Tag Archive: China

American dollar is losing to Canadian, Australian and even to Singaporean dollar and losing so fast that its parity changes before the flight originating from Los Angeles lands at Sydney. This rings alarms bells but nobody seems to be listening. Does the losing American dollar signal America’s loss of its economic hegemony? Will China be crowned as economic power much ahead of the estimates? Does it have anything to do with steady rise in the price of gold? The events are unfolding at pretty faster pace. The economic gurus had predicted China to be Number One economic power of the world by 2050. Some more ambitious had set this date somewhere closer to 2030. But the International Monetary Fund has rejected all those estimates and has just dropped a bombshell. For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China. And it’s a lot closer than you may think. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.

According to Market Watch, the IMF assessment provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power. According to the IMF forecast, which was quietly posted on the Fund’s website just two weeks ago, whoever is elected U.S. president next year will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this because they were looking at GDP to make comparison between China and the USA using current exchange rates. IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising. Just 10 years ago, the U.S. economy was three times the size of China’s.

The report says that this is more than a statistical story. It is the end of the Age of America or its economic hegemony. We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

China’s neighbors in Asia are already waking up to the new reality. The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t. Equally to the point, here is what this means economically, and for investors.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America. No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old Deutschmark. If it’s just the Greek drachma in drag … not so much.

Related story:

The Age of America comes to an end, finally…..

Normally, loose economic blocs do not assert their political clout in matters which are handled by UN or the group of five established powers. But it now seems that BRIC which refers to the countries of Brazil, Russia, India and China, (South Africa will join soon) which are all deemed to be at a similar stage of newly advanced economic development, has decided to come out of just economic closet and start talking politics. They see their opportunity to assert themselves in the Libya intervention of the West, which they have dared to criticize. According to a paper published in 2005, Mexico and South Korea were the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed, as they were already members of the OECD. BRIC countries are developing rapidly and by 2050 their combined economies could eclipse the combined economies of the current richest countries of the world. These four countries, combined, currently account for more than a quarter of the world’s land area, more than 40% of the world’s population, and hold a combined GDP (PPP) of 18.486 trillion dollars. On almost every scale, they would be the largest entity on the global stage. These four countries are among the biggest and fastest growing emerging markets.

BRICs could not organize themselves into an economic bloc, or a formal trading association, as the European Union has done. However, there are some indications that the “four BRIC countries have been seeking to form a ‘political club’ or ‘alliance'”, and thereby converting “their growing economic power into greater geopolitical clout”. These are not a political alliance (such as the European Union) or any formal trading association, like ASEAN. Nevertheless, they have taken steps to increase their political cooperation, mainly as a way of influencing the United States position on major trade accords, or, through the implicit threat of political cooperation, as a way of extracting political concessions from the United States, such as the proposed nuclear cooperation with India.

And they have demonstrated their political ambitions in their abstention failing to support UN Security Council Resolution 1973 which raises serious questions about the future functionality of the multilateral system – a system in which the BRIC countries aspire to have a stronger voice. Effectively, the BRICs sