ThatDamnGood
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US Defaulting thread...
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ThatDamnGood
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US getting pissed on again. Are we ganging up on it too much?
World Bank chief surprises with gold standard idea - Yahoo! Finance
LONDON (Reuters) - Leading economies should consider adopting a modified global gold standard to guide currency rates, World Bank president Robert Zoellick said on Monday in a surprise proposal before a potentially acrimonious G20 summit.
Writing in the Financial Times, Zoellick called for a new system of floating currencies as a successor to the Bretton Woods fixed-exchange rate regime, which broke down in the early 1970s and involved measuring currency rates against gold.
The former U.S. trade representative, who served in several Republican administrations, said the new system "is likely to need to involve the dollar, the euro, the yen, the pound and (a Chinese yuan) that moves toward internationalization and then an open capital account.
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," he added.
Zoellick did not spell out in detail how this system might work, but said it would help to rebuild the confidence of financial markets and the general public in the global monetary system after the financial crisis.
However, policymakers appeared cool to the idea of returning to a gold standard, while many analysts said they doubted it would be implemented given practical difficulties.
European Central Bank President Jean-Claude Trichet said central bankers from around the world did not discuss returning to a gold standard at a meeting of the Bank for International Settlements in Switzerland on Monday.
"In my memory such an idea was mentioned a long time ago by Jim Baker when he was a (U.S.) Secretary of Treasury in the 1980s. I have no particular comment," Trichet told a news conference.
A German government official, speaking on condition of anonymity, said Zoellick was correct in worrying that currency values were becoming too vulnerable to the whims of governments, but added that the idea of a new gold standard was impractical.
"The diagnosis that Zoellick is making is correct: that monetary policy is becoming overly politicized," the official said. "The system, as it is, is not functioning well."
But he added that it would not be practical to use modern monetary policy tools in a system that was "based on a commodity whose availability is dictated by natural conditions."
Analysts said it would be very difficult to introduce any new gold standard partly because the global supply of gold was limited and might not be able to keep pace with the expansion of global trade and money supply.
"Going forward, that would be something that we could look toward, but it's not going to happen within a short period of time," said Ong Yi Ling at Phillip Futures in Singapore.
The price of gold barely moved in response to Zoellick's proposal. It briefly hit a record high of $1,398.35 an ounce early on Monday on concern about a weakening trend for the dollar, after the U.S. Federal Reserve last week decided to resume buying Treasury bonds to inflate its money supply.
SUMMIT ACRIMONY?
That policy has fed acrimony among leading economies in the Group of 20 in the run-up to their summit in Seoul on Thursday and Friday.
China and Germany, major exporting nations, have both criticized the Fed's quantitative easing -- effectively printing money -- which is weakening the dollar.
Investors are pumping dollars into emerging markets in search of higher yields, and the potentially destabilizing impact of this, along with big current account deficits and surpluses as well as China's reluctance to let the yuan appreciate faster, are set to dominate the G20 debate.
France, which takes over the G20 chair after this week's summit, says it plans to work on a new international monetary system to bring greater currency stability.
Beijing's central bank chief has suggested an alternative monetary system based on using the International Monetary Fund's Special Drawing Rights, a notional unit of value based on a basket of major currencies, instead of the dollar as the sole global reserve currency.
Zoellick was a senior official in the U.S. Treasury at the time of the 1985 Plaza and 1987 Louvre Accords on rebalancing currencies among major industrialized nations. He noted that that phase of currency coordination helped launch the Uruguay Round of world trade liberalization negotiations.
While his opinion article in the Financial Times did not represent either U.S. or World Bank policy, it may reflect a greater openness in Washington than in the last two decades to some form of international currency cooperation.
"The dollar is losing its relevance especially with the emergence of Asia economies, so a more neutral benchmark may be required. Gold, amid all the recent uncertainty, is proving its worth," said ANZ's senior commodity analyst Mark Pervan.
Zoellick said a new monetary system would take time to develop and should be part of a package approach including possible changes in IMF rules to review capital as well as current account policies, and linking IMF monetary assessments to World Trade Organization obligations.
World Bank chief surprises with gold standard idea - Yahoo! Finance
LONDON (Reuters) - Leading economies should consider adopting a modified global gold standard to guide currency rates, World Bank president Robert Zoellick said on Monday in a surprise proposal before a potentially acrimonious G20 summit.
Writing in the Financial Times, Zoellick called for a new system of floating currencies as a successor to the Bretton Woods fixed-exchange rate regime, which broke down in the early 1970s and involved measuring currency rates against gold.
The former U.S. trade representative, who served in several Republican administrations, said the new system "is likely to need to involve the dollar, the euro, the yen, the pound and (a Chinese yuan) that moves toward internationalization and then an open capital account.
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," he added.
Zoellick did not spell out in detail how this system might work, but said it would help to rebuild the confidence of financial markets and the general public in the global monetary system after the financial crisis.
However, policymakers appeared cool to the idea of returning to a gold standard, while many analysts said they doubted it would be implemented given practical difficulties.
European Central Bank President Jean-Claude Trichet said central bankers from around the world did not discuss returning to a gold standard at a meeting of the Bank for International Settlements in Switzerland on Monday.
"In my memory such an idea was mentioned a long time ago by Jim Baker when he was a (U.S.) Secretary of Treasury in the 1980s. I have no particular comment," Trichet told a news conference.
A German government official, speaking on condition of anonymity, said Zoellick was correct in worrying that currency values were becoming too vulnerable to the whims of governments, but added that the idea of a new gold standard was impractical.
"The diagnosis that Zoellick is making is correct: that monetary policy is becoming overly politicized," the official said. "The system, as it is, is not functioning well."
But he added that it would not be practical to use modern monetary policy tools in a system that was "based on a commodity whose availability is dictated by natural conditions."
Analysts said it would be very difficult to introduce any new gold standard partly because the global supply of gold was limited and might not be able to keep pace with the expansion of global trade and money supply.
"Going forward, that would be something that we could look toward, but it's not going to happen within a short period of time," said Ong Yi Ling at Phillip Futures in Singapore.
