was accused of holding a meeting with the Canadian embassy, and saying Obama wasn’t serious. The tough talk about NAFTA was only campaign rhetoric, Goolsbee allegedly confided to his Canadian audience. Then Obama’s campaign people said that no such meeting occurred.

Now that he’s in the White House, the fog obscuring President Obama’s views on trade is beginning to clear. In Group of 20 (G20) meetings, he’s paid lip service to free trade. But his actions contradict his statements.

President Obama has done nothing to advance the South Korea and Colombia free trade agreements, stuck in Congress since 2007. He has also done nothing to revive the stalled Doha round of trade talks, though his global prestige is so high he could easily have done so. That would be no small achievement. The World Bank estimates that a deal would add $100 billion a year to global trade.

Worst of all, however, is that President Obama now appears to be doing nothing to enhance trade with China, the country that will be our most important trading partner for generations to come. In the past two weeks alone, he’s twice imposed anti-dumping duties on China. On Sept. 9, the administration said it imposed a 23% duty on $2.6 billion worth of steel pipe from China.

President Obama owes a lot to union support, and it’s pretty clear that he is prepared to go along with Big Labor’s protectionist agenda. But the two cases are very different and one has to question whether the gains will be worth the very real costs.

In terms of the actual dollar value – as well as indirect economic costs – experts say the steel-dumping case may be the biggest case in years to be brought before the nation’s trade-dispute system. It demonstrates that there’s a deep-and-growing concern that Beijing’s industrial subsidies are translating into lost U.S. jobs.

The tire case may be a different story, however. It involves the “low-grade” tire market. The profit margins in that slice of the tire market are virtually non-existent. In fact, U.S. tire manufacturers did not join in the complaint. The reason: They actually lose money in the low-end market. Most had already abandoned it to China-based rivals, reports Irwin M. Stelzer, a columnist and director of economic policy studies at the Hudson Institute.

The One Sequel That Shouldn’t Be Made
None of this would matter much if the global economy were sailing serenely along, as it did before the financial crisis struck. For the 20-year stretch that ended in 2007, world trade advanced at a pace that was slightly faster than global economic growth in general. Against such a relatively healthy backdrop, minor disputes on tires or metal pipes would be of interest only to the tire and metal-pipe industries. And perhaps to the poultry or other industries against which China chose to retaliate.

But the global financial crisis changed the game. For a couple of months immediately following last September’s near-meltdown of the world’s financial system, global trade plunged by an astonishing 35% from its normal levels. That wasn’t really a surprise. U.S. consumption was way down. And the near-freeze-up in the banking system made trade financing very difficult to get.

That 35% drop was not as bad as the 65% plunge in world trade that came during the first four years we during the Great Depression between 1929 and 1933. But let’s face it, a stretch that’s half as bad as the Great Depression – even a relatively short one – is still pretty serious.

Global trade has since recovered somewhat, as trade finance has once again become available. As of July, it appears to be down about 20% on the previous year. However, that’s still a lot: Economic activity on a worldwide basis is down about 5%.

Even U.S. retail sales are down only around 8%. The U.S. consumer is being more careful than before, but still is spending at a pretty rapid clip.

By comparing all these numbers, we can come to only one conclusion: Global trade is still ailing as a result of the financial crisis.

Lower global trade affects all of us. Thanks to a concept called “comparative advantage,” the whole point of trade is that it allows each item to be manufactured in the place that’s most efficient. So if trade is blocked, as it was in the 1930s, the whole world economy becomes less efficient, output declines, and we enter a Great Depression (in which U.S. GDP nose-dived 25%).

There’s no reason a Great Depression has to follow a banking crisis. After all, the world has had lots of banking crises, both before and after 1930. And virtually every one has been followed by only a medium-sized recession.

The one banking crisis that set off a really serious downturn was that of 1837, after U.S. President Andrew Jackson abolished the Second Bank of the United States. The Second Bank’s notes were the main mechanism for financing trade between different parts of this still-young country. So President Jackson’s action effectively wiped out about 25% of the U.S. money supply. Not surprisingly, things got very tough for several years.

As tough as that period was, a 67% freefall in world trade would clearly plunge us into a much more dire period. In fact, were world trade to decline by two thirds, there would be no way of avoiding “Great Depression II – the Sequel.”

And this is one sequel everyone is certain to hate.

This post has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.

Chinese Investment In Silver Could Push Up Prices

Now that Chinese citizens are not only allowed to invest in silver, but encouraged to, there is reason to believe that this could push up silver values. The Chinese are savvy investors and are skeptical of the security of American dollars, which may mean a shift to greater investment in precious metals like silver and gold. The following article from Daily Wealth explains why an increase in Chinese demand for silver can have a significant impact on prices.

Two years ago on August 21, China's government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.

Hong Kong is a special region of China. It's one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward "investment freedom" for the Chinese people.

On that day, Hong Kong's benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years: When the Chinese decide to invest in something, it causes giant ripples across the world.

This sort of situation is starting to happen again: This time it's happening in precious metals... especially silver.

The Chinese have a centuries-old affinity with silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with gold and silver. After the Chinese threw off imperial rule in 1912, the country used silver money. Today, the Chinese word for "bank" means, "silver movement."

And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want silver again.

Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them... so they invest.

I recently watched a China Central Television piece on gold investing... According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of gold. The average gold ownership in most emerging countries works out to about 1 ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in precious metals.

Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn't seem like much, when you add up all those households, there's about $36 billion that could move into the next big investment opportunity – precious metals.

The government is now actively encouraging its citizens to buy gold and silver. They recently unveiled silver bullion for investing (you can see the video here). The premise is that gold was 50 times more expensive than silver in 2007... but is now 70 times more expensive.

The government is promoting silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at U.S. Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets... real money like gold and silver.

What does this mean for silver prices? It's impossible to say. But here's a little math that interests me. According to the Silver Institute, demand for silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today's price, that's an $11.5 billion market... or about 1/3 the capital available in China alone.

The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn't legally buy silver bars before. Now, they can. They're becoming richer... and they will continue to do so for decades.

Add this to a world already waking up to the grand currency debasement you've read about in DailyWealth (like here and here), and you have a recipe for the continuation of the big bull market in silver and other precious metals.

This post has been republished from Daily Wealth, an investment analysis and advice site.

China's Economic Strategy To Become The World's Biggest Superpower

China is taking advantage of the global recession to position themselves to eventually become the world's number 1 superpower. They are lending out massive amounts of money to countries like the US, and stockpiling gold in order to prepare for the possible fall of the dollar. Tony Straka from The Prudent Investor explains China's economic strategy and why we should all be watching very closely.

Shocked by the fact that lamestream media and Twitter are all about Michael Jackson's death from what appears to be a drug overdose, I enjoy being the spoiler for a world that seemingly does not know how to set its priorities anymore. While 33 of the 42 commercial media I regularly read headline with Jacko, it is Chinese media that published the truly important news of the day.

Here's the executive version of Chinese economic news picked from the English language People's Daily Online.

1. China takes public ownership as the main body and the other (issue) is to adhere to the common growth of economy belonging to diverse forms of ownership.
2. The People's Bank of China (PBoC) will stick to an appropriately easy monetary policy but will ensure reasonable growth in money and credit, the central bank said yesterday.
3. New credit in the first half of 2009 will definitely surpass 6 trillion yuan, and some experts even predict the figure to be up to 6.5 trillion yuan. This means that total credit in the first half of this year will be more than the total amount invested in any year since China was founded.
4. China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said.

You can now go back to watch CNN's US propaganda broadcast and remain in the "don't worry, be happy" camp which still has a solid majority in the Western world. Or would you prefer to gather a little more intel on the next #1 power in the world? Then read on.
Bullet point #1 appears to point to a struggle of ideologies in the Chinese communist party. Chinese entrepreneurs certainly favor a more liberal business climate but one must not forget that there is still a gap as wide as the Amazon river between the Ferrari driving riches in towns and a rural hinterland where oxcarts and bicycles remain to be seen as signs of prosperity. In order to prevent social upheaval China needs to bridge this gap or it risks falling apart. The anonymous commenter in the People's Daily reminds the world that China still favors a hands-on approach:

Taking public ownership as the mainstay is a fundamental principle of socialism. In a socialist country like China, where people have become masters of their own destiny, it is imperative to keep public ownership of means of production as a basis of the socialist economic system. So, adherence to public ownership as the main body is of vital importance in giving play to the superiority of the nation's socialist system, increasing the nation's economic strength and promoting social harmony in the country.

Pointing out, that 26 of the 500 largest companies in the world as of 2008 are state-controlled Chinese corporations, the most populous nation on earth insists that it is not so much about ownership-ideology but about keeping up a harmonious people.

In a nutshell, it is imperative and essential to consolidate and develop the public ownership economy, to encourage, support and guide the growth of the non-public sector economy, and to maintain the right to equal access of property resources, so that a brand-new situation will emerge, in which all economic sectors will "vie with each other" on an equal footing so as to spur their economic activity for mutual advancement.

Confronted with a global economic downturn China's central bank made it clear this week that it will emphasize an easy monetary policy to keep its economy humming despite declining exports. In a stark contrast to the indebted western world China sits on roughly $2 trillion in assets, enabling it to conduct stimulus policies no country in the Western hemisphere could afford. Read their opinion on bullet point #2 in their own words as it also signals a concern about the environment:

In a summary of the conclusions drawn at its second-quarter monetary policy committee meeting, the central bank said yesterday that it would ensure reasonable growth in money and credit but would strictly control lending to polluting, energy-intensive industries...
"The top priority at the moment is to stop the explosive growth in lending at the end of the month and quarter," China Banking Regulatory Commission said in a recent notice to lenders, pointing to the phenomena of banks racing to offer loans before June to meet their half-year lending targets.

The Eastern dragon so far performs much better than any recession-stricken nation in the West, where money supply has rocketed to potentially fatal (hyper inflationary) levels. Covering bullet point #3 in their own words, China plays its monetary muscle.

People's Bank of China Monetary Policy Committee recently held a regular meeting on the second quarter of 2009. The conference studies the orientation of monetary policy and measures for the coming future, concluding that we need to implement moderately easy monetary policy and maintain the continuity and stability of policies to guide a reasonable growth in monetary credit.
It is learned that in the first five months, RMB loans increased by 5.84 trillion yuan. June figures have not yet been released, but according to past experience, new credit in the first half of 2009 will definitely surpass 6 trillion yuan, and some experts even predict the figure to be up to 6.5 trillion yuan. This means that total credit in the first half of this year will be more than the total amount invested in any year since China was founded.

2 Ways Through a Recession: China Can Afford It Because of Savings
Show me a Western country that could shell out a trillion Euros/dollars from its full pockets! There is no such thing. All stimulus packages Western politicians promise are only backed by the hope of future tax payments. China can dive through a recession on its savings whereas the so called first world has nothing else to show than debts that are enough of a burden for the two next generations.

Wouldn't we all love to have the same economic discussion as the Chinese where economists argue whether the economy has bottomed out at a growth rate of 6.1% in Q1 2008 or whether one should be skeptical about a possible GDP growth rate of 9%?

Diving into recent history (i.e. this blog's archive) China can actually see the global downturn as a benefit that helps keeping the economy from overheating. BTW, why are we actually concerned with "overheating" economies? Don't we all want to become rich by tomorrow? But I won't digress, this is an entirely different discussion best to be had over a bottle of good plum wine.

Let's better proceed to bullet point #4: China's growing role in forex markets.
Reuters staffers Zhou Xin and Alan Wheatley direct my attention to the fact that China sees a much bigger role of gold in global currency policy after surprising the world with the fact that it had domestically purchased gold and now sits on a hoard of 1,054 tonnes after publishing a figure of 660 tonnes since 2003.

Buy Gold Before China Buys It All

The communist party's chief economist told Reuters the following strategic goals (found on GATA's website):

China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said on Thursday.
Li Lianzhong, who heads the economic department of the party's policy research office, said China should use more of its $1.95 trillion in foreign exchange reserves to buy energy and natural resource assets.
Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.
"Should we buy gold or U.S. Treasuries?" Li asked. "The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice."

Following the nuances of Chinese official-speak it is clear that China sees itself superior in monetary policy but is left with a problem it shares with all creditors in the world: Its forex reserve stash consists mainly of unbacked Federal Reserve Notes (FRNs), a fiat currency backed by nothing else than the belief it will buy you the same amount of goods and services in the future as it did in the past.

China takes appropriate steps at its own rhythm to secure a bigger role for the Yuan in the future. Looking at the Yuan's slow revaluation so far China has made good on its promises to the bankrupt USA.

The Reuters story sums it up correctly:

Li cited the high share of gold in the foreign exchange reserves of the United States, Italy, Germany, and France to argue that China's gold holdings, which account for about 1.6 percent of its reserves, are too small.
China does not disclose the composition of its currency reserves, but bankers assume around 70 percent is held in dollar assets.
China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data.
Analysts say this data set understates the true number as it does not capture paper bought through dealers in London or elsewhere.
Li said a second reason for buying more gold would be in anticipation of the yuan one day becoming a reserve currency.
The yuan is not convertible on the capital account, meaning it cannot be freely traded for other currencies for financial transactions that are not related to trade. This rules out the yuan's use as an international reserve currency, for central banks would not be able to convert it quickly if necessary.
But in a very preliminary step toward that goal, China is paving the way for greater use of the yuan beyond its borders.
The People's Bank of China has arranged currency swap deals with six countries since December totalling 650 billion yuan ($95 billion) so that trade and investment with China can be conducted in yuan, not dollars.
And China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan, or renminbi.
"If the yuan should go international or become a reserve currency, China needs more gold to back that," Li said.

One must not forget that China's political state supports long term strategies for which Western leaders who want to get reelected every 4 years have no leeway.
Reuters fills in here very well too:

When the yuan does become an international currency, which Li acknowledged was a long way off, he said the composition of the SDR should be reformed to include the Chinese currency.
Ideally, in the long term, the SDR would be made up of the dollar, euro, sterling, yen, and yuan, each with a weighting of 20 percent, Li said.
The SDR is currently made up of the dollar (with a weighting of 44 percent), the euro (34 percent), the yen (11 percent), and sterling (11 percent)
The four currencies in the SDR, which must be convertible, are those issued by fund members with the largest share of global trade. The weights assigned by the IMF are based on the value of exports and the amount of reserves denominated in those currencies.
The composition of the basket is reviewed every five years. the next review is due in 2010.

Rest assured that the dragon will blow some hot air down the Western world's spine in the run-up to this review.

This was reposted from Tony Straka's blog, The Prudent Investor.

Why The Yuan Will Become The New Global Currency

Should we be worried that China's yuan will overtake the dollar as the new default global currency? Investment Director of Money Morning, Keith Fitz-Gerald thinks it's not a matter of if but when. In the following article, Fitz-Gerald, makes the argument on why he thinks that the yuan will eventually become the dominant global currency.

China has taken yet another step to transform the yuan into the dominant global currency, a long-term initiative that could ultimately dethrone the dollar as the world’s top unit of exchange.

In the last four months alone, China has signed currency swap agreements worth more than $95 billion (650 billion yuan) with an array of nations - including: Argentina, Brazil, South Korea, Indonesia, Malaysia, Belarus and Hong Kong - that are only too glad to move away from the increasingly shaky U.S. dollar.

For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon.

But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle. In fact, I’d even go so far as to say the dollar’s days of dominance are numbered and with each new round of bailout chicanery, the clock is winding down ever faster.

Asia’s Long-Term View

In such Asian markets as Japan, Hong Kong and Mainland China, the long-term planning that’s an anathema to Corporate America is actually standard fare. During the height of Japan’s dominance in the 1980s, the Western business press - with a touch of derision - wrote about how some Japanese companies routinely formulated business plans with durations of 100 years or more (while working in Asia early in my career, I actually even contributed to several such plans … but that’s another story for another time).

That’s neither here nor there to most people who note smugly that Japan is getting its comeuppance. But what they don’t understand is that Japan is not alone. In fact, many people I talk with are shocked to learn that at a time when the West is still busy handing out Band-Aids in an attempt to deal with the greatest financial crisis on record, China has been quietly and shrewdly reinventing itself with the same kind of long-term vision.

Take commodities, for example. While companies in the United States, Great Britain and Europe are being forced to shed promising assets in order to compensate for massive losses or to pay down debt, cash-rich China has been able to operate as a buyer in a buyer’s market. While the rest of the world has interpreted this as a sign that China’s interested in buying the things it needs to grow, what they have not understood is that China’s also interested in using physical assets as a source of “currency” that offsets an increasingly eviscerated U.S. dollar.

