2010-07-30

Euro speculative shorts stable

Just in time for the election

U.S. House panel sets Sept hearing on China's yuan
China loosened its yuan, also known as the renminbi, on June 19 from a 23-month-old peg to the dollar but it has barely risen in value since then.

Many lawmakers believe the currency is undervalued by as much as 25 to 40 percent against the dollar, giving Chinese companies an unfair trade advantage that has caused U.S. manufacturing job losses.

"There is no real question that China's deliberately undervalued exchange rate is unfair, contributes to global trade imbalances, and costs the United States jobs and economic growth, particularly in the manufacturing sector," Ways and Means Committee Chairman Sander Levin said in a statement.

"We must ensure that China's rhetoric translates into results that are meaningful and that the international trading system ensures fair rules of competition," Levin said.
Congress returns from their summer break on September 10. Target date for adjournment is October 8.

2010-07-29

Counter balancing China

Vietnam hedges its China risk
So far, cooperation between Vietnam and Malaysia seems to be the most advanced. Last year, they made a joint submission to the United Nations commission that administers the Convention on the Law of the Sea. The filing, which delineated Vietnam's and Malaysia's respective exclusive economic zones in the lower part of the South China Sea, was quickly rejected as "illegal" by China, which claims the entire maritime area from Taiwan to Singapore.

China's aggressive behavior has made other ASEAN nations without a direct stake in the island disputes take notice. When US Secretary of State Hillary Clinton declared at the ASEAN Regional Forum on July 23 that the US had a "national interest in freedom of navigation, open access to Asia's maritime commons, and respect for international law in the South China Sea", Indonesia, Singapore, Malaysia, the Philippines, Brunei and Vietnam were among the dozen countries that expressed support for a "collaborative diplomatic process".

By openly wading into the South China Sea dispute, the US has given ASEAN support to develop a more coherent regional response. Vietnam reportedly urged the US in private talks to take a stronger stand, and Hanoi would have the most to gain if ASEAN countries stuck together more consistently when dealing with China.

Hanoi's poor human-rights record makes it unlikely that the US and Vietnam will pursue an outright military alliance, but the two former adversaries now hold annual security talks and periodic military exchanges. In recent years, the US Navy has made over a dozen visits to Vietnamese ports and on at least two occasions Vietnamese officers have been flown out to visit US carriers.

While the Communist Party leadership in Hanoi remains deeply ambivalent about getting too close to Washington, there is a growing realization that the US is essential to counter-balancing China's rise.
Much more at the link.

South China Sea dispute rages on

War of words heats up with US over South China Sea disputes
In a signed commentary, the People's Liberation Army Daily - an organ of the Central Military Commission - warned that Washington's involvement in regional territorial disputes was ill-intended.

Under the headline "Be alert to outside forces' involvement in issues of the South China Sea", the commentary urged Asian nations to be aware of traditional superpower tactics designed to maintain dominance in a disputed region.

Superpowers often adopted the strategy of "divide and rule", stirring up tensions, disputes and even conflicts before stepping in as a "mediator" or a "judge" in a bid to maximise their own interests, it said, citing British colonialism in the 19th century.

"Outside forces' involvement will only complicate the South China Sea issue and add difficulty to its solution," it said.
Many people think linearly about Asia, in that they see China rising and displacing the United States. China's neighbors don't see it the same way, however, they see the U.S. as a counterweight to Chinese power. The question is how far the U.S. allows itself to be drawn into regional disputes.

2010-07-28

Central banks could go broke as well

Now let us stress-test the central banks
Consider Asian central banks, with their total of $5,000bn in foreign reserves. These assets are often mistakenly seen as a sign of strength. As the vast bulk of liabilities against these reserves are denominated in local currencies, a prolonged period of US dollar and/or euro weakness would generate unprecedented marked-to-market losses. A 20 per cent appreciation of the renmimbi versus the People’s Bank of China’s owned foreign assets would thus result in a hit to Chinese federal finances of some 10 per cent of domestic GDP. Similar appreciation of the Singaporean or Taiwanese dollar would generate losses nearly twice this amount measured in Singaporean or Taiwanese GDP. Losses would be even greater for those institutions – such as the Hong Kong Monetary Authority – where dollar pegs are in place.

Currency mismatches are not a concern only for Asian central banks, however. Over the past 14 months the Swiss National Bank spent more than SFr150bn ($143bn, €110bn, £92bn) – some 30 per cent of Swiss GDP – accumulating euros, all in a futile attempt to stem the rise of the Swiss franc. Marked-to-market losses on these positions are estimated to have exceeded SFr20bn recently, or about SFr3,000 for every Swiss citizen. A further 10 per cent appreciation of the Swiss franc versus the euro would generate additional marked-to-market losses of 3 per cent of Swiss GDP. Such losses are politically unsustainable, if not financially.
Michael Pettis discusses the box the PBOC finds itself in.

The PBoC can’t easily raise interest rates
In fact they may do what they did the last time the currency revalued – engineer a reduction of real interest rates and a rapid expansion of credit. This will counteract the contractionary effect of revaluing the currency – competitiveness lost because of a higher currency will be counterbalanced by competitiveness gained by lower costs of capital.

This of course will also put more upward pressure on the trade surplus, allowing China to continue to use the external sector to absorb excess capacity. Of course it will also sharply increase the asset misallocation problem – as Japan demonstrated after 1985 when, in response to the appreciating yen, they reduced interest rates and expanded credit.
Governments and central banks are weakening their fiscal positions. Global financial risk is rising, not falling.

Life imitates art in Chinese murder-extortion plot

Dark Secrets of Death in China's Mine Shafts
For fans of Chinese film director Li Yang, the crimes followed a familiar script. In his 2002 film Blind Shaft, an extortion plot targets a coal mine boss who, in exchange for their silence, pays off a pair of mine workers who murdered a coworker and masked the death as an accident.

In the movie, the killers and victims were strangers. Huang, however, not only knew the victims but was their kin. Indeed, all the actors in Huang's plot were from the Chengde area of Hebei Province, just north of Beijing, and most knew each other.

The film's storyline is built around the uniquely Chinese phenomenon of what are commonly called "illegal" coal mines. These include underground mines of various sizes that operate secretly and without business licenses, often in remote areas, and require collusion between mine bosses and local government officials.

At the court hearing, Zhang freely wept and repeatedly claimed innocence. Yet she failed to weaken the prosecution's argument that her quickie marriage to Han was clearly part of a scheme to murder him. Indeed, he died just nine days after the newlyweds moved to Beijing from Chengde.

Huang told the court he had suggested Zhang divorce her former husband because he was abusive. But his advice went farther. "Divorce and find someone else and then kill him," he told Zhang, according to his court testimony. "You can make a little money."

Huang said he learned the art of mine-shaft extortion from others. "If you do this, you can make money fast," he told Zhang, according to testimony. "You can extort 200,000 or 300,000 yuan for one person's life."

Huang told the court he was an experienced murderer, and proved his point by saying that he suggested Zhang "find a bachelor with very few family members. Then it's easy for you to get money.

"If you go after relatives, they won't be suspicious."'
More details here.

Yuan reform continues...

China, Singapore Sign Currency Swap Pact
Singapore has become the latest addition to the list of countries to sign currency swap agreements with China. China's central bank and Monetary Authority of Singapore recently signed a three-year swap agreement valued at 150 billion yuan.

"End of the world" makes a comeback

Hollywood has been destroying the world and 2012 "prophecies" are still circulating, so why not protect your family?

Doomsday shelters making a comeback
Hodge bought into the first of a proposed nationwide group of 20 fortified, underground shelters — the Vivos shelter network — that are intended to protect those inside for up to a year from catastrophes such as a nuclear attack, killer asteroids or tsunamis, according to the project's developers.

"It's an investment in life," says Hodge, a Teamsters union representative. "I want to make sure I have a place I can take me and my family if that worst-case scenario were to happen."

There are signs that underground shelters, almost-forgotten relics of the Cold War era, are making a comeback.

The Vivos network, which offers partial ownerships similar to a timeshare in underground shelter communities, is one of several ventures touting escape from a surface-level calamity.

Radius Engineering in Terrell, Texas, has built underground shelters for more than three decades, and business has never been better, says Walton McCarthy, company president.
Lots of great quotes in the article.

2010-07-27

Protectionism continues

Just because it isn't front page news doesn't mean it isn't happening.

Zhongwang shares in danger of collapse
Shares in embattled aluminium extruder China Zhongwang Holdings could dive to just HK$3 because of a United States anti-dumping attack on its industry, a top investment bank has claimed.
Zhongwang, which has been fighting claims about the accuracy of its accounts since shortly after its HK$7 a share initial public offering in May last year, now faced losing business because US politicians might impose punitive import taxes on its American customers that would stop them buying from China, Morgan Stanley said.

The US International Trade Commission (ITC) said last month American companies were being damaged by the low cost of Chinese extruded aluminium, which is used in products from door frames to solar panels.

Morgan Stanley analysts Charles Spencer and Mean Phil Chong said in a research note that Zhongwang's profits could collapse if the price of the metal falls to 6,000 yuan (HK$6,863) per tonne by 2015 from more than 15,000 yuan currently, not least because the Liaoning firm was also facing increased competition from Aluminum Corp of China (SEHK: 2600).
There's a lot more to the story though, as some say the firm inflated its U.S. sales figures.

Interesting talk on choice



H/T Kevin Depew. He comments,
Challenging number two is perfectly consistent with deflation as a cultural phenomenon that is now appearing as an economic phenomenon. Socionomics and the shift in social mood actually impact the studies findings, creating a negative view of choice as problematic. How can this possible be? Isn't science rigorous and objective? Consider the irony that choice actually plays a significant role in which studies to pursue? As well, consider that the paramaters of the study, as Iyengar observes, also play a role in what the results will be since Americans are "trained" to cope with choices, even artificial choices. "The value of choice depends on our ability to perceive differences between the options," she says. "Americans spend their whole lives playing 'spot the difference'."

Political disaster in the making

Mass. Legislature approves plan to bypass Electoral College
The Massachusetts Legislature has approved a new law intended to bypass the Electoral College system and ensure that the winner of the presidential election is determined by the national popular vote.

...Illinois, New Jersey, Hawaii, Maryland, and Washington have already approved the legislation, according to the National Popular Vote campaign's website.
A bunch of typically Democrat states have chosen to give their electoral votes to the national vote winner.

Putting aside the fact that this directly undermines the Great Compromise that created the United States and flies in the face of the fundamental ideas behind the Constitution...

Imagine that the Republican wins the national vote by a small percentage, small enough to trigger a recount, and that the electoral votes from these states makes the difference in the electoral college. The Democrat candidate wants a national recount, since these votes could change the election, but the Republican states refuse. The recount happens and the Democrat states miraculously find the votes to give the national vote to the Democrat.

Combine this with the fact that states are increasingly coming into opposition with the central government, and the recipe for interstate conflict has increased considerably (albeit still remote).

Report on Chinese banks and NPLs

Notice that the banks are trading at a premium in Hong Kong. A-shares historically were the ones with the premium.
Goldman China LGP Loans

2010-07-26

Do they miss Musharraf?

We finally know what the big news from Wikileaks is all about. They have not shaken the market, but they do raise some serious issues.

Murder on the Khyber Pass express
The "everybody" involved in this case seems to exclude whomever actually leaked the documents, presumably some element of the US military, which has to absorb the effect of Pakistan's double game in the region in the form of body bags for enlisted men and shattered reputations for commanders. Like the Rolling Stone magazine interviews that led to the firing of General Stanley McChrystal, the America commander in Afghanistan, the WikiLeaks documents suggest a degree of disaffection of the American military with civilian leaders deeper than anything in living memory.

To exit the Afghan quagmire in a less than humiliating fashion, the United States requires Pakistani help to persuade the Taliban not to take immediate advantage of the American departure and evoke Vietnam-era scenes of helicopters on the American Embassy roof. The politicians in Washington know they have lost and have conceded to the Taliban a role in a post-American Afghanistan. They can only hope that once the country plunges into chaos, the public will have moved onto other themes, much as it did after the Bill Clinton administration put Kosovo into the hands of a gang of dubious Albanians in 1998.
He goes on:
With 170 million people - more than Russia - and a nuclear arsenal, Pakistan is too big to fail, that is, too big to fail without traumatic consequences for its neighbors. Whether it can be kept from failure is questionable. Half its people live on less than a dollar day, and half are illiterate. It is riven by religious differences - a seventh of Pakistanis are Shi'ite - as well as ethnic ones.
Spengler goes over the top with a World War I reference, but a lot of oil is shipped from the Persian Gulf (a short trip from Pakistan) and all the major global and regional powers are here (Iran, China, India, U.S., Russia).

2010-07-25

Belief in magic

Maybe you've come across ads for this product or something similar.

Belief in magic increases during declines in social mood.

Youth demonstrate for Cantonese

The demonstrations announced last week took place on Sunday in Guangdong. Surprisingly, it was the young, not the old, who turned out in support of their native tongue.

Thousand rally to support Cantonese
More than 1,000 people, most of them in their 20s or early 30s, gathered outside an exit at the Jiangnanxi Guangzhou Metro station yesterday afternoon in a show of support for the Cantonese dialect.
A strong police presence and a media gag on coverage of the campaign to defend the local dialect failed to stop the protest.
One reason for the youth turnout was because it was organized online.
More people gathered around the exit, some displaying posters and wearing T-shirts with slogans in support of the local dialect. One poster said "Languages slaughterer" in English and showed a skull and bloody bones, referring to the endangerment of Cantonese. The protesters also shouted "Support Cantonese" and "Shut up, Ji Kekuang ".

It was Ji, an official of Guangzhou's political advisory body, who suggested the switch to Putonghua on local television.

Some college students arrived as early as 2.30pm yesterday. Alvis Zhao, 21, said he wanted to claim a good seat in a fast-food outlet by the metro exit to watch the event. Zhao and seven of his friends - all Guangzhou natives who went to high school together - said they had decided to attend the gathering even though they had heard it might be banned.

"We want to express our dissatisfaction and worry," Zhao said. "We don't hate Putonghua, and it's OK for us to speak it in the schools, but the government has gone too far with its plan to use more Putonghua on local TV channels."
Seeing a purely domestic debate over language clarifies what is going on with the social mood. Often it is colored with other issues, such as English and immigration in the U.S., minarets in Switzerland or burkas in France.

Liu Jun Luo expects violent U.S. dollar appreciation

Liu Jun Luo is looking for a big U.S. dollar rally in August or September. He sees the U.S.-ROK joint military exercises, with Japanese observers, as a small piece of the U.S. long-term strategic plans, which includes a major U.S. dollar rally to sink its economic rivals. He also believes India is part of a broader U.S. anti-China strategy and thinks there could be a small Sino-Indian border conflict.

In a declining social mood, conflicts are more likely in an of themselves. China and other emerging markets benefit from peaceful international relations that allow countries to focus on economic development. As the largest economy, military power and printer of the reserve currency, the United States has the ability to weather periods of instability and even profit from the chaos, economically and strategically. However, these periods also are the ones in which great powers lose their position and a new global order emerges, so they are not without risk.

Also, while the U.S.-ROK military exercises receive some press in the West, it is one of the major stories of this week in China, along with U.S. comments about disputes in the South China Sea and U.S. visits to countries in the region.

美、韩军演与美元暴力暴涨

Wealthy Chinese travel to U.S. to give birth

Parents deliver US citizenship
The list of benefits runs long for babies born in the US, says Jiang Feng, the Chinese mainland partner of the agency, which originated in Taiwan.

Jiang said babies born in the US will, at the very least, be entitled to a place at an American public university, which is favored by many parents over domestic institutions, both for quality of teaching and cheaper tuition.

"The number of mainland customers has been skyrocketing since we opened the branch in late 2008, right after the US opened tourist visa applications to Chinese individuals," he told China Daily.

Most parents come from affluent families in cities such as Shanghai, Beijing, and Hangzhou. Some are motivated by the chance to get US citizenship for their babies, others want to evade China's family planning policy, which restricts most urban couples to one child, he said.

Usually, parents use tourist visas to travel to the US when the pregnancy is in the sixth or seventh month. Typically, they stay for between three and six months, then return with their new arrivals.

Jiang said the agency trains couples to obtain visas and tells them how to handle themselves during US customs interviews.

"I got my visa, as they instructed, and insisted that I wanted to go to the US to travel when I faced the US customs officer," said Wang.

In rare cases, the customs officers might only grant a short stay, such as for one month, according to Jiang.

"But don't worry. The agency is actually experienced in handling that," he said, adding that it has contracted local lawyers who can help people apply for an extended period of stay. He said the waiting period such legal action buys, which is about four or five months, gives mothers enough time to have their babies.

Jiang predicted that more and more mainland parents-to-be will want to have their babies in the US after they learn about the benefits, but he said his agency is already helping about 50 couples a month.
Now the story is getting heavy coverage in China. On Tencent's QQ news page, the subject is covered in "Today's Topic.". The article lists all the benefits for immigrants and how the U.S. treats illegals compared to the situation in Germany. A the bottom is the editorial conclusion, that Chinese cannot really blame these people for following the American Dream. There's also a link to an article discussing the China Dream versus the American Dream.

Many Chinese do condemn those people as unpatriotic. And in the U.S., many people see this situation as a small part of an insane immigration policy.
Solid gold anchor babies
You can tell how great something is by the number of people stuffed within its boundaries, not by how many people are lined up waiting to get in (don't even think about that). That's why Arizona State is the most prestigious university in the country: because it has 67,082 students. That makes Arizona St. much more prestigious than piddling little colleges like Harvard and Caltech. (Of course, Arizona St. has a long way to go to catch up in prestige with the Allama Iqbal Open University in Islamabad, Pakistan, enrollment three million.)

Conversely, the Augusta National Golf Club made Bill Gates wait for years to become a member despite Warren Buffett sponsoring him, so who'd want to belong to Augusta? There's probably some golf club in Calcutta that has three million members and they each get one teetime per lifetime (but you get an additional teetime per reincarnation, so you've got that going for you, which is nice), and thus it would be much better to belong to Calcutta Municipal than empty old Augusta National.
Immigration and national identity will remain hot topics during the decline in social mood.

2010-07-24

China to build museum for Japanese Unit 731

Dark wake-up call for Sino-Japanese ties
Unit 731 - or to give it its Japanese name, the Epidemic Prevention and Water Purification Department of the Kwantung Army - was the headquarters of the Japanese army's chemical and biological warfare program from 1935 to 1945.

Among the unit's activities was human testing; it conducted experiments on over 10,000 live subjects, including vivisection, weaponry, germ and chemical warfare tests, and other biological experiments. After World War II, most of those who worked at Unit 731 were granted an amnesty by the occupying American administration in Tokyo in return for complete access to their methods and data - many even embarked on successful careers in Japan and the United States. Most victims were Chinese, but Russians, Mongolians, Koreans and Western prisoners were also used in experiments.

...As China's national strength and standing increase, how the story of the Pingfang complex plays out will provide evidence of whether Chinese propagandists are willing to move away from the narratives of victimhood and humiliation that they have traditionally deployed in such situations. Historical sites play a significant role in Chinese international relations, not only due to pervasive nationalist sentiment, but also because, as sociologist Jacques de Lisle has remarked in his essay "One World, Different Dreams", "Chinese political discourse remains highly attuned to metaphor and symbol," a statement also valid for other East Asian nations.

U.S. says South China is "national interest"

US says S China Sea pacts in its national interest, riling Beijing
China and Vietnam claim the sea's Spratly and Paracel archipelagoes in their entirety, while the Philippines, Malaysia and Brunei claim the Spratlys in part. Taiwan's claim mirrors Beijing's. Potentially rich in oil and gas, both island groups straddle vital sea lanes linking Asia to Europe, the Middle East and Africa.

"The United States has a national interest in freedom of navigation, open access to Asia's maritime commons and respect for international law in the South China Sea," Clinton said. She referred repeatedly to the need to settle the rival territorial claims under international law - including the UN Convention on the Law of the Sea - and "existing Asean principles".

One senior Association of Southeast Asian Nations diplomat said the issue of the Spratly Islands had been raised explicitly by members of Asia's top security forum, as well as concerns about China's military build-up, which has been marked by the rapid modernisation of its navy.

"The discussion was quite tense at one point. China ended up on the defensive," said the diplomat, who declined to be identified. Yang was "clearly exasperated", he said.

A second diplomat with knowledge of the discussion said Yang responded with "a very strong and emotional statement essentially suggesting that this was a pre-planned mobilisation on this issue ... He was distinctly not happy."

2010-07-23

Euro shorts decline slightly

Hungary PM wants economic sovereignty

The stress tests included banking panics, right?

Budget-cutting fatigue in Hungary tests the IMF's calls for European austerity
"We will have a single demand, namely that of equal treatment, that is, the same time frame must be set for all to meet the E.U.'s expectation," Orban said in a speech to the parliament in which he called on the country to take back its "economic sovereignty."
Social mood still declining in Europe.

Yuan reform contniues

Beijing Considers Plan To Move Its Currency Further From Dollar
People's Bank of China Vice Gov. Hu Xiaolian said in comments published on the central bank's website Thursday that China will consider gradually moving toward using the effective exchange rate as a reference point for the yuan. The effective exchange rate is an estimation of the value of a currency relative to a group of other currencies, weighted based on the amount of trade between the countries.
The yuan could then move up or down versus the U.S. dollar...
A strict linking of the yuan to a basket of currencies is unlikely in the near term, analysts say, as it would mean the yuan could fall against the dollar when the U.S. greenback is rising against other currencies, which could enrage parties in the U.S. calling for yuan appreciation.

2010-07-21

Wenzhou private interest rates hit 96%

温州民间利率触及96%巅峰 民营金融期待破冰

A story I've been trying to find information on is the one about "loan sharks" in China. These aren't loan sharks as in the West, they're more like grey market savings pools. This is found in Asian countries beyond China and immigrants have brought the practice abroad. It has also been used by other immigrant communities that do not have access to the banking system.

The way it sometimes works is people will put in a set amount each year, and each year one person takes the pot. They then repay the loan over time. It's an old tradition and even today in China, consumer credit is hard to obtain from the banking system.

Medical, housing and educational expenses were probably the largest destination for these funds. For housing, that usually meant the down payment for a child's first home, but now these pools are being used to fuel real estate development.

I saw a short video about this last week from Peter Navarro, but I couldn't find the proper Chinese term for this phenomena and the people discussing this have only referred to "sources in China." Considering it is supposedly a widespread financing method, I'm skeptical if there's not at least forum and blog postings discussing some aspects of it.

Mish Shedlock picked up on the story today in Ponzi "Shark Loans" Fuel China's Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin. He has some anecdotal evidence from his own contacts, but he also links to a blog with extensive coverage.

Israel's Financial Expert covers the story in: Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance

Very simply, here's how this is working. Chinese are using mortgage equity withdrawal (MEW) to borrow at low interest rates and they are lending to "loan sharks" who make loans to real estate developers. The interest rates on these loans can run from 20% to triple digits, according to sources. This pushes real estate prices higher, which allows for more borrowing by homeowners, lending to sharks, etc. A "virtuous cycle" that of course grows into a very unbalanced situation, just as MEW fueled the U.S. housing bubble.

I stumbled across this article when looking for more information. All translations by Google Translate.

温州民间利率触及96%巅峰 民营金融期待破冰
Wenzhou private interest rates hit 96% at the peak look forward to ice-breaking
其实,这种情况在已不是头一回。温州上一次掀起民间信贷高潮是在2007年下半年,当时房地产成为温州人最狂热的投资领域,但时值银根紧缩,民间借贷变得异常高涨,借贷利率不断飙升,也使非法融资的活动大行其道,担保公司成为此中的一种重要渠道。
In fact, this situation is not the first time. Wenzhou climax of the last wave of civil credit is in the second half of 2007, when real estate became the most fanatical Wenzhou investment, but a time when money crunch, borrowing is unusually high, and lending rates soaring, also illegal financing activities popular, the security company to become an important channel for herein.
China has flooded the economy with credit, but private interest rates are 11% per month. The last time rates peaked this high was at the top of the real estate market in 2007.

I kept digging and found this on the Currency War blog.

万亿流动性蒸发谜局:谁劫走了人民币
Evaporation of trillions of liquidity puzzle: Who stole the renminbi?

The article discusses the possibility that hot money is no longer flowing into China because of the growing yuan business in Hong Kong.

Something I've covered is the case for the weaker yuan, two such posts are here and here.

China Currency Reserves Increase Least in 11 Years
Capital outflows may have amounted to $51 billion in May and $21 billion in June, reflecting pessimism among international investors about the outlook for China’s equity and property markets and low expectations for yuan appreciation, according to Orlik.

Morgan Stanley’s Wang estimates hot money outflows amounted to about $41.6 billion in May and $4.2 billion in June.

China’s benchmark stock index has dropped 25 percent this year, and government policies to crack down on real-estate speculation led to a slump of as much as 70 percent in housing transactions in some cities.
I don't know how they calculate outflows and that's important.

Did China experiencing January hot money outflows?

In the above article, Michael Pettis discusses what could be the reason for a decline in reserves, other than hot money.

There may be nothing tying these stories together—I found the stories I was looking for and perhaps this is just confirmation bias. I think each story tells us something in and of itself, but there may not be a larger thread to them other than a housing bubble, as Mish covers at the end of his post.

However, if these stories are linked, then this has the potential for a major credit crunch in China that could touch off round two of global deflation. Here's how China's M0, M1 and M2 money supply shape up through June:


And here's a look at the month-to-month change in forex reserves that has some folks worried:

The next few months will bear close watching.

Indonesia opening to foreigners

Why Gita Wirjawan Wants to Open Indonesia to International Investors
Gita Wirjawan: What we have to do is project positive realities about Indonesia, or in other words, pitch positivity with realism. Not many people in the right places know about us. The most fundamental area that we have to work on is to elevate the level of awareness -- and we are doing that. We are reaching out to different parts of the world -- to the United States, to Europe, to many parts of Asia-Pacific -- to let everybody know that Indonesia is a $650 billion economy this year, and that it has 240 million people, making it the third-largest democracy, and that it is the largest Muslim country, and a modern one. That, I think, is being remedied as we go.

Beyond that, we would like to educate the international community with respect to some of the other positives about Indonesia. For instance, not many people know about our fantastic demographic dividend -- 60% of the population is 39 years old or younger and 50% is 29 or younger. Compare those numbers with the situation in countries like Japan and China. We not only have a competitive economic environment but we also are able to show political stability. If you had talked to me about Indonesia 11 or 12 years ago, it would have been tough for me to project Indonesia in a positive way -- in a realistic manner. Now we've got those two elements -- macroeconomic stability and macro-political stability.

From an economic standpoint, we've been able to show fiscal sustainability. We've been able to show monetary stability for the last five or six years. There is no apparent inflationary pressure coming, as we had seen a few years ago. Our ability to balance our budget has been recognized by the international community -- particularly the ratings agencies. Our ability to trim down our debt to a mere 28% debt-to-GDP ratio is commendable, especially if you put that number in the context of what some of the other economies in the world are going through today. That's the macroeconomic stability story we need to tell.

As for political stability, we have gone through a rather difficult democratization earlier on, but we've been able to show to the rest of the world that we have democratized in a good way. And there's no apparent centrifugal force now that could rip the country apart like many people thought would happen 11 or 12 years ago. So you can tick off those boxes on politics and the economy.

Beyond that, one needs to take into account Indonesia's ability to remedy its mistakes. Indonesia needs to stop being known as a country of tsunamis, earthquakes, floods and all the negatives that have been portrayed in many international media.

The world needs to understand Indonesia in a different way -- it has been more misunderstood than it deserved. And that's what we're trying to remedy by sitting down with think tank organizations and people within academia and within executive decision-making bodies.


2010-07-20

The end of diversity?

Racial tensions roil NC school board; 19 arrests
The Wake County School Board has voted multiple times over the last several months to scrap the district's diversity policy, which distributed students based on socioeconomics and for years had been a model for other districts looking to balance diversity in schools. Several school board members elected last year have built a majority in favor of focusing on neighborhood schools.

The board's chairman, Ron Margiotta, said the panel would not be distracted in its effort to "provide choice and increased stability for families."

"This board does not intend to create high poverty or low-performing schools," he said to scoffs from the crowd.

Reflating to gold $5000

From Institutional Risk Analytics:Deflation: Should the Fed be Buying Gold? Hugo Salinas-Price on the Silver Peso
Quaintance: Have you asked yourself why most people have come to believe that deflation is to be avoided at all costs? It's painfully obvious to us -- because it destroys the banks and handcuffs the politicians. For everyone else, it's seemingly a zero sum game. Why all the fuss?
The IRA: Well, if the U.S. economy continues to decelerate and deflate, we are going to see a lot of politicians facing mandatory "retirement" a la Harrison Ford in the film Blade Runner. A large portion of the U.S. population thinks that we are entitled to full employment, price stability and early retirement even as the government expands the deficit and currency at a double digit rates. The Chartalists think that we should just print money and use it to monetize all existing debt. The neo-Chartelist framework comes from the same intellectual wellspring as Keynesian economics and has been extended by the likes of Nobel laureate Bob Mundell. The current policy of the Obama Administration to borrow trillions of dollars to fund future deficits is similar madness, in our view, but is Fed-induced inflation better? What do you propose?
Quaintance: We have some basic views on what should be done and it comes in two steps. First, there needs to be a coordinated global currency devaluation. We argue for the Fed to tender for private gold holdings at something like $5,000 per ounce and to maintain that bid/offer. This would be the true economic/regulatory function of a central bank and/or monetary authority.
The IRA: The U.S. central bank has not had any gold holdings since FDR's expropriation of the private banking industry's gold in the 1930s. All of the gold in the Fed's vaults belongs to somebody else. We have a reserve bank with no reserves. So you would have the Fed buy gold rather than purchase more crap assets from the large dealer banks via a second round of quantitative easing (QE II)?
Quaintance: Precisely.


The article also has a great anecdote the shows deflation:
To us, there is no "double dip" in the economy. We never recovered from the first decline in aggregate demand. Forget the bogus inflation and GDP statistics coming from Washington. Talk to your neighbors and family, the people in the community who own businesses. Ask them how their revenues for 1H 2010 are doing YOY.

Our favorite anecdotal indicator for inflation is the sausage and mozzarella index. Our local purveyor at the A&S Pork Store in Montrose, New York, says that sales are down 25-35% compared with last year. If you know anything about the lower Hudson Valley and the large population of Italian-Americans who happily call it home, this is a deeply disturbing revelation. Other vendors in the area report similar diminution of volumes of basic necessities.
Read the whole thing.

Europe's fault lines

I've covered a number of the topics in the following article, but Spengler places them in a different geopolitical context based on trade flows.

PIIGS to the slaughter
German exports have crossed an important threshold: shipments to Poland, Russia and China (combined) now exceed those to France. The original European Community members are becoming less important to Germany and Eastern Europe and Asia are becoming more important.



Europe's dependence on Russian energy supplies too often is the focal point of discussion of Russian influence over Western Europe. Why political influence should attend oil exports is far from clear; Mexico, Venezuela and Nigeria all export a great deal of oil to the United States, yet none of them has notable influence on America. Countries that want to sell oil generally take money for it, and except for the Arab oil embargo following the 1973 Arab-Israeli war, no oil producer in the past half-century has used the threat of cessation of supplies as political blackmail.

Germany's long-term problem is not energy, but people. With constant fertility, three-fifths of Germany's population will be aged 60 or over by mid-century, and it seems unlikely that the country's fertility rate of around 1.3 births per woman will rise at the behest of natalist government policies. What Germany requires is exports that translate into savings, and it cannot get them from the turgid European economies around it - most of Europe is in the same demographic predicament with an average fertility rate for the continent of just 1.5.

Foreign policy analysts should focus more on Germany's exports. Despite the country's problems, it still excels in many areas, particularly industrial machinery. Germany has one more generation in which to turn its industrial prowess into a buffer of savings to allay retirement costs. It is in a race against time; it cannot afford to fritter away resources supporting the welschen to its south and east.

Failing demographics underlying an expensive welfare state make the European Union (EU) a failing proposition. It is a loser's game in which the most benefits accrue to the weakest, and that is a game that Germany simply cannot afford to play.
The article provides a nice summary of how the Germans will be looking at their situation during the next leg down in Europe. It places the debt crisis in context and points to areas that may become political flash points.

Socionomics Watch—Authoritarianism on the farm; Ruling class strikes back

Raids are increasing on farms and private food-supply clubs—here are 5 tips for surviving one
This was the third time she was being raided in 18 months, and she had thought she was on her way to resolving the problem over labeling of her goat cheese that prompted the other two raids. (In addition to producing goat's milk, she raises cattle, pigs, and chickens, and makes the meat available via a CSA.)

But her 12-year-old daughter, Jasmine, wasn't the least bit tongue-tied. "She started back-talking to them," recalls Palmer. "She said, 'If you take my computer again, I can't do my homework.' This would be the third computer we will have lost. I still haven't gotten the computers back that they took in the previous two raids."

As part of a five-hour-plus search of her barn and home, the agents -- from the Los Angeles County District Attorney's office, Los Angeles County Sheriff, Ventura County Sheriff, and the California Department of Food and Agriculture -- took the replacement computer, along with milk she feeds her chickens and pigs.

While no one will say officially what the purpose of this latest raid was, aside from being part of an investigation in progress, what is very clear is that government raids of producers, distributors, and even consumers of nutritionally dense foods appear to be happening ever more frequently. Sometimes they are meant to counter raw dairy production, other times to challenge private food organizations over whether they should be licensed as food retailers.

The same day Sharon Palmer's farm was raided, there was a raid on Rawesome Foods, a Venice, Calif., private food club run by nutritionist and raw-food advocate Aajonus Vonderplanitz. For a membership fee of $25, consumers can purchase unpasteurized dairy products, eggs that are not only organic but unwashed, and a wide assortment of fermented vegetables and other products.

The main difference in the two raids seems to be that Palmer's raiding party was actually much smaller, about half the size of the Venice contingent: Vonderplanitz was also visited by the FBI and the FDA.
These farms can also be seen as part of the broader trend towards secession, since they are opting out of the federal and state regulatory bodies. Also note that there's no political agenda here, and these farmers in these cases may even be overrepresented on the left side of the political spectrum. Secession coverage tends to focus on right-wing comments such as those by Texas governor Rick Perry.
What's behind all these raids? They seem to stem from increasing concern at both the state and federal level about the spread of private food groups that have sprung up around the country in recent years -- food clubs and buying groups to provide specialized local products that are generally unavailable in groceries, like grass-fed meats, pastured eggs, fermented foods, and, in some cases, raw dairy products. Because they are private and limited to consumers who sign up for membership, these groups generally avoid obtaining retail and public health licenses required of retailers that sell to the general public.
It sounds like raw milk is as dangerous as Al-Qaeda sleeper cells:
The current uptick has Pete Kennedy of the Farm-to-Consumer Legal Defense Fund concerned, not only about the spreading of the raids, but about the seemingly easy willingness of judges to hand out search warrants. While the U.S. Constitution's fourth amendment suggests judges should exercise tight controls over search warrants ("no Warrants shall issue, but upon probable cause..."), Kennedy observes, "I haven't seen an agency turned down yet" over the last four years in requests for search warrants connected with raw milk and other food production and distribution.
The article goes on to offer some tips. The first one is another great example of socionomics, the trend away from social openness:
Be wary of strangers who want to join your private buying group or herdshare
The second piece of advice is interesting:
Have a video camera at the ready
Interesting because I saw this headline earlier this week:

Growing Number of Prosecutions for Videotaping the Police
But it wasn't his daredevil stunt that has the 25-year-old staff sergeant for the Maryland Air National Guard facing the possibility of 16 years in prison. For that, he was issued a speeding ticket. It was the video that Graber posted on YouTube one week later -- taken with his helmet camera -- of a plainclothes state trooper cutting him off and drawing a gun during the traffic stop near Baltimore.

In early April, state police officers raided Graber's parents' home in Abingdon, Md. They confiscated his camera, computers and external hard drives. Graber was indicted for allegedly violating state wiretap laws by recording the trooper without his consent.
A question that comes to my mind is how the authoritarianism plays out. These raids actually make it appear that this is not driven by "the people" demanding more authoritarian government, but a reaction of the government against the people. It is the ruling class versus the people, something that has jumped into mainstream conversation due to this article:
America's Ruling Class -- And the Perils of Revolution

I won't excerpt that article because it is long and should be read in full. It's important because it takes ideas that only 2 or 3 years ago were on the fringe of political thought and has brought them into the mainstream. There's an undercurrent of libertarianism in there, as well as social conservatism. The overwhelming message is one of devolving power.

Economic indicators look weak

Mish is looking at the ECRI in: ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?

David Rosenberg sees some volatility, with recession probability increasing: Rosenberg On The Specifics Of The ECRI Leading Index As An Investment Tool
The growth rate on the ECRI leading index did it again! It sank further into negative terrain, now at -9.8% during the week ending July 9, down from -9.1% the prior week. This was the tenth deterioration in a row and the growth index is now negative for six straight weeks. We have never failed to have a recession with the ECRI at current levels but there is also inherent volatility in the index that requires acknowledgment. Our reckoning is that in the past few weeks, the index has gone from pricing in even-odds of a double-dip to two-in-three odds. It may take a while, but Mr. Market will figure it out before long.

...Relying on indicators that have been useful in previous post-WW2 recessions is like comparing the statistics of U.S. football teams versus the statistics of Australian football teams. They may be called the same thing but they are different sports. The economy is one sick puppy and we are seeing first hand now what it looks like once the crutch of government support is taken away.

Then there's Consumer Metrics Daily Growth Index:

Has the debt situation fundamentally improved in Europe?


Fears Intensify That Euro Crisis Could Snowball
After Tumult, Debt Worries Ease in Europe
Just two months ago, Europe’s sovereign debt problems seemed grave enough to imperil the global economic recovery. Now, at least some investors are treating it as the crisis that wasn’t.

The euro is up 10 cents from its lows versus the U.S. dollar and some investors are ready to declare the passing of the crisis, but volatility is high in the markets because investors' minds are volatile. They are moving rapidly between Armageddon and Goldilocks as they try to understand and accept reality. Many cannot fathom a long period of economic crisis because it hasn't happened in 80 years and the mood picks up rapidly on an otherwise typical bounce rally.

2010-07-18

Guangdong residents demonstrate for Cantonese

Provincial officials in defence of Cantonese
Guangzhou residents are taking the initiative to protect their mother tongue, with a call for people to gather next Sunday and recite Cantonese - a subtle form of protest - winning widespread support.


Against this background, top provincial leaders started a two-day meeting yesterday to discuss "cultural development in Guangdong", a propaganda department official said.

It's a development that underlines the significance of regional tensions on the mainland and anger at edicts from Beijing seen to undermine local culture.

The official said the government would release a policy outline and new regulations afterwards to boost "Cantonese cultural heritage".

The authorities also plan to hold a public forum, the official said, describing it as "one of the hottest topics that have grabbed our leaders' attention".

2010-07-16

Map of minimum wages in China

China's Wage Raise

Euro shorts continue to cover


Next week will be interesting with the stress tests on Friday and the euro at important technical levels. Both reverse head & shoulders and Fibonacci retracements are in play.

Socionomics—Audit the Fed to Financial Reform

I just wanted to give a very quick summary in one chart.
Audit the Fed CoSponsors

I used the House numbers to create a chart and compare it to the S&P 500 Index. There were no new cosponsors after December 1, 2009 in the House of Representatives. Note that there's either a delay, usual for politicians, or they were reacting to the Tea Parties, which started up in April around tax time. The big surge in cosponsers comes in the weeks following the week of April 15.


The chart below is a quick summary of what happened. Consider this snip from the WSJ article on the topic.
Fed Gets More Power, Responsibility
Just a few months ago, amid populist anger at the Fed for failing to prevent the financial crisis of 2008 and bailing out Wall Street, Congress was talking of stripping the central bank of its supervisory oversight of banks or forcing it to submit to congressional audit of its interest-rate decisions.

Instead, the new law gives the Fed more power and a better tool box to help prevent financial crises. It will become the primary regulator for large, complex financial firms of all kinds, such as American International Group, the insurer which built a massive derivatives portfolio that regulators didn't see until it was too late.




"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." -Rahm Emanuel

Markets in beauty

HOW SUPERMODELS ARE LIKE TOXIC ASSETS
When trying to figure out how winners happen in the modeling industry, the first thing to know is that nobody knows. This was one of the most striking things I discovered over the course of researching fashion. Clients—designers, photographers, and stylists—don’t know what makes one model a better choice than another. And how would they? It’s an inherently uncertain task, hinging upon aesthetic preference, unknown consumer demand, and quick turnover—fashion is, after all, by definition change.

Consider the Fashion Week catwalks. There are thousands of models worldwide that vie for a chance to appear in the shows of New York, London, Milan, and Paris, and nearly all of them meet a high bar of tall, slim, and beautiful. As many as 200 models may walk through a casting director’s door in a single day during show season, and typically the shows have just 15 – 40 slots to fill. That’s a lot of models to sort through.

How do the clients know which models to choose for their fashion shows? Plucking the right face from the flock to fit a particular designer’s look of the season is, as Prada casting director Russell Marsh told me, like finding a needle in a haystack. Russell peruses hundreds of images of women and men for potential spots in the Prada and Miu Miu runway shows and campaigns; he’s a key “Mover, Shaker and Style-Maker” according to the London Independent. When I put the question to him—why this model as opposed to that one?—he threw his hands up in the air, and excitedly pointed around his studio, “Why did I decide to buy this chair and sofa? You know, for me, it ticks the box. You know, it’s an internal thing!”

Like dozes of fashion producers I spoke with, Russell doesn’t really know what it is about a kid like Coco Rocha that excites him. He “just knows” if a model is right for him, and further, he “knows it when he sees it.” This instantaneous knowledge is what sociologist Patrik Aspers calls “contextual knowledge” that creative producers tap into as they broker otherwise “fuzzy” values like beauty and edginess. It’s also what sociologist Michel Abolafia has called “gut feeling” in his study of Wall Street traders—on the trading floor, brokers have a kind of 6th sense for what’s hot and cold.

2010-07-15

Thursday China roundup

SCMP has a bunch of articles painting a declining social mood.
New strike hits Honda parts supplier
A strike has broken out at a Guangdong factory supplying parts for Japan’s Honda Motor, the latest in a string of stoppages by mainland workers demanding a bigger piece of the country’s economic wealth.

The strike, at Atsumitec Company in the city of Foshan, began on Monday, with 170 workers striking after management fired about 100, a worker who declined to give his name told reporters by telephone.
This is becoming a regular occurrence and the English press is probably only covering a fraction of the stories.

HK shares fall, Henderson Land down after police raid
Property developer Henderson Land (SEHK: 0012) fell 2.1 per cent after Hong Kong police raided the company's headquarters as part of an investigation into the group's aborted sale of luxury apartments.
Henderson is one of the largest property developers in Hong Kong.

Subdued ABC debut dampens fundraising outlook
“Apparently, investors think the ABC IPO was overvalued, and the only reason it isn’t falling is that it’s a political task to keep it above the IPO price,” said Qiu Zhicheng, an analyst at Guosen Securities Co in Shanghai. “This is not good for other banks’ fundraisings going forward.”

However, some retail investors looked to ABC’s modest day-one performance as a positive sign for the long run.

“A debut like this means the stock price will soon choose a direction, and I think it’s more likely to rise,” said Tony Shu, a lawyer who bought 20,000 shares, worth around US$8,000, in the IPO. “I won’t sell ABC until it reaches 3 yuan, which I think is very possible,” he said.

ABC has about a 5 per cent weighting in the Shanghai Composite Index, putting it neck-and-neck with China Construction Bank (SEHK: 0939, announcements, news) (CCB) as the index’s third-biggest component.

Further weakness could bode ill for upcoming fundraisings by peers including Industrial & Commercial Bank of China (ICBC) and Bank of China, who are returning to capital markets to raise tens of billions of dollars to supplement their capital.

“I am naturally inclined to resist judging a stock on one day, but it’s certainly becoming clear that investors I’m talking to are taking this as a poor indicator for financing this quarter,” said Ben Collett, Head of Equities at Louis Capital in Hong Kong.

China's economy slows to 10.3pc
Annual gross domestic product growth moderated to 10.3 per cent from 11.9 per cent in the first quarter, the National Bureau of Statistics (NBS) said on Thursday. The reading was slightly below market forecasts of 10.5 per cent growth.

Other data suggested that curbs on lending to home buyers and local authorities, along with an ebbing of government stimulus spending and an end to inventory rebuilding, were biting with greater force as the quarter drew to a close.
TV switch from Cantonese rekindles fight over cultural diversity
Alarmed at the threat to his mother tongue, Guangzhou resident Yao Cheuk last month sent more than 100 e-mails and instant messages to friends and relatives.
His plea was simple: join an online survey and register a protest over Guangzhou Television's plan to switch the broadcast language on its two leading channels from Cantonese to Putonghua.

Yao was not alone in resisting the official effort to impose broadcasts in the national language. Like-minded residents on June 7 launched a discussion forum on a popular Guangzhou website to speak up for Cantonese.

"Their plan is ridiculous," Yao said. "Can't they show some respect for our culture? The United Nations says cultural diversity should be preserved because it is mankind's heritage."

Yao need not have worried about support for his plea. More than 80 per cent of the 30,000 respondents to a survey by the Guangzhou committee of the Chinese People's Political Consultative Conference opposed the plan.
This story is interesting. They've made the change for the upcoming Asian games, but listen to the arguments. Yesterday I linked to the story about gating migrant communities in Beijing and how that parallels the migration from Mexico into the United States. The arguments made by the Cantonese speakers to protect their language are the same as those made by Americans promoting English.
"We are talking about a harmonious society," he said. "How can our television be so selfish as to cater only to the needs of locals?

"We have 13 million people in Guangzhou, and at least six million of them are immigrants. They don't understand Cantonese and we can't exclude them."

Cantonese, which is spoken in Guangdong, Hong Kong, Macau and parts of the Guangxi Zhuang Autonomous Region , is regarded as a modern variant of the ancient Han language. In pronunciation, vocabulary and usage, it is very similar to the official language used during the Tang dynasty (618-907) and is a much older language than Putonghua, according to experts in linguistics.

To standardise Putonghua, officials decided to eliminate the indigenous usage and vocabulary of the Beijing dialect while including terms in wide use across the north, making the northern dialects the basis of the language.

As a result, Putonghua is not the native tongue of anyone, according to some experts who describe it as a linguistic artefact.

The government has stepped up efforts in recent years to promote Putonghua in Cantonese-speaking areas. Schools post banners reminding students of the importance of speaking Putonghua and equate the use of the national language to civilised behaviour. Some Guangzhou parents complain their children are now reluctant to speak Cantonese, even at home.

This assault on Cantonese is compounded by the increasing population of immigrants working and living in cities like Guangzhou.

Yao estimates the Cantonese-speaking community in the city has dwindled to less than half of the total population.
Newspaper slams mining firm after spill
One of China’s leading newspapers slammed a major mining firm on Thursday for its poor handling of a poisonous leak at a copper mine, as the company said it would cooperate with regulators in an investigation.
Zijin Mining Group (SEHK: 2899) suspended trading of its shares on Monday after news broke about the spill of wastewater containing acidic copper from its Zijinshan Copper Mine, into the Ting river in the southeastern province of Fujian.

But the contamination began much earlier, on the afternoon of July 3, and the public was initially kept in the dark about the spill, which went on for nearly 24 hours.

Communist Party mouthpiece the People’s Daily said the company explained that it did not report the accident earlier as “they thought it was just as small matter”.

“How can a company like Zijin Mining, which is an industry with a high risk of pollution, not take a ‘small problem’ seriously?” the newspaper said in a commentary.

“In industries with a high risk of pollution, small problems are the hidden dangers that lead to large accidents, and you can’t ever just count on your luck,” it added.
It's not every day that major state-owned corporations are slammed by the government mouthpiece, even if they deserve it.

64.5 million mainland houses lying vacant: economist
Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.
I don't think electricity meter readings give a clear picture, but there are undoubtedly many apartments purchased for investment that are vacant.

Compare the depressions

Five Things You Need to Know: The Modern Stealth Depression Revisited
It took a little more than two full years, December 11, 1931, before the New York Bank of the United States would collapse. Surely that would rattle a few cages. Well, no cover play. That was reserved for Dr. James Henry Breasted, "foremost Egyptologist of the US," but the bank collapse did garner a story in the Business section, below a piece on Lorillard Co., then in the news as "the only major industrial concern in the US to resume dividends in 1931."

Jesus, Mary, and Joseph -- what is wrong with these people? Haven't they even the vaguest sense of the impending doom they face? Someone should warn them. They're headed straight into a vicious buzz saw. It's like watching drunken sheep follow one another off the Cliffs of Moher.

On January 22, 1932, things turned desperate. The Reconstruction Finance Corporation was formed to dole out government aid to banks, railroads, farm mortgage associations, and all manner of failed business enterprises. By any decent measure of journalistic standards, this deserved top billing in a weekly newsmagazine. So Time's cover story on playwright Philip Barry's eleventh play, "The Animal Kingdom," comes as a sharp, kneecap-shattering nightstick blow.
Fast forward to today. Alex Jones complains that Americans are distracting themselves with TV, athletes and celebrities in
LeBron Nation: Americans Hypnotized As Country Collapses

China provides outlets for declining social mood

In China turns netizen anger on Seoul, Peter Lee takes a detailed look at the Cheonan incident and then focuses on how Chinese netizens have been allowed to blast the South Koreans online.
The strategy would have the added benefit of using vociferous and intolerant nationalism to crowd out domestic criticism of Communist Party rule and its various shortcomings, which threaten to become a dominant theme on China's lively, massive, and indignant domestic Internet despite extensive monitoring and censorship operations and the Herculean efforts of paid sock puppets to dilute and redirect unsuitable threads.

There are increasing signs that the Chinese government prefers to repackage its own media operations as channels for expressions of useful popular feelings and unobtrusively guided image and issue management, and not just explicit platforms for official government and party positions.

A flagship for this new experiment appears to be People's Daily Online English edition. As it attempts to keep up with China's rambunctious local tabloids, People's Daily Online has made some questionable editorial choices recently, including pushing a story that the Taliban is training monkeys to attack American troops in Afghanistan with assault rifles. [4]

It has also allowed posts on its forums that serve to decouple the website from official foreign policy positions and turn it into an expression of the purported concerns and priorities of Chinese netizens.

China has been awash with posts, editorials and articles flaying the United States and South Korea for planning military exercises in the Yellow Sea. As part of that trend, People's Daily Online featured a forum post [5] including some photographs of a US aircraft carrier in flames, obviously faked but apparently also extremely gratifying to the hypernationalist audience.

In an indication of the convoluted path of content across the Chinese Internet, the People's Daily English-language post was an uncredited cut-and-paste of an EastSouthWestNorth (ESWN) post [6], itself a credited translation of a Chinese-language post at my1510.cn [7] that reposted (with a credit only to the author, Jia Qingsen) an opinion piece in Nanfang Daily [8]. The opinion piece glossed the sina.com micro-blog hoax-post that had been pulled - but not until after it had created a sensation on the Chinese Internet.

Commentary on the photos discussed the role of popular opinion, at least for an English-speaking audience:

When there is such a vigorous official opposition, it is no surprise that some Chinese netizen would make up the story that "an American aircraft carrier has been bombed". In a certain sense, this can be regarded as the interplay between the official and civilian sectors in response to the South Korea-American military exercise in the Yellow Sea.
Jia Qingsen at Nanfang Daily, while decrying the false rumor (and reproducing two of the best pictures), declared it "reflected the feelings of the netizens (I don't know if it could be elevated to the level of 'national will' or not) and is worthy of being savored and heeded."


Obviously, neither accuracy nor copyright will stand in the way of the Chinese media savoring, heeding and pushing a crowd-pleasing piece of xenophobia.

It should also be noted that the nation most vulnerable to attacks led by aggrieved netizens is not the United States, but South Korea. The Super Junior jihad in early June, before the current Yellow Sea crisis emerged, gives an idea of the latent energy of anti-Korean xenophobia on the Chinese web.
Similar focused incidents were allowed against Japan a few years ago, over the issue of Japanese tectbooks that omit references to WWII massacres.

Secession talk in Alabama and San Francisco

Art Carden posts at Mises.org, Can Secession Succeed?

He links to his article in Forbes, Crazy In Alabama?
In response to an ongoing conflict over electronic bingo and other kinds of gambling, at least one legislator in Alabama's Seventh Congressional District--which includes part of the state's "Black Belt"--are discussing the possibility of seceding from Alabama and forming a new state. Residents of the district, over 60% of whom are African-American, claim that they are being slighted by the state government. The secession question speaks to a larger question: Does the United States have the right number of states? Should we have more?


In the San Francisco Chronicle there's The Bay Area needs to act like a city-state
It is clear that Sacramento can't solve California's problems. It is also clear that California's voters are unwilling to force real change, preferring merely to add to the state's thicket of ruinous, gridlock-inducing initiatives. Meanwhile, the mess in Sacramento is threatening the Bay Area's economic future.

That is why the Bay Area needs to start thinking like a city-state. In an age when nations have become so large that their citizens no longer identify with distant governments, city-states are political units large enough to have a global economic impact but small enough for even the most casual citizen to understand the relationships that make their city-state work. Politicians are local and thus more inclined to pragmatism and constructive action. Businesses understand that their fortunes are tied to the success of the local community. This balance between effect and size and the tendency toward social cohesion make contemporary city-states like Singapore and Hong Kong bright spots in an uncertain global economy.

2010-07-14

Governments crack down on migrants

Beijing starts gating, locking migrant villages
It's Beijing's latest effort to reduce rising crime often blamed on the millions of rural Chinese migrating to cities for work. The capital's Communist Party secretary wants the approach promoted citywide. But some state media and experts say the move not only looks bad but imposes another layer of control on the already stigmatized, vulnerable migrants.

So far, gates have sealed off 16 villages in the sprawling southern suburbs, where migrants are attracted to cheaper rents and in some villages outnumber permanent residents 10 to one.

"In some ways, this is like the conflict between Americans and illegal immigrants in the States. The local residents feel threatened by the influx of migrants," Huang Youqin, an associate professor of geography at the University at Albany in New York who has studied gating and political control in China, said in an e-mail. "The risk is that the government can control people's private life if it wants to."
As the article shows, this isn't an extreme policy for China. This method was used during SARS, for instance, to stop the spread of the disease. The comment about illegal immigration shows the parallel social mood, however, as both countries turn against human migration. Chinese are building fences in their cities, Americans want to build a fence on the border.

Fundamental reasons for a stronger U.S. dollar

Even though one factor may be enough to power a trend, I prefer investments that have several factors working in their favor.

In the case of the U.S. dollar, one argument is that there's a bull market based on the charts. Technical analysis is not concerned with the why.

The leading explanation for why the U.S. dollar will rally is that deflation will destroy U.S. dollars and make them more valuable (reduce the money supply through credit destruction). In addition to this "bearish" argument for a U.S. dollar bull market, there are also "bullish" arguments.

In a blog post today, Liu Junluo compares the U.S. economy's growth rate to the European economy's growth rate. He notes that when the U.S. was growing at 3-5% before 2008, Europe was growing at about 50-70% of the American rate. He sees the U.S. growing around 2.8% now, and Europe at 1%, or nearly one-third the rate. The difference is much larger and he believes it will translate into a major U.S. dollar bull market.
2008年前,美国经济年均增长在3%~5%,欧洲经济在2%~3%,那个时期美国经济增长速度高于欧洲经济50%~70%左右。现在美国经济最保守增长不低于2.8%,而欧洲经济最乐观增长是1%,从现在开始美国经济增长速度是高于欧洲经济是以几倍为基数来衡量了,所以美元未来疯涨又是个常识问题。社会不是由笨蛋来决定进步的,如果你相信美国核心层是由笨蛋组成的话,那何以解释中国大地愈演愈烈的移民潮。

Today, Michael Pettis discusses capital flows in The capital tsunami is a bigger threat than the nuclear option
In fact the real threat to the US economy is not the dumping of USG bonds. On the contrary, in the next two years the US markets are likely to be swamped by a tsunami of foreign capital, and this will have deleterious effects on the US trade deficit, debt levels, and employment. Investors and policymakers should be far more worried that China and other capital exporting countries are trying their hardest to maintain and even increase their capital exports, while the capital importing countries are either going to see capital imports collapse, or are trying desperately to bring them down.
Later on he writes
The US, in other words, is not likely to face the “nuclear option” of a Chinese disruption of the US Treasury bond market. It is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad.

Therein lies the problem. A reduction in net foreign capital inflows means a welcome decline in the US trade deficit, but the US is likely to see just the opposite. Foreign capital will push desperately into US markets and as an automatic consequence the US trade deficit will surge. So the problem isn’t too little capital inflow or a sudden boycott of USG bonds. On the contrary, the US will see too much capital inflow.

All this may turn out to be very bad for the US economy, but in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit? I would be willing to bet that we do.
I suggest reading the whole post if you are interested in speculation about Chinese dumping U.S. treasuries and why that won't happen.

As for a bull market in U.S. assets, I'm not fully convinced that U.S. markets will go up, but I do expect they will be relative outperformers because We are all currency traders now. In this article, Howard Simons concludes:
US mutual fund investors have been pumping their hard-printed pieces of paper overseas more than they've been keeping them home for the past five years, with the prominent exception of late 2008. This behavior has held regardless of the trend in the dollar, which indicates a belief that greater returns are to be had elsewhere. The sad truth is global equities have been homogenized by an efficient market into the current price reflecting future expectations for earnings. All that's left, then, is a currency trade -- and an expensive one at that.
Not far off from Prechter's "All one market" argument.

For the U.S. dollar bulls, there's a little comfort in knowing that the asset bulls and bears both find compelling reasons for a U.S. dollar rally.

2010-07-13

Chinese currency reform continues; why Chinese consumption is low

China Boosts Yuan Services for Taiwan
The People's Bank of China said Tuesday that it had authorized BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of state-controlled Bank of China Ltd., to offer yuan cash settlement services to Taiwan banks. BOC Hong Kong already supplies yuan banknotes and related exchange and repatriation services to banks in Hong Kong.

Products made in China often cost more there than in the West
The only difference — besides a manual written in Chinese — was the price. Luo paid $2,760. That's about $460, or 20%, more than an American buyer would spend at an Apple store or buying it online.

"It's a huge expense, but what can I do?" said Luo, a 24-year-old professional photographer who wears glasses with Buddy Holly frames.

The premium prices aren't limited to foreign-branded computers. Kobe Bryant's Nike sneakers with the Made in China label go for $165 in the U.S. But at an official Nike store in China? $190. A flat-screen Sony TV assembled by Chinese laborers runs about $800 at a Best Buy store in the U.S. But you'd pay 30% more at the popular Chinese appliance chain Gome. The same goes for that Maclaren Techno XT infant stroller. It's also manufactured here, but you'll typically pay 40% more for one at a Beijing mall than you would in the U.S.

It's a paradox of life here in the world's factory floor. The place known for delivering low-cost goods to Western consumers doesn't always do the same for its own people.

This may have been of little consequence to economists and world leaders a few years ago. But today, getting China's consumers to open their wallets is crucial to balancing a wobbly global economy grown too dependent on American and European shoppers.

It won't be easy. Chinese households are already famously frugal — and with good reason. A flimsy social safety net means tens of millions must save for their own education, healthcare and retirement. And while consumer spending has been rising along with China's prosperity, it has done so almost in spite of an economic model geared almost exclusively toward production rather than domestic consumption.
The social net reasoning is total bunk. It's just taking Peter's savings to pay for Paul's stuff, but its a popular story for economic illiterates and socialists. Next we get the real reasons:
For example, U.S. manufacturers have long complained that the Chinese government keeps the value of its currency, the yuan, artificially low. That has boosted China's exports by making its goods cheap for foreigners to buy. But it also makes imported products expensive for Chinese consumers.

Then there are taxes and levies. That Apple laptop is made at a factory that's granted a rebate on China's 17% value added tax, as long as those computers are exported and sold abroad. Chinese buyers aren't so fortunate. Before that same machine can be sold domestically, it is first sent to Hong Kong, a special administrative region of China, then returned to the mainland with a 20% import tariff, industry experts said.

The price penalty is frustrating to savvy Chinese consumers who know what things cost elsewhere thanks to the Internet and their own shopping trips abroad.

"When I saw the prices at an outlet mall in New York, I thought it was crazy how much we were paying in China," said Joanna Tong, 22, a Beijing native who has vacationed in the U.S. "It's not fair. Now that I know the prices in the U.S., I've been reluctant to shop here at all."
Not one mention of tax reform in the article. It's happening, slowly, and it will benefit consumption.

Tension in the Pacific

Only a few days ago I wrote Declining social mood evident in the Pacific, which looked at disputes over territorial waters and Japan's extension of its Air Defense Identification Zone (ADIZ).

Here's one Chinese outlook.
China takes new tack in maritime diplomacy
Beijing's stance on the South China Sea is a proclamation that China will no longer tolerate activity deemed unfriendly or hostile there, since no country would compromise on any issue concerning its core national interests.

In the Yellow Sea too, China has reacted with unprecedented strength over a planned United States-South Korean joint naval maneuver, which reportedly is likely to start now that the United Nations Security Council has adopted a resolution on the sinking of the South Korean corvette Cheonan in March. A firmer stand seems likely on territorial waters in the East China Sea, where China this month has been carrying out naval exercises aimed at rattling the United States over its sale of weapons to Taiwan.
Part of this is not socionomic, but rather the rise of China. Greater friction is natural when there is a rising power, no matter the intentions of the participants.
China's naval exercise happened, interestingly enough, after a PLAN officer told two visiting senior US officials in Beijing in March that China regarded the South China Sea as its territorial water and core national interest - the first time this has been said.

A major reason for China's more proactive interventions in regard to safeguarding its rights and interests in its territorial waters is that with its growing economic muscle, China no longer wants to tolerate any threat in its "near" seas from its neighbors or the United States.

The overtly unfriendly posture toward China from two of its strategic partners - the US and South Korea - is unacceptable to Beijing, especially since China compromised on the Iran nuclear issue and the Cheonan incident by voting in line with the US on two Security Council resolutions.
And the biggest conflict may be over territorial claims and natural resources with China's neighbors, not the U.S.:
Beijing's claim that the South China Sea (and hence other near seas) is part of its core interests is not only in response to perceptions of a US challenge, but also to the realities of geopolitical conflict in the area. In Beijing's view, the most controversial islands in the South China Sea, especially the Nansha (or Spratly) islands, have been occupied by neighboring countries.

Among them, Vietnam is perceived as the most aggressive, followed by the Philippines, Malaysia and Indonesia. Yet China only controls a small part of the Nansha islands, while the biggest island in the group, Taiping, is managed by Taiwan.

Mostly due to Beijing's weakness on the issue, these countries became more ambitious in strengthening their hold of the islands in the South China Sea. Vietnam, for example, has placed a new administrative division on some islands - although they have no permanent residents - and developed some tourist routes, and built military infrastructure to lay greater claim to sovereignty.
And then we come to the changing attitude of China (or what the author believes the change should be):
China should not be unjustly labeled as nationalistic, since it never claims other countries' territory. Simply for the sake of keeping "peace" and "stability", for a long time China has adopted an appeasement policy toward the US and neighboring countries.

But now, Beijing perhaps thinks appeasement is coming to an end. A friendly China is considered by some neighbors as a weak state, and hence potential conflicts are accumulating. So Beijing must stop playing the part of a non-contentious person. In the long run, a tougher China with a clear strategic policy toward the South China Sea and other seas will help maintain stability and peace in East and Southeast Asia.

Since the policy of "shelving disputes and co-developing" cannot effectively be put into practice because of a lack of cooperation from some Southeast Asian countries, it should be replaced by a new policy, even though the image of China as a peaceful rising power could be damaged.
The most probably area of conflict is not between the major powers in the Pacific, at least initially, but between China and its smaller neighbors. If the U.S. or Japan decided to get involved in these disputes, then there would be potential for wider conflict, but there's no reason for these disputes to ever result in military conflict. The major powers could reach agreements and freeze out the smaller states, for instance. A declining social mood does, however, make greater conflict more likely.