The price of gold barely moved in response to Zoellick's proposal. It briefly hit a record high of $1,398.35 an ounce early on Monday on concern about a weakening trend for the dollar, after the U.S. Federal Reserve last week decided to resume buying Treasury bonds to inflate its money supply.
SUMMIT ACRIMONY?
That policy has fed acrimony among leading economies in the Group of 20 in the run-up to their summit in Seoul on Thursday and Friday.
China and Germany, major exporting nations, have both criticized the Fed's quantitative easing -- effectively printing money -- which is weakening the dollar.
Investors are pumping dollars into emerging markets in search of higher yields, and the potentially destabilizing impact of this, along with big current account deficits and surpluses as well as China's reluctance to let the yuan appreciate faster, are set to dominate the G20 debate.
France, which takes over the G20 chair after this week's summit, says it plans to work on a new international monetary system to bring greater currency stability.
Beijing's central bank chief has suggested an alternative monetary system based on using the International Monetary Fund's Special Drawing Rights, a notional unit of value based on a basket of major currencies, instead of the dollar as the sole global reserve currency.
Zoellick was a senior official in the U.S. Treasury at the time of the 1985 Plaza and 1987 Louvre Accords on rebalancing currencies among major industrialized nations. He noted that that phase of currency coordination helped launch the Uruguay Round of world trade liberalization negotiations.
While his opinion article in the Financial Times did not represent either U.S. or World Bank policy, it may reflect a greater openness in Washington than in the last two decades to some form of international currency cooperation.
"The dollar is losing its relevance especially with the emergence of Asia economies, so a more neutral benchmark may be required. Gold, amid all the recent uncertainty, is proving its worth," said ANZ's senior commodity analyst Mark Pervan.
Zoellick said a new monetary system would take time to develop and should be part of a package approach including possible changes in IMF rules to review capital as well as current account policies, and linking IMF monetary assessments to World Trade Organization obligations.
Chinese-Dragon
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We shouldn't just assume that our rivals will fail.
That will just make us lazy. What if they don't fail?
That will just make us lazy. What if they don't fail?
ThatDamnGood
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Not assuming anything.
For me, when it happens, then it happens. But there are things you can't so easily reverse. As long as the smarter ones are sidelined, things will be fine for China.
I don't assume Taiwan is a done deal. And if it isn't and the civil war resumes, US will be an adversary. Hence the bottom line in any future scenario has the US as an adversary.
In the mean time, I will highlight US isolation. Seems their spin on China's isolation was based more on their fear for themselves.
G20 finds common ground opposing U.S. - Yahoo! News
G20 finds common ground opposing U.S.
By Emily Kaiser Emily Kaiser Sun Nov 7, 3:02 pm ET
WASHINGTON (Reuters) – The Group of 20 is beginning to look more like the G19 plus 1 as emerging and rich countries alike accuse the United States of breaking a vow of unity.
This week's G20 summit will require every bit of President Barack Obama's diplomacy skills after the Federal Reserve embarked on a new $600 billion bond-buying spree, sparking criticism from four continents that the U.S. central bank was ignoring the global repercussions.
Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.
If the G20 fails to defuse these global tensions, it may heighten investor concerns that policymakers are drifting further apart, leaving the world economy vulnerable to another bout of upheaval.
Domestic politics and policies make Obama's job tougher.
He arrives in Seoul for the November 11-12 summit weakened by a crushing congressional election defeat for his Democratic Party. His primary task will be to convince his peers the Fed's actions do not run counter to a U.S.-led push for global cooperation to even out economic imbalances.
(For a graphic on G20 economies, see http://link.reuters.com/tah43q)
South African Finance Minister Pravin Gordhan said the Fed's move "undermines the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis."
German Finance Minister Wolfgang Schaeuble was less diplomatic. He called U.S. policy "clueless."
It was less than five months ago that G20 leaders gathered in Toronto, talking in warm and fuzzy terms about "collective well-being" and "shared objectives."
"G20 members have a responsibility to the community of nations to assure the overall health of the global economy," the leaders said in their closing statement in June.
"If we act in a coordinated manner, all regions are better off, now and in the future."
G20 PLUS QE2 = CATCH 22
Since that Toronto meeting, the dollar has dropped 11 percent against a basket of currencies, driving up currencies in Japan, Brazil, the euro zone and elsewhere. The biggest exception is China, where the tightly managed yuan has gained a relatively modest 2 percent versus the dollar since late June.
Obama's response to G20 criticism is expected to be that the world needs a healthy U.S. economy, and the U.S. economy needs healthier exports.
Fed Chairman Ben Bernanke himself said a strong U.S. economy was critical for the global recovery, and his central bank was well aware of the dollar's "special role" in the global economy and monetary system.
Indeed, G20 members all seem to agree that the world needs a better balance between cash-rich exporters such as China and Germany and heavily indebted consumer countries like the United States. The difference lies in how best to accomplish that.
For emerging markets fearful that the Fed's flood of cash will swamp their economies, the United States does not seem to be keeping up its end of the "shared objectives" bargain.
That makes it harder for Washington to push for policy changes elsewhere, particular in Beijing, which insists the yuan is not the primary culprit behind big global trade gaps. Treasury Secretary Timothy Geithner's proposal to set numerical targets limiting current account imbalances was roundly rejected at a G20 finance ministers meeting last month.
The Obama administration was the driving force behind a proposal adopted by the G20 in Pittsburgh last year to promote more balanced global growth.
That framework may be the best bet for G20 consensus at this week's Seoul summit.
Unlike Geithner's numerical targets, the framework for balanced growth calls for mutual assessments to ensure domestic policies don't disrupt global growth.
G20 countries submitted their medium-term economic plans for International Monetary Fund review last month. Leaders may agree to keep this process going beyond Seoul, keeping the IMF as arbiter.
The Fund told the G20 nations in June that if they adopt mutually supportive policies, they could raise global output by $4 trillion and create 52 million jobs in the medium term.
Unless leaders can put on a convincing show of cooperation in Seoul this week, those loftier economic goals may remain well out of reach.
For me, when it happens, then it happens. But there are things you can't so easily reverse. As long as the smarter ones are sidelined, things will be fine for China.