This is actually a double-whammy of sorts, for while the rest of the world has been grappling with the global slowdown, China has been locking up supplies of commodities that are only going to become more scarce (and more valuable) as global demand escalates.

In fact, as I’ve suggested for months, now, China isn’t just going to consume those assets; it’s going to use them as part of the same long-term vision it’s been staking out with regard to its own currency, the yuan, which it fully intends to boost in status to the point where it becomes an internationally accepted currency.

The Once-Dominant Dollar

That’s quite a turn of events.

Even now, despite the travails of the U.S. economy, the dollar remains the world’s most widely held reserve currency and, as such, is the standard unit of exchange in most international transactions. In fact, many non-U.S. firms (such as Airbus SAS) actually price their manufactured products in dollars. And the dollar is the de facto unit of pricing for such commodities as oil (hence the term “petrodollar“). Several countries even use it as their “official” currency.
But the global financial crisis is threatening that dominance.

The United States has already “injected” into the world economy trillions of dollars that are collectively worth more than 60% of this country’s entire gross domestic product (GDP). And the prospect of still more injections for California, GMAC LLC and other “national” interests is extremely worrisome - and not just to millions of Americans, either. If Washington stays on this path, the result will be a currency crisis the likes of which few are capable of imagining and a near-complete devaluation of the once-almighty U.S. dollar.

Ironically, both events will only further embolden China, speeding up its efforts to boost the yuan’s international acceptance.

The “New” Yuan

While some experts may question Beijing’s motives, it’s hard to question China’s long-term strategic vision, since the country is actually being forced to take these steps that ensure its own survival. Unfortunately, our leaders in Washington don’t seem to understand this, so they’re only making matters worse - when they instead could be actively working with China and the world community on this instead of summarily ignoring the fact that the yuan may well be the world’s next reserve currency.

At the very least, China’s currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not.

I’ve outlined this scenario many times in recent years and, quite frankly, too often received blank stares in return. Most folks here in the West just aren’t prepared to deal with the idea that the U.S. dollar could be finished and that another currency could replace it after more than 60 years of global dominance. But they better get used to the idea - and in a hurry.

China is acutely aware that not having international currency convertibility hampers both its development and - thanks to the ongoing financial crisis - its potential survival. Not only has China been forced to accept huge reserves built upon previous trade growth (its $2 trillion in reserves is an all-time record), but its own policies have contributed to its relative inability to flex its capital-market muscles. That’s especially true in transactions involving U.S. dollar/yuan exchange rates.

What for us sounds quite theoretical in nature represents a very real problem for businessmen such as Dong Xianbin, the chairman of the Guangxi Sanhuan Enterprise Group Holding Co. Ltd. He estimates that he’s lost more than 150 million yuan (about $22 million at current exchange rates) on international trade in the past three years alone because of exchange rate changes between the dollar and the yuan. So he’s keen to see yuan-based transactions that will reduce exchange-rate risks, or eliminate them entirely. And he’s not alone. Thousands of Chinese companies are chomping at the bit for the same reasons.

As a nation, not having a universally accepted currency is a huge issue. China’s record reserves are now at risk thanks to the U.S. government’s bailout boondoggle, because each new greenback printed debases the value of every other dollar out there, including the ones China holds.

Historically, Beijing sought to mitigate that risk by diversifying its holdings into other currencies most notably the European euro and the Swiss franc, for instance. But now China’s facing the kinds of problems that massive mutual funds closer to home must deal with when they hold a disproportionately large amount of money: China’s reserve fund is so massive that there’s literally no other single currency that can absorb all that liquidity. So even if China wanted to diversify more aggressively, it’s going to be hard pressed to do so.

Incidentally, this is precisely why China’s so-called “nuclear option” will never become more than a theory bandied about by conspiracy buffs. Under such a scenario, China will either “dump” its dollars, and/or stop buying them, causing the value of the greenback to plummet. China might start selling, but there literally is not another currency on the planet that could absorb a wholesale liquidation.

Therefore, the reality is that China needs to have the U.S. boost the value of the dollar - even as the United States needs to have China do all it can to maintain the dollar’s value.

Shopping for Commodities

At this point in time, China essentially has two alternatives:

• It can seek out other stores of value, such as natural resources, which are highly liquid and reasonably “deep” in global markets, but which can also be very volatile from a pricing standpoint.

• Or it can elevate the credibility of its own currency in the international financial markets and effectively remove the exchange rate risks associated with its own partially blocked yuan.

Never one to leave anything to chance, China is pursuing both strategies. For instance, China’s been buying gold like there’s no tomorrow - and is looking to add to its holdings. Since 2003, China has boosted its holdings of gold by 73% to an estimated 1,054 metric tons, with an approximate value of $31.3 billion. This makes China the fifth-largest holder of gold on the planet, followed by the United States, Greater Europe, and Switzerland.

China’s also gone global in its hunt for oil - which, of course, is the only other global “currency” truly in international demand.

While there’s a real benefit to having locked up supplies of commodities, they aren’t an ideal store of value. And that suggests that what China really needs to do is elevate the global prominence of its own currency at the same time, whether U.S. leaders aid the process or not.

History shows that strong economies tend to have strong currencies. And the actions that I’ve reported on recently from China - the cross-Straits agreements reached between China and Taiwan, the Hong Kong yuan-trade agreements and the “yuan carry trade,” to name a few - only reinforce the effort China is putting forth to achieve this goal.

Speaking of goals … there are obviously plenty of Doubting Thomases on this issue - but they were around years ago before China announced that it wants to put a man on the moon by 2020.

This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.

Could The Yuan Become The World's Next Reserve Currency?

The U.S. dollar has faced some serious attacks lately, and our economy here in the U.S. is struggling, but have things really gotten so bad that the USD could lose its place as the world's reserve currency? And even if it did, wouldn't the Euro be next in line to take its place? According to Nouriel Roubini, the next world reserve currency could in fact be the Chinese Yuan, and the transition could happen sooner than we think. For more on this, read the following blog post from Mark Thoma which looks at Roubini's recent article on the subject.

Nouriel Roubini is worried that the dollar will lose its status as a reserve currency if we don't change our ways:

The Almighty Renminbi?, by Nouriel Roubini, Commentary, NY Times: ...While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear. ...

The... downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. ...

At the moment,... the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. ...

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. ...

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. ... For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

This post can also be viewed on economistsview.typepad.com.

Expectations Of A Dollar Collapse

So far — despite the huge run up in U.S. debt — the U.S. dollar has held strong during the financial crisis, however, Andy Xie expects a major collapse to come. He feels that pressures from China, and an overall loss of faith in the U.S. financial policy, will destroy the greenback. For more on this, read the following blog post from Mark Thoma.

Andy Xie expects the dollar to collapse:

If China loses faith the dollar will collapse, by Andy Xie, Commentary, Financial Times: Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. ...[T]he Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn in foreign exchange reserves, mostly in dollar assets. ...[T]he US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse. ...

The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese ... may account for half of the foreign holdings of dollar assets. ...

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. ... The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out. ...

Other currencies are not safe havens either. ... Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. ...

America’s policy is pushing China towards developing an alternative financial system. ... Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote... However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

Barry Eichengreen explains why using SDRs as a reserve currency, as has been suggested by the governor of the People's Bank of China, is not as easy as it might seem:

Commercialize the SDR now, by Barry Eichengreen, Commentary, Project Syndicate: Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency. ...

Sympathizers acknowledged the contradictions... Central banks understandably seek more reserves as their economies grow. But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost. In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash. ...

But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency. It is a composite accounting unit in which the IMF issues credits to its members. Those credits ... cannot be used in the other transactions in which central banks and governments engage. ... This means that the SDR is not an attractive unit for official reserves.

This would not be easy to change. Despite the trials and tribulations of the American economy, dollar securities remain the dominant form of reserves because of the unparalleled depth and liquidity of US markets. Central banks can buy and sell dollar securities without moving those markets. There is also the convenience factor: dollars are widely used in a variety of other transactions. As a result, not even the euro has seriously challenged the dollar as the dominant reserve currency. ...

If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDR claims. It could issue its own SDR-denominated bonds. ... Of course, an earlier attempt was made to create a commercial market in SDR-denominated claims ... in the 1970’s... But these efforts ultimately went nowhere. The dollar being more liquid, its first-mover advantage proved impossible to surmount.

Overcoming that advantage now would require someone to act as market-maker ... and subsidise the market in its start-up phase. The obvious someone is the IMF. The Fund could stand ready to buy and sell SDR claims to all comers, ... at narrow bid/ask spreads competitive with those for dollars. ...

Transforming the SDR into a true international currency would require surmounting other obstacles. The IMF would have to be able to issue additional SDRs in periods of shortage... The IMF’s management would also have to be empowered to decide on SDR issuance, just as the Fed can decide to offer currency swaps. For the SDR to become a true international currency, in other words, the IMF would have to become more like a global central bank and international lender of last resort.

For worries about inflation, see Inflation Nation by Alan Meltzer (and also see Krugman's response, A History Lesson for Alan Meltzer).

[Note: A lot of people have noted the apparent contradiction in the concern from Krugman over deflation, and from Meltzer over inflation, e.g. Mankiw for one, but here's an example of this from Mankiw's colleague, Martin Feldstein, within the same article. It's simply a short-run, long-run distinction.]

This post can also be found on economistsview.typepad.com.

Gold And Silver Update

Last week we saw some big news come out of China regarding gold, and investors are paying close attention. China almost doubled their gold reserves, and after a stretch of falling prices, this news sent prices up. For more on this, read the following post from Tim Iacono.

Big news for the precious metals markets came from China last week when the Xinhua News Agency published comments made by Hu Xiaolian, head of the State Administration of Foreign Exchange, indicating that China's gold reserves had increased by 454 tonnes since 2003. Apparently, they were required to report the new total to the IMF and made a public disclosure at the same time, however, it is not at all clear why there were no previous updates in recent years.

This almost doubled their previous reserve total of 600 tonnes and vaulted China into sixth place on the World Gold Council's list of official gold holdings as noted in this item last week. With almost $2 trillion in foreign exchange reserves and an increasingly vocal dislike of the U.S. dollar in recent months, this big gain comes as no surprise to most analysts, however, the magnitude of the increase in dollar terms was mostly overlooked in media reports.

This addition amounts to only $13 billion - less than one percent of their foreign exchange reserves - and boosts their "percent of reserves held as gold" from 0.9 percent to just 1.6 percent. The "rule of thumb" for western central banks is a stockpile of 15 percent, about ten times the new total, and most analysts expect thousands more tonnes to be purchased.

Prices for both gold and silver were buoyed by the news late in the week but, after two months of mostly lower prices, the metals were due for a rebound. For the week, the price of gold rose five percent to end at $913 an ounce and spot silver surged nine percent to close at $12.89 an ounce.

As a result of this move back up above the $880 level, buy indicators for both gold positions in the model portfolio - Gold Bullion and the SPDR Gold Shares ETF (GLD) - have been changed from green back to yellow.

It will be important to keep an eye on the world's most popular gold ETF since, for the first time this year, metal recently exited their vaults as shown to the right. Inventory has declined by 23.2 tonnes since April 16th after an impressive addition of almost 350 tonnes since the first of the year.
Interestingly, mainstream financial media outlets such as Reuters and Bloomberg now routinely report changes in GLD inventory in their gold reports and also compare their stockpile to official country holdings around the world, something that I've been doing for years. In fact, I remember being disappointed early last year about not being mentioned in an article in the Wall Street Journal after a reporter called to follow up on one of my articles about the GLD inventory passing China's official holdings of 600 tonnes.

It's was ironic to see these two items in the news together last week.

Buying in India has supported the gold price in recent days as the world's most price-sensitive buyers have been on strike for most of the year, only appearing when sub-$900 an ounce prices were to be had as Monday's important Akshaya Tritiya festival neared. This is one of the four most important days of the year for Hindus and is considered an auspicious day for buying long-term assets such as gold, a legend stating that any venture begun on Akshaya Tritiya will bring prosperity.

The recent surge in enthusiasm for the gold price, while welcome, should be tempered by the knowledge that, according to GFMS, about 500 tonnes of scrap gold entered the market during the first quarter of 2009. This is the equivalent of an entire year's worth of scrap metal and exceeds the record 469 tonnes added to gold ETFs around the world over the same period. While I'm sure that prices for precious metals will go much higher at some point, making such a move in the near term will be difficult absent another flight to safety, something that is now looking more likely than it did a few weeks ago.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

China Is Trapped In The Dollar

There has been a lot of talk lately about China's desire to diversify out of the dollar, however, unfortunately for them they are trapped. The worst part for China is that this entrapment was self-inflicted as Paul Krugman points out in his recent New York Times article. For more on this, read the following blog post from Mark Thoma.

It's time "to face up to new realities":

China’s Dollar Trap, by Paul Krugman, Commentary, NY Times: ...The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in into that trap in the first place.

Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets. ...

Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets,... U.S. Treasury bills... T-bills are as safe from default as anything on the planet... But ... any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts. ...

S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds. And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else:... China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago,... China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

This post can also be viewed on economistsview.typepad.com.

Geithner's Comments Are Moving The Currency Markets

Timothy Geithner should quickly learn that currency traders take everything he says literally. Recent comments he made caused the dollar to take a nose dive. Geithner quickly followed those comments up with a retraction of sort, which left the markets unsure of his true intent. Currency expert Kathy Lien address this matter further in her blog post below.

How long will it take for Treasury Secretary Tim Geithner to realize that his comments move markets? When he first took office, he mistakenly threatened to brand China as a currency manipulator. This caused a wave of volatility in the currency market and sharp criticism about the experience of the new Administration. And now, Geithner has done it once again (Geithner Comments send Dollar for a Ride).

Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”

These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.

Why has the dollar had such a big reaction to these comments? Because if the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean less demand for U.S. dollars.

source: eSignal

This post can also be viewed on kathylien.com.

China Beginning To Use Monetary Leverage On U.S.

While the U.S. has racked up trillions in debt, China has been buying up this U.S. debt. Now China owns more U.S. debt than any other country on the planet, and of course with that comes a great deal of political power over the U.S. China owns so much of our debt that if they were to start selling it off in mass quantity it could collapse our entire financial system. China has not said that they have any intention of doing so, nor would it be financially wise for them to, however, the threat alone carries a lot of weight. One of Obama's campaign claims was that he intended to fight China's monetary manipulation, but with little surprise — after urging from China — the U.S. backed down. Now China is urging the U.S. to be more prudent with their stimulus spending — in order to protect the value of their investment. Kathy Lien dives more into this story in her blog post below.

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

CNBC VIDEO: Is US Debt Still Desirable to China?

This post can also be viewed on KathyLien.com.

Beijing Is Turning Into A Ghost Town

After the incredible display at the Olympic Games last year it is hard to imagine Beijing as anything other than spectacular. Apparently things have gone down hill, though, for Beijing since the Olympics. Overseas Property Mall reports that with all the empty buildings now, Beijing has the feeling of a huge modern day ghost town.

Stories of Beijing being a ghost city are surfacing all over the Internet. They tell of a city which less than a year ago was prepped to bustle in anticipation of the Olympic Games and yet, a few months after it is all over the city looks deserted and half of the city center’s sky scrapers stand desolated and empty.

This is the story of Beijing, formerly glorified as the new "glitz town" of China and host to the Summer Olympic Games of 2008.

But fast forward less than one year and the outlook for the city is very gloomy indeed.

Take the example of a brand new baseball stadium that has just been demolished after opening last spring with an exhibition game between the Dodgers and the San Diego Padres. Those are sad stories that make us wonder what happened behind the scenes and why in the world big projects like these are being granted without checking their longevity.

Then there is the story of the million square feet of commercial real estate that sits EMPTY in the middle of the city before as mentioned . Just to give you an idea, 100 million square feet make up the better side of 14 years of commercial real estate supply in a good year.

Right now, the inner city of Beijing is home to a vast amount of eye catching and awe inspiring skyscrapers that are empty.

The question remains to what will happen to these buildings when no one pays rent? Plus as more and more corporations have to scale back their enterprises it is highly unlikely that this situation will change for the better real soon.

So what IS the Chinese government going to do with all these brand new, empty buildings? And where does this leave all the workers who are left on the streets, often without getting paid for their work since many developer simply went underground to avoid paying their wages?

We think we can all agree that the situation in Beijing is not a pretty one. In fact it is a very sad one. It makes one wonder how on earth it could ever get this bad.

Are our egos so big that we continue to build just for the sheer pressure of delivering better and bigger cities to host Olympic Games, giving no consideration to realistic demand and the environment?

You tell us.

Read the whole story here

This post can also be viewed on overseaspropertymall.com.

Brazil’s Economy Remarkably Strong, But For How Much Longer?

In the midst of worldwide reports of falling economies, Brazil’s economy has been remarkably strong. According to Bloomberg, Brazil’s GDP grew 6.8 percent in the third quarter of this year compared to last, up from 6.2 percent growth in the previous quarter year over year. Considering the state of the worldwide economy those numbers are staggering—so staggering that they beat the estimates of all 31 economists polled by Bloomberg. Compared to the constant underperforming of estimates in the U.S., this must be truly exciting for Brazil. On the downside, though, economists are predicting a slowdown for Brazil’s economy, and Morgan Stanley is even predicting a recession for Brazil, according to Bloomberg.

While the talk of recession is probably a bit premature, Brazil will likely see a substantial slowdown in their growth. Economists quoted in the Bloomberg article gave 2009 GDP growth ranges anywhere from 2 to 4 percent. The article also mentioned that certain industries in Brazil were starting to lay off employees, which is never a good sign. However, the layoffs that they mention are nowhere near the level that we are experiencing here in the U.S. We also should remember that 31 of 31 economists underestimated Brazil last time around, so who is to say they won’t do it again?

Brazil is an amazing country with investment potential that has interested me for quite some time. The country has almost every imaginable natural resource and is making great strides towards becoming a world power. I certainly think that we will begin to see a slowdown in their economy as external pressures take their toll on Brazil along with the rest of the world, but I don’t foresee a recession. I think Brazil will continue to grow, albeit at a slower pace than before. Once the global economy begins to turn around I see Brazil taking off once again.

We hear a lot about the BRIC economies (Brazil, Russia, India and China), but of those four Brazil seems to be the least discussed. India and China have their huge populations and incredible growth numbers, and Russia has its huge oil reserves. Brazil always trailed them in growth and in investment hype. To me, though, I think Brazil has as much potential as the others, if not more. India and China have huge populations, but they also are facing some huge problems, such as water shortages. They also are almost entirely dependent on other countries for their energy needs. Russia has abundant water and energy, but their government is repressive. Brazil has tons of fresh water, is energy independent, and though their government is not perfect by any stretch of the imagination, it continues to improve and seems to be headed in the right direction. In addition, the fact that Brazil has not had the same type of investment hype as the other countries is a good thing for investors. Over the long term I think we might see Brazil moving to the head of the BRIC class, and it might happen sooner than we think.

China's Looming Problems Give New Government Biggest Test Yet

China has been integrating many capitalist principals into its communist government for sometime, but until now the new blended policies have really yet to be tested. Tim Iacono at The Mess That Greenspan Made takes a closer look at China's looming problems and discusses how their new government is in for its biggest test yet.

There's a very good story in the Washington Post today about the slowdown in China detailing the impact of the sharp decline in the export industry and all the steps being taken by the government to counter the slowdown.

Being in the unique position of have huge cash reserves, the Chinese government has begun applying these funds liberally in the hardest hit areas.

In a report yesterday, David Burton, Asia-Pacific director of the International Monetary Fund, noted the Chinese economy "will slow but should remain relatively strong and help to support the rest of Asia".

This morning, according to this story at 24/7 Wall Street, "Dark Star" Nouriel Roubini predicts the Chinese economy "will fall apart".

Which will it be? We'll find out soon enough. Here's the Post article:

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

It sounds like the combination of a communist government and a free market economy is about to face its biggest test yet.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.

China’s Olympic Opening Ceremony

Like millions of other people across the world, I watched the Olympics opening ceremony on Friday, and I can say that it was quite a spectacle. While it certainly was an amazing show, the likes of which I have never seen before from an opening ceremony, the price tag for this show made me choke. When the announcer said that China had spent $300 million on just this one show I was shocked. I knew they had spent $40 billion on the whole Olympics, but most of that went to infrastructure improvements and pollution cleanup. $300 million for a show just seems ridiculous.

To me, this just proves the point that China is trying to use these games to show the world that they are now a power to be reckoned with. What better way to do that than throw down $40 billion for the Olympics and $300 million for the opening show, both of which are unprecedented numbers.

The problem with this is that the world already knows China is now a powerhouse. We all know about the growth in their economy, and pretty much every country in the world wants a piece of China right now. They don’t need to prove a point that has already been made. While in one sense the employment created by all this spending is a good thing for China, one can’t help but feel the money could have been put to better use. China still has a lot of poverty in their country as well as many other areas of need, which could have greatly used some of these funds set aside for the Olympics. I don’t think there is any chance of China seeing a return on the money they have spent in the form of increased tourism (or anything else for that matter) after the Games, so really, most of this money will have been wasted on what the country considers a big party for themselves.

The Olympics is a great event with loads of history and tradition, but when countries start using it to make statements or impress the world (and to be fair, China is not the first, nor will they be the last to use the Olympics in this way) it is just a shame. Countries shouldn’t neglect the good of their people for the sake of a game. The Olympics bring in a large sum of money and countries should be smart and spend only on the Olympics what they can expect to see in return, anything beyond that is just a waste.

China Olympics: Cost Versus Reward

With China’s Olympic Games coming next month I thought it would be fitting to look at the cost they have paid, and compare that to the potential rewards which come from hosting this prestigious event. There has been a debate for sometime about whether or not hosting the Olympic Games is good or bad for the city’s economy, and this year’s games are no different. Beijing will spend an estimated $42 billion on the Olympic Games, according to the Wall Street Journal, a number that far surpasses any other city’s previous commitment, but will they receive value from this investment?

Sure, $42 billion is a ridiculous number to think about, and on the surface one could say that there was no way the Olympics could generate that much money for a city. However, we must also consider what that $42 billion went towards. A good majority of these funds went towards infrastructure improvements, as well as environmental cleanup. In the rapidly growing economy of China, infrastructure is in high demand, and many of these improvements were badly needed. The bigger question is whether they got a little too extravagant with the improvements, and whether those additional funds could have been put to better use elsewhere. Not all of the improvements have been of the extravagant type, however; in some cases, residential areas now feature streets lined with port-a-potties.

In addition, the almost $10.5 billion spent on environmental cleanup--while not providing immediate economic benefits, per se--is hard to argue with. I’ve heard horror stories about the pollution in Beijing, as I’m sure most people have. In fact, the pollution is so bad that many Olympic athletes will be staying in South Korea or Japan and flying in solely for their events. So the fact that the government is finally trying to clean it up is probably a good thing. Now, if they can just keep the pollution under control once the Games are over, that would be the next step.

On the other hand, some of that $42 billion has seemingly been spent on extravagances and items which will be of little lasting value. For example, there really aren’t any plans for the bird's nest stadium after the Games, and it doesn’t offer protection from Beijing’s harsh winters and hot, rainy summers, according to the Wall Street Journal. If we want to see how the Olympic Games can adversely affect a city’s economy, we need to look no further than Athens. The $15 billion Athens spent readying itself for the last Olympic Games--ranging from building a light rail system to kenneling all the city's stray dogs for the duration of the event--sent the city into debt, and they have yet to recover. In addition, according to Tourism-Review, the Olympic Games don’t always result in increased tourism. They point out that during the Barcelona and Sydney games, for example, while they did see Olympic Games-specific tourism, the regular tourists stayed home. They ended up in the same place, tourism-wise, as they would have been without the games.

Increased tourism to China is unlikely, as the country is making it more difficult to obtain visas to visit the country. Many people who have already purchased tickets to the Olympics will not be able to attend because the country won't allow them in. Further, the city will be shutting down shops and restaurants that are near Olympic venues because they don't want crowds to form. The city is so paranoid about crowds that, on the 11th day of each month, the city's residents practice lining up (this is done on the 11th because the number 11 looks like two people standing in line).

When all is said and done, I think on the books, at least, this spending spree in Beijing will appear to be a loser. I also think that China knows this, but is willing to put up with a loss on paper in order to cement their image across the globe. They want to be seen as a modern world power, and what better stage on which to make this statement than the Olympics? They are being smart with a lot of the budget, putting it towards things such as infrastructure, however at the same time, they are building this infrastructure in a manner that is probably not the best long-term. One example of this is that they build brick buildings quickly and cheaply, then encase them in glass so that they look modern. They are being a tad more extravagant then they really need to be, and the infrastructure they are building is likely being maximized for Olympic venues. China is a growing world power; they know it, and they want the world to know it. The Olympic Games will likely prove this point, and for that, China is willing to waste a few billion dollars.

New President Of Taiwan Calls For Closer Relations To China

For years the rift between Taiwan and mainland China has grown as the Chinese government asserted ownership of Taiwan and Taiwan called for independence. The Taiwanese government took a hard-line stance and heavily restricted travel and immigration from the mainland out of fear of sabotage or attack, but this has affected trade. Taiwan is now unable to compete with mainland China and other lower cost countries on several exports, and the economy in Taiwan, which was very healthy only a few years ago, is starting to suffer. For this reason, many residents of Taiwan were calling for change from their leadership.

Well, change is on the way. The people of Taiwan have elected Ma Ying-jeou as their new president. Ma is of the opposition party and favors closer relations with mainland China. According to an article in the International Tribune, Ma said in an interview yesterday that, in his first 100 days in office, he hoped to have an immediate effect on the economy by opening up Taiwan to mainland Chinese tourism. After that, Ma has other plans on how to better incorporate mainland China into Taiwan’s economy.

The former leading party of Taiwan, the Democratic Progressive Party, thinks closer relations with China will only result in disaster. If Taiwan can successfully reintegrate China into their economy without major disruption, then Taiwan’s economy should experience a nice surge. If the Democratic Progressive Party is correct in their conspiracy claims against China, and the situation turns ugly, then Taiwan may decline further.

Investors who think that Taiwan and China will live harmoniously should buy into Taiwan now. Taiwan’s tourism sector especially is in for a boost. As an indication of how investors are thinking, Taiwan’s stock market saw a 4 percent jump today in response to the election results. One should remember that certain Chinese leaders deeply despise Taiwan, and not discount the risks in this relationship. The Chinese seem to support Ma, so hopefully the two sides will be able to resolve the issues between them in a peaceful manner.

Foreign Investment Property: Where Are The Highest Yields?

Many of our readers are interested in purchasing foreign investment property for various reasons. Some want to purchase foreign investment property as a vacation retreat, while others look at foreign property strictly as an investment and an alternative to U.S. real estate. If you are looking at vacation spots, then you should be concerned with more than the yield of a property. However, if you are buying foreign property solely as an investment, then yields will be one of the most important factors of the property you decide to buy.

Global Property Guide has published a list of the top 10 highest yielding foreign markets which might help you in your search for that perfect location. They identified the top 10 highest yielding foreign markets as: Egypt, Indonesia, Philippines, Panama, Ukraine, UAE, Jordan, China, South Africa, and Morocco.

Before you get too excited, consider that these figures are only based on highest yield. The rankings do not take into account the risks, taxes and fees associated with buying, selling and owning property in the country. One needs to analyze and account for these things before one buys property in a foreign country. Global Property Guide covers many different countries and offers additional information, including tax rates. They are a great place to start your research for foreign investment property.