I don't assume Taiwan is a done deal. And if it isn't and the civil war resumes, US will be an adversary. Hence the bottom line in any future scenario has the US as an adversary.
In the mean time, I will highlight US isolation. Seems their spin on China's isolation was based more on their fear for themselves.
G20 finds common ground opposing U.S. - Yahoo! News
G20 finds common ground opposing U.S.
By Emily Kaiser Emily Kaiser Sun Nov 7, 3:02 pm ET
WASHINGTON (Reuters) – The Group of 20 is beginning to look more like the G19 plus 1 as emerging and rich countries alike accuse the United States of breaking a vow of unity.
This week's G20 summit will require every bit of President Barack Obama's diplomacy skills after the Federal Reserve embarked on a new $600 billion bond-buying spree, sparking criticism from four continents that the U.S. central bank was ignoring the global repercussions.
Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.
If the G20 fails to defuse these global tensions, it may heighten investor concerns that policymakers are drifting further apart, leaving the world economy vulnerable to another bout of upheaval.
Domestic politics and policies make Obama's job tougher.
He arrives in Seoul for the November 11-12 summit weakened by a crushing congressional election defeat for his Democratic Party. His primary task will be to convince his peers the Fed's actions do not run counter to a U.S.-led push for global cooperation to even out economic imbalances.
(For a graphic on G20 economies, see http://link.reuters.com/tah43q)
South African Finance Minister Pravin Gordhan said the Fed's move "undermines the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis."
German Finance Minister Wolfgang Schaeuble was less diplomatic. He called U.S. policy "clueless."
It was less than five months ago that G20 leaders gathered in Toronto, talking in warm and fuzzy terms about "collective well-being" and "shared objectives."
"G20 members have a responsibility to the community of nations to assure the overall health of the global economy," the leaders said in their closing statement in June.
"If we act in a coordinated manner, all regions are better off, now and in the future."
G20 PLUS QE2 = CATCH 22
Since that Toronto meeting, the dollar has dropped 11 percent against a basket of currencies, driving up currencies in Japan, Brazil, the euro zone and elsewhere. The biggest exception is China, where the tightly managed yuan has gained a relatively modest 2 percent versus the dollar since late June.
Obama's response to G20 criticism is expected to be that the world needs a healthy U.S. economy, and the U.S. economy needs healthier exports.
Fed Chairman Ben Bernanke himself said a strong U.S. economy was critical for the global recovery, and his central bank was well aware of the dollar's "special role" in the global economy and monetary system.
Indeed, G20 members all seem to agree that the world needs a better balance between cash-rich exporters such as China and Germany and heavily indebted consumer countries like the United States. The difference lies in how best to accomplish that.
For emerging markets fearful that the Fed's flood of cash will swamp their economies, the United States does not seem to be keeping up its end of the "shared objectives" bargain.
That makes it harder for Washington to push for policy changes elsewhere, particular in Beijing, which insists the yuan is not the primary culprit behind big global trade gaps. Treasury Secretary Timothy Geithner's proposal to set numerical targets limiting current account imbalances was roundly rejected at a G20 finance ministers meeting last month.
The Obama administration was the driving force behind a proposal adopted by the G20 in Pittsburgh last year to promote more balanced global growth.
That framework may be the best bet for G20 consensus at this week's Seoul summit.
Unlike Geithner's numerical targets, the framework for balanced growth calls for mutual assessments to ensure domestic policies don't disrupt global growth.
G20 countries submitted their medium-term economic plans for International Monetary Fund review last month. Leaders may agree to keep this process going beyond Seoul, keeping the IMF as arbiter.
The Fund told the G20 nations in June that if they adopt mutually supportive policies, they could raise global output by $4 trillion and create 52 million jobs in the medium term.
Unless leaders can put on a convincing show of cooperation in Seoul this week, those loftier economic goals may remain well out of reach.
Chinese-Dragon
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muse
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I would bring readers attention to Mr. Obama's public statements in India about seeking precisely what has been rejected at the G20 finance ministers meeting -- - seems to me that this beginning to be a dangerous time for the global economy - while the US has for the most part been a benign power, in this instance, we should be careful to not allow what in my opinion are criminals, to hide behind US rhetoric -- we warned (see thread "Silent War" on the World affairs board) that while fingers were being pointed at others, it would be highly irresponsible to distribute internationally structural loss the US has incurred and whose solution remains owning up to those losses.
ThatDamnGood
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After Eisenhower, they have not been benign. He stopped the Suez invasion. After that, they have been invading instead.
Capital controls (direct and indirect) will stop real estate bubbles locally but they cannot stop international commodity and food prices from rising due to QE2.
You wait and see the food riots next year. Chapatis and stuff are going to get expensive...
US will be so loved all over the world.
Then China will have even more pretext to do more stuff MUAHAHAHAHA
ThatDamnGood
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More analysis from smarter Americans.
Gold Trades North Of $1,420 After China's PBOC Advisor Li Says "Absurd" Dollar Is Reserve Currency | zero hedge
I use such sources not to avoid creating an image of being a rabid anti American but rather, I think its also important to understand that there are smart ones. While Jim Rogers, Ron Paul, Peter Schiff, etc obviously come to mind, it be good to know there are many others but its is also important to know that there dun make the rulez in the US. They ain't in the loop.
So who does?
YouTube - green day - american idiot HD
So prophetic - Greenspan, Bush, Cheney, Geithner, Obama, Bernake ...
Gold Trades North Of $1,420 After China's PBOC Advisor Li Says "Absurd" Dollar Is Reserve Currency | zero hedge
I use such sources not to avoid creating an image of being a rabid anti American but rather, I think its also important to understand that there are smart ones. While Jim Rogers, Ron Paul, Peter Schiff, etc obviously come to mind, it be good to know there are many others but its is also important to know that there dun make the rulez in the US. They ain't in the loop.
So who does?
YouTube - green day - american idiot HD
So prophetic - Greenspan, Bush, Cheney, Geithner, Obama, Bernake ...
below_freezing
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now is the time to start stocking food. prices will simply continue rising. i'm going out and buying enough snack cake to last a month.
ThatDamnGood
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Americans are lucky that they are MREs easily available.
ThatDamnGood
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Fed Global Backlash Grows - WSJ.com
Mr. Clueless just appeared.
Mr. Obama enlisted an ally in Mr. Singh, an economist whose country is wielding increasing influence at the G-20. Responding to Mr. Schäuble's criticism of the Fed, the prime minister said, "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."
Mr. Clueless just appeared.
Mr. Obama enlisted an ally in Mr. Singh, an economist whose country is wielding increasing influence at the G-20. Responding to Mr. Schäuble's criticism of the Fed, the prime minister said, "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."
ThatDamnGood
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Dagong report on the US
Dagong Sovereign Credit Rating Report for the US
Page 9
"In essence, the depreciation of the US dollar adopted by the US government indicates that its solvency is on the brink of collapse, therefore it wants to cuts its debt through the act of devaluation with the national will; such a move has severely harmed the interest of its creditors. The whole world, consequently will have to face a period of dramatic adjustment
of interest patterns."
...
Notice the calm with which this was written.
Dagong Sovereign Credit Rating Report for the US
Page 9
"In essence, the depreciation of the US dollar adopted by the US government indicates that its solvency is on the brink of collapse, therefore it wants to cuts its debt through the act of devaluation with the national will; such a move has severely harmed the interest of its creditors. The whole world, consequently will have to face a period of dramatic adjustment
of interest patterns."
...
Notice the calm with which this was written.
ThatDamnGood
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China's Sure Bet
By LESLIE P. NORTON
Barron's
November 6 2010
As the dollar wobbles, China is pulling back from U.S. Treasury securities and buying up hard assets around the world.
THIS YEAR, FOR THE FIRST TIME EVER, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds.
China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of U.S. government debt ranged as high as $100 billion a year.
Why does China now have such a voracious appetite for hard assets? The most frequently cited reason is its need to feed its rapidly expanding industrial base. True enough. But it's also important to see China's reduction in Treasury purchases and its sharp increase in hard-asset deals as part of its currency strategy. It's widely accepted that the Chinese currency, the yuan, is undervalued against the dollar, perhaps by as much as 40%. Based on moves made in the past few years, it seems likely that Chinese officials will let the yuan, which is pegged to the dollar, rise by 2% to 3% against the greenback each year.
In the face of such a weak dollar, it doesn't make much sense to keep investing heavily in Treasuries or any other dollar-based asset. The annual interest payments can easily be outweighed by the loss in the dollar's value. There are serious concerns in Beijing, too, about the creditworthiness of U.S. debt. The smarter bet is to invest in assets that are likely to hold their value, or even increase in value, as the dollar continues its slide.
Iron ore in Sierra Leone. Mines in South Africa. Coal and gas in Australia. Oil in Brazil and Venezuela. Even Canada's timber industry is reviving as a result of demand from China. Just last week, China jacked up estimates for how much uranium it will need for nuclear power plants (see story, "Uranium's Unhealthy Glow.")
The recent move by the Federal Reserve to start buying $600 billion of government bonds, known as QE2, will only hasten China's rush for hard assets. Because it amounts to printing money, "QE2 makes the dollar even less attractive," notes Jim Lennon, head of commodities at Macquarie Bank in London. "It's certainly a policy orientation of China to diversify, and they are buying commodities as a strategic investment, and opportunistically."
China's preference for hard assets over Treasuries, taken by itself, is sure to put upward pressure on U.S. interest rates and make U.S. economic growth somewhat more difficult than it would be if China went back to its previous policy of buying heftier amounts of U.S. government debt each year. Lately, however, any "China effect" has been overwhelmed by Treasury purchases by the Federal Reserve.
For its part, China must maintain a balance between investing wisely and making sure the U.S. remains economically healthy enough to absorb Chinese exports. That consideration will become less important as China further expands its own domestic market and becomes less reliant on exports.
CHINA HAS BEEN ACCUMULATING hard assets at a rapid clip for several years. Among this year's biggest deals, CNOOC (ticker: CEO), China's largest offshore oil producer and one of its most powerful state-owned companies, is spending $2.2 billion for shale acreage in the U.S. owned byChesapeake Energy (CHK) and $3.1 for 50% of a unit of Argentina's Bridas Energy. State Grid Corp. of China plowed $1 billion into Chilean copper deposits. Sinopec (SNP) coughed up $4.6 billion for 9% of ConocoPhilips (COP)—and another $7.1 billion for 40% of Repsol's (REP) Brazilian unit.
When China can't buy the business, it buys the underlying commodity. China's Sinofert, after weighing and dropping a bid for Potash Corp. (POT) to counter BHP Billiton's hostile offer, announced last week that it would buy $2.2 billion of the key fertilizer ingredient from Canpotex, the monopoly whose three members include Potash.
Chinas's investments in hard assets are growing quickly. In June, even as the mainland dumped a net $15.6 billion of U.S. Treasury and agency bonds, it also bought $1.1 billion in Canadian minerals and Mozambique coal deposits. "China is upgrading its industries, and all are very heavy users of these materials," explains Lu Kang, deputy director general of the Ministry of Foreign Affairs in Beijing.
Adds He Ning, director general of the Ministry of Commerce in Beijing: "China is starting to make overseas investments as a return to the world. It's just a start." As such deals become more numerous, says He, "people will no longer pay attention."
For now, though, the hard-asset investments are making China a standout. In 2008, even as global investment flows by countries around the world fell by 15%, China's more than doubled, points out Ken Davies, a research fellow at Columbia University's Vale Center for Sustainable Investment. In 2009, when the global flows fell 43%, China's inched up by 1%. Had Chinalco's bid to increase its stake in mining giant Rio Tinto (RIO) not fallen apart, China's foreign investment in '09 would have been up by 36%. And last year, for the first time, China purchased more assets in the U.S. than the U.S. did in China, according to data information provider Dealogic.
For 2010, China's nonbond investments around the world, primarily commodities, should hit $55 billion, says Derek Scissors, a research fellow at the Heritage Foundation who keeps a database of China's investments over $100 million. The foundation's data closely tracks the official data published annually by Beijing's Ministry of Commerce.
At the same time, China's net purchases of U.S. Treasury securities are likely to fall to $55 billion this year from about $100 billion last year, says Joe Quinlan, chief market strategist at U.S. Trust. "They're just drowning in dollars," says Quinlan. "QE2 will make them even less likely to want U.S. paper."
Much of China's hard-asset investing is by state-owned companies as part of Beijing's industrial strategy; as state-owned operations, they bear an implicit government guarantee. They often take minority stakes because all the check-writing makes people nervous. Says Michael Perkinson, the China expert at Veracity Worldwide, a risk-management consultancy: "Chinese companies are committed to being very deliberate." After CNOOC's 2003 takeover bid for Unocal was thwarted by Capitol Hill, "They feel they've been burned."
Some of the investments are made by China Investment Corp. and the State Administration of Foreign Exchange Investment Co., both sovereign-wealth funds that are charged with diversifying China's $2.5 trillion in foreign-exchange reserves. After the values of big stakes in Blackstone and Morgan Stanley slid during the financial crisis, CIC reevaluated its strategy, investing last year in commodity companies like Hong Kong's Noble Group, Russia's Nobel Oil, and Canada's South Gobi Energy Resources.
IN 2001, BEIJING launched its "zou chuqu" edict for Chinese companies to "go global"—to develop world-class brands, diversify import sources, expand export markets, boost competitiveness and reduce low-return currency reserves. The U.S. was the perfect destination: China had massive amounts of dollars and the U.S. had plenty of the types of resources that China needs. Lenovo (0992.Hong Kong), for example, acquired a world-class PC manufacturer from IBM. Relates Andy Rothman, a former U.S. diplomat and the top China analyst at CLSA Asia-Pacific Markets: "It was frustrating to them that they were driving the growth in demand for resources but didn't have a seat at the table."
Then came the Unocal debacle in 2005, when CNOOC withdrew a buyout offer after organized opposition from Congress. Reeling, China began a hunt for assets elsewhere around the globe. But Western multinationals had most of the resources tied up. "The problem is the existing monopoly system is very hard to break down," says Fan Gang, a prominent Beijing economist and former advisor to China's central bank. "Being a latecomer is not easy. We were very late, and very cornered."
That drove China to some of the riskier parts of the globe. It pushed heavily into resource-rich Africa. Beijing pronounced 2006 "The Year of Africa" and began buying up resources there.
It wooed leaders of countries the West might find unsavory. "In China, there is no concept of a failed state. The Chinese way is to stoke the pace of development," says Jin Linbo, a senior fellow at the influential China Institute of International Studies in Beijing.
In many African countries, where investment plummeted after the end of the Cold War, China's interest was hugely appreciated. China offered, in addition to direct investment, a mix of cheap loans and infrastructure improvements, export credits, and regular visits by top brass from the mainland.
Industrial & Commercial Bank of China (1398.Hong Kong)—bought 20% of Standard Bank, the continent's largest financial institution. China financed the presidential palace in Sudan. It built soccer stadiums. "If you are a typical multinational, you do a one-shot deal. China will build a port, a refinery. China is investing big time in what counts for Africa," says V. Shankar, CEO for Middle East, Africa, Europe and the Americas for Standard Chartered, the London-based banking company.
Even noncontroversial nations welcomed the People's Republic. Botswana's president famously said: "I find that the Chinese treat us as equals. The West treats us as former subjects." All that the mainland asks for, in turn, is that the countries cut ties with Taiwan.
CONSIDER THE CASE of Kosmos Energy's stake in a massive offshore field in Ghana, which state-owned Ghana National Petroleum Corp. and CNOOC offered to buy for $5 billion. Exxon Mobil (XOM) withdrew a $4 billion offer in August, amid signs that Accra favored the Chinese-backed bid. The next month, China Export-Import Bank loaned Ghana $10.4 billion for infrastructure projects; China Development Bank offered another $3 billion loan to develop Ghana's oil and gas sector. Last week, Texas-based Kosmos, which is backed by Warburg Pincus and Blackstone, rejected the CNOOC offer as too low. But observers believe the CNOOC group will keep pursuing it.
China built pipelines across Kazakhstan and Uzbekistan, and began mining for copper south of Kabul. It hopes to build roads and pipelines through Pakistan and Afghanistan. That has U.S. officials seething. "The Chinese are not particularly concerned about the regime they deal with. They are oligopoly buyers who drive up prices all around the world. In U.S. trade policy, we need to think about the way China is directing its state-owned companies," says one top U.S. diplomat in Asia.
Less controversially, China invested heavily in Australia, where it is such a large presence that Australia's Foreign Investment Review Board recommends that Chinese ownership stakes stay below 50%. In Australia, Chinese acquirers accounted for 40% of 2009's inbound mining transactions. The mainland has committed to buying 20 years worth of natural gas from Chevron's $37 billion project on Australia's Barrow Island. It already owns 9% of Rio Tinto and has tried to buy more; after that effort failed, it detained a Rio Tinto executive in China for alleged bribery.
Beijing's new five-year plan, to be adopted early next year, will focus on more sustainable growth: higher consumption, lower dependence on exports, increased wages in the interior, more efficient energy consumption. That might "slow" demand for resources, says Scissors of the Heritage Foundation, "but they will still have a deficit in commodities and primary products and will invest to protect supply."
In coming years, China will face more competition for resources from other rapidly developing nations, all of them industrializing and huge owners of dollars. Of the total $8.1 trillion in foreign exchange reserves held by countries in 2009, more than 60% was held by 11 Asian countries., according to Christopher McNally of the East West Center.
"The financial crisis of 2008 encouraged people to make investments in hard assets as opposed to U.S. Treasuries," says Colin Banfield, head of Asian mergers and acquisitions for Citigroup in Hong Kong. "There's a desire to spend reserves on actual businesses rather than holding the currency."
Thanks to its resource purchases in Africa, "China has leapfrogged India by a quarter mile," says Shankar of Standard Chartered.
The appreciating yuan also means buying abroad will be easier. CLSA Asia-Pacific Markets says that a rate of five yuan to the dollar, versus 6.65 today, would reduce "economic distortions," and help create a consumer economy: China's market would suddenly become 33% larger. At that rate, CLSA predicts, China's "reserve accumulation and consequently its official purchases of U.S. Treasuries will slow to a tiny fraction of the current pace." Manufacturing in China gets less attractive; factories in the U.S. become more alluring.
Already the world's second-largest economy, the mainland is expected to have more than 350 million middle-class households in the next decade. Imagine what that means for future commodities prices.
China is now the world's largest consumer of copper, tin, steel, coal, aluminum and seaborne iron ore, and the second largest consumer of oil. And investors are betting on an array of companies they think will benefit. At T. Rowe Price, that includes companies like Freeport McMoran Copper & Gold (FCX), the largest publicly traded copper producer, Peabody Energy (BTU) and Joy Global (JOYG).
"The reality of the situation is everything you touch in commodities is affected" by China's hearty appetite, says Rick de los Reyes, who follows the materials industry for T. Rowe Price.
"In some ways, China has the most perfect information, because much of what's driving commodity prices higher is Chinese demand," says Shawn Driscoll, an energy specialist at T. Rowe Price and keen observer of the mainland's movements around the globe. "The Chinese government knows what their needs are long-term. From my perspective, they are the most informed buyer."
For the U.S. Treasury market, that may not be such a good thing.
By LESLIE P. NORTON
Barron's
November 6 2010
As the dollar wobbles, China is pulling back from U.S. Treasury securities and buying up hard assets around the world.
THIS YEAR, FOR THE FIRST TIME EVER, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds.
China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of U.S. government debt ranged as high as $100 billion a year.
Why does China now have such a voracious appetite for hard assets? The most frequently cited reason is its need to feed its rapidly expanding industrial base. True enough. But it's also important to see China's reduction in Treasury purchases and its sharp increase in hard-asset deals as part of its currency strategy. It's widely accepted that the Chinese currency, the yuan, is undervalued against the dollar, perhaps by as much as 40%. Based on moves made in the past few years, it seems likely that Chinese officials will let the yuan, which is pegged to the dollar, rise by 2% to 3% against the greenback each year.
In the face of such a weak dollar, it doesn't make much sense to keep investing heavily in Treasuries or any other dollar-based asset. The annual interest payments can easily be outweighed by the loss in the dollar's value. There are serious concerns in Beijing, too, about the creditworthiness of U.S. debt. The smarter bet is to invest in assets that are likely to hold their value, or even increase in value, as the dollar continues its slide.
Iron ore in Sierra Leone. Mines in South Africa. Coal and gas in Australia. Oil in Brazil and Venezuela. Even Canada's timber industry is reviving as a result of demand from China. Just last week, China jacked up estimates for how much uranium it will need for nuclear power plants (see story, "Uranium's Unhealthy Glow.")
The recent move by the Federal Reserve to start buying $600 billion of government bonds, known as QE2, will only hasten China's rush for hard assets. Because it amounts to printing money, "QE2 makes the dollar even less attractive," notes Jim Lennon, head of commodities at Macquarie Bank in London. "It's certainly a policy orientation of China to diversify, and they are buying commodities as a strategic investment, and opportunistically."
China's preference for hard assets over Treasuries, taken by itself, is sure to put upward pressure on U.S. interest rates and make U.S. economic growth somewhat more difficult than it would be if China went back to its previous policy of buying heftier amounts of U.S. government debt each year. Lately, however, any "China effect" has been overwhelmed by Treasury purchases by the Federal Reserve.
For its part, China must maintain a balance between investing wisely and making sure the U.S. remains economically healthy enough to absorb Chinese exports. That consideration will become less important as China further expands its own domestic market and becomes less reliant on exports.
CHINA HAS BEEN ACCUMULATING hard assets at a rapid clip for several years. Among this year's biggest deals, CNOOC (ticker: CEO), China's largest offshore oil producer and one of its most powerful state-owned companies, is spending $2.2 billion for shale acreage in the U.S. owned byChesapeake Energy (CHK) and $3.1 for 50% of a unit of Argentina's Bridas Energy. State Grid Corp. of China plowed $1 billion into Chilean copper deposits. Sinopec (SNP) coughed up $4.6 billion for 9% of ConocoPhilips (COP)—and another $7.1 billion for 40% of Repsol's (REP) Brazilian unit.
When China can't buy the business, it buys the underlying commodity. China's Sinofert, after weighing and dropping a bid for Potash Corp. (POT) to counter BHP Billiton's hostile offer, announced last week that it would buy $2.2 billion of the key fertilizer ingredient from Canpotex, the monopoly whose three members include Potash.
Chinas's investments in hard assets are growing quickly. In June, even as the mainland dumped a net $15.6 billion of U.S. Treasury and agency bonds, it also bought $1.1 billion in Canadian minerals and Mozambique coal deposits. "China is upgrading its industries, and all are very heavy users of these materials," explains Lu Kang, deputy director general of the Ministry of Foreign Affairs in Beijing.
Adds He Ning, director general of the Ministry of Commerce in Beijing: "China is starting to make overseas investments as a return to the world. It's just a start." As such deals become more numerous, says He, "people will no longer pay attention."
For now, though, the hard-asset investments are making China a standout. In 2008, even as global investment flows by countries around the world fell by 15%, China's more than doubled, points out Ken Davies, a research fellow at Columbia University's Vale Center for Sustainable Investment. In 2009, when the global flows fell 43%, China's inched up by 1%. Had Chinalco's bid to increase its stake in mining giant Rio Tinto (RIO) not fallen apart, China's foreign investment in '09 would have been up by 36%. And last year, for the first time, China purchased more assets in the U.S. than the U.S. did in China, according to data information provider Dealogic.
For 2010, China's nonbond investments around the world, primarily commodities, should hit $55 billion, says Derek Scissors, a research fellow at the Heritage Foundation who keeps a database of China's investments over $100 million. The foundation's data closely tracks the official data published annually by Beijing's Ministry of Commerce.
At the same time, China's net purchases of U.S. Treasury securities are likely to fall to $55 billion this year from about $100 billion last year, says Joe Quinlan, chief market strategist at U.S. Trust. "They're just drowning in dollars," says Quinlan. "QE2 will make them even less likely to want U.S. paper."
Much of China's hard-asset investing is by state-owned companies as part of Beijing's industrial strategy; as state-owned operations, they bear an implicit government guarantee. They often take minority stakes because all the check-writing makes people nervous. Says Michael Perkinson, the China expert at Veracity Worldwide, a risk-management consultancy: "Chinese companies are committed to being very deliberate." After CNOOC's 2003 takeover bid for Unocal was thwarted by Capitol Hill, "They feel they've been burned."
Some of the investments are made by China Investment Corp. and the State Administration of Foreign Exchange Investment Co., both sovereign-wealth funds that are charged with diversifying China's $2.5 trillion in foreign-exchange reserves. After the values of big stakes in Blackstone and Morgan Stanley slid during the financial crisis, CIC reevaluated its strategy, investing last year in commodity companies like Hong Kong's Noble Group, Russia's Nobel Oil, and Canada's South Gobi Energy Resources.
IN 2001, BEIJING launched its "zou chuqu" edict for Chinese companies to "go global"—to develop world-class brands, diversify import sources, expand export markets, boost competitiveness and reduce low-return currency reserves. The U.S. was the perfect destination: China had massive amounts of dollars and the U.S. had plenty of the types of resources that China needs. Lenovo (0992.Hong Kong), for example, acquired a world-class PC manufacturer from IBM. Relates Andy Rothman, a former U.S. diplomat and the top China analyst at CLSA Asia-Pacific Markets: "It was frustrating to them that they were driving the growth in demand for resources but didn't have a seat at the table."
Then came the Unocal debacle in 2005, when CNOOC withdrew a buyout offer after organized opposition from Congress. Reeling, China began a hunt for assets elsewhere around the globe. But Western multinationals had most of the resources tied up. "The problem is the existing monopoly system is very hard to break down," says Fan Gang, a prominent Beijing economist and former advisor to China's central bank. "Being a latecomer is not easy. We were very late, and very cornered."
That drove China to some of the riskier parts of the globe. It pushed heavily into resource-rich Africa. Beijing pronounced 2006 "The Year of Africa" and began buying up resources there.
It wooed leaders of countries the West might find unsavory. "In China, there is no concept of a failed state. The Chinese way is to stoke the pace of development," says Jin Linbo, a senior fellow at the influential China Institute of International Studies in Beijing.
In many African countries, where investment plummeted after the end of the Cold War, China's interest was hugely appreciated. China offered, in addition to direct investment, a mix of cheap loans and infrastructure improvements, export credits, and regular visits by top brass from the mainland.
Industrial & Commercial Bank of China (1398.Hong Kong)—bought 20% of Standard Bank, the continent's largest financial institution. China financed the presidential palace in Sudan. It built soccer stadiums. "If you are a typical multinational, you do a one-shot deal. China will build a port, a refinery. China is investing big time in what counts for Africa," says V. Shankar, CEO for Middle East, Africa, Europe and the Americas for Standard Chartered, the London-based banking company.
Even noncontroversial nations welcomed the People's Republic. Botswana's president famously said: "I find that the Chinese treat us as equals. The West treats us as former subjects." All that the mainland asks for, in turn, is that the countries cut ties with Taiwan.
CONSIDER THE CASE of Kosmos Energy's stake in a massive offshore field in Ghana, which state-owned Ghana National Petroleum Corp. and CNOOC offered to buy for $5 billion. Exxon Mobil (XOM) withdrew a $4 billion offer in August, amid signs that Accra favored the Chinese-backed bid. The next month, China Export-Import Bank loaned Ghana $10.4 billion for infrastructure projects; China Development Bank offered another $3 billion loan to develop Ghana's oil and gas sector. Last week, Texas-based Kosmos, which is backed by Warburg Pincus and Blackstone, rejected the CNOOC offer as too low. But observers believe the CNOOC group will keep pursuing it.
China built pipelines across Kazakhstan and Uzbekistan, and began mining for copper south of Kabul. It hopes to build roads and pipelines through Pakistan and Afghanistan. That has U.S. officials seething. "The Chinese are not particularly concerned about the regime they deal with. They are oligopoly buyers who drive up prices all around the world. In U.S. trade policy, we need to think about the way China is directing its state-owned companies," says one top U.S. diplomat in Asia.
Less controversially, China invested heavily in Australia, where it is such a large presence that Australia's Foreign Investment Review Board recommends that Chinese ownership stakes stay below 50%. In Australia, Chinese acquirers accounted for 40% of 2009's inbound mining transactions. The mainland has committed to buying 20 years worth of natural gas from Chevron's $37 billion project on Australia's Barrow Island. It already owns 9% of Rio Tinto and has tried to buy more; after that effort failed, it detained a Rio Tinto executive in China for alleged bribery.
Beijing's new five-year plan, to be adopted early next year, will focus on more sustainable growth: higher consumption, lower dependence on exports, increased wages in the interior, more efficient energy consumption. That might "slow" demand for resources, says Scissors of the Heritage Foundation, "but they will still have a deficit in commodities and primary products and will invest to protect supply."
In coming years, China will face more competition for resources from other rapidly developing nations, all of them industrializing and huge owners of dollars. Of the total $8.1 trillion in foreign exchange reserves held by countries in 2009, more than 60% was held by 11 Asian countries., according to Christopher McNally of the East West Center.
"The financial crisis of 2008 encouraged people to make investments in hard assets as opposed to U.S. Treasuries," says Colin Banfield, head of Asian mergers and acquisitions for Citigroup in Hong Kong. "There's a desire to spend reserves on actual businesses rather than holding the currency."
Thanks to its resource purchases in Africa, "China has leapfrogged India by a quarter mile," says Shankar of Standard Chartered.
The appreciating yuan also means buying abroad will be easier. CLSA Asia-Pacific Markets says that a rate of five yuan to the dollar, versus 6.65 today, would reduce "economic distortions," and help create a consumer economy: China's market would suddenly become 33% larger. At that rate, CLSA predicts, China's "reserve accumulation and consequently its official purchases of U.S. Treasuries will slow to a tiny fraction of the current pace." Manufacturing in China gets less attractive; factories in the U.S. become more alluring.
Already the world's second-largest economy, the mainland is expected to have more than 350 million middle-class households in the next decade. Imagine what that means for future commodities prices.
China is now the world's largest consumer of copper, tin, steel, coal, aluminum and seaborne iron ore, and the second largest consumer of oil. And investors are betting on an array of companies they think will benefit. At T. Rowe Price, that includes companies like Freeport McMoran Copper & Gold (FCX), the largest publicly traded copper producer, Peabody Energy (BTU) and Joy Global (JOYG).
"The reality of the situation is everything you touch in commodities is affected" by China's hearty appetite, says Rick de los Reyes, who follows the materials industry for T. Rowe Price.
"In some ways, China has the most perfect information, because much of what's driving commodity prices higher is Chinese demand," says Shawn Driscoll, an energy specialist at T. Rowe Price and keen observer of the mainland's movements around the globe. "The Chinese government knows what their needs are long-term. From my perspective, they are the most informed buyer."
For the U.S. Treasury market, that may not be such a good thing.
ThatDamnGood
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ICE Clear Europe Announces Acceptance Of Gold Bullion Collateral - Adds Triparty Collateral Management Service To Enhance Security And Flexibility
ICE Clear Europe Announces Acceptance Of Gold Bullion Collateral - Adds Triparty Collateral Management Service To Enhance Security And Flexibility
08/11/10
IntercontinentalExchange (NYSE: ICE), a leading operator of global regulated futures exchanges, clearing houses and over-the-counter (OTC) markets, today announced that ICE Clear Europe will accept gold bullion as collateral for all energy and credit default swaps (CDS) transactions beginning 22 November.
Acceptable collateral for ICE Clear Europe currently includes cash and government securities. Gold bullion will be permitted for initial margin only and will be accepted by the clearing house by electronic transfer in increments of 1 troy ounce, and will be priced daily using the London Gold Fixing Price in US Dollars.
In addition, ICE Clear Europe recently introduced a triparty collateral management arrangement with Euroclear Bank, the international central securities depository, through which European government bonds may be used as collateral to fulfill initial margin requirements. Both the addition of gold bullion collateral and the availability of collateral via Euroclear Bank are intended to enhance the stability and flexibility of the clearing house, particularly during periods of intensive economic stress, while providing alternatives to customers.
"We are pleased to offer these enhancements as the first clearing house in Europe to permit gold bullion as collateral," said Paul Swann, President of ICE Clear Europe. "By working closely with members, we are continually searching for ways to lead in enhancing risk management practices. Particularly in times of economic change or uncertainty, the addition of gold and Euroclear Bank's triparty collateral management services bring additional flexibility and security to the markets we serve globally."
Yves Poullet, Chief Executive Officer of Euroclear Bank, said: "As the market continues to move from unsecured to secured transactions, accessing and efficiently managing collateral is becoming increasingly important. Helping clients optimize use of their collateral held with Euroclear Bank is precisely our objective, which is easily achieved when collateralizing margin calls from ICE Clear Europe. We are delighted to be of service."
ICE Clear Europe launched in November 2008 to serve the futures markets of ICE Futures Europe and ICE's OTC energy markets and today lists more than 330 energy contracts for clearing. In July 2009, ICE Clear Europe introduced clearing for European CDS and has cleared more than 3.7 trillion in gross notional value to date across 130 credit derivative products.
ICE Clear Europe offer the industry's only real-time risk management methodology, with marks based on price feeds from ICE's energy markets. The methodology provides calculations of initial margin, realized and unrealized variation margin, and fully revalues all positions throughout the trading day. This provides the clearing house and all clearing members with trade, position, profit and loss and margin reports at five minute intervals, thereby substantially reducing intraday price risk.
ICE Clear Europe Announces Acceptance Of Gold Bullion Collateral - Adds Triparty Collateral Management Service To Enhance Security And Flexibility
08/11/10
IntercontinentalExchange (NYSE: ICE), a leading operator of global regulated futures exchanges, clearing houses and over-the-counter (OTC) markets, today announced that ICE Clear Europe will accept gold bullion as collateral for all energy and credit default swaps (CDS) transactions beginning 22 November.
Acceptable collateral for ICE Clear Europe currently includes cash and government securities. Gold bullion will be permitted for initial margin only and will be accepted by the clearing house by electronic transfer in increments of 1 troy ounce, and will be priced daily using the London Gold Fixing Price in US Dollars.
In addition, ICE Clear Europe recently introduced a triparty collateral management arrangement with Euroclear Bank, the international central securities depository, through which European government bonds may be used as collateral to fulfill initial margin requirements. Both the addition of gold bullion collateral and the availability of collateral via Euroclear Bank are intended to enhance the stability and flexibility of the clearing house, particularly during periods of intensive economic stress, while providing alternatives to customers.
"We are pleased to offer these enhancements as the first clearing house in Europe to permit gold bullion as collateral," said Paul Swann, President of ICE Clear Europe. "By working closely with members, we are continually searching for ways to lead in enhancing risk management practices. Particularly in times of economic change or uncertainty, the addition of gold and Euroclear Bank's triparty collateral management services bring additional flexibility and security to the markets we serve globally."
Yves Poullet, Chief Executive Officer of Euroclear Bank, said: "As the market continues to move from unsecured to secured transactions, accessing and efficiently managing collateral is becoming increasingly important. Helping clients optimize use of their collateral held with Euroclear Bank is precisely our objective, which is easily achieved when collateralizing margin calls from ICE Clear Europe. We are delighted to be of service."
ICE Clear Europe launched in November 2008 to serve the futures markets of ICE Futures Europe and ICE's OTC energy markets and today lists more than 330 energy contracts for clearing. In July 2009, ICE Clear Europe introduced clearing for European CDS and has cleared more than 3.7 trillion in gross notional value to date across 130 credit derivative products.
ICE Clear Europe offer the industry's only real-time risk management methodology, with marks based on price feeds from ICE's energy markets. The methodology provides calculations of initial margin, realized and unrealized variation margin, and fully revalues all positions throughout the trading day. This provides the clearing house and all clearing members with trade, position, profit and loss and margin reports at five minute intervals, thereby substantially reducing intraday price risk.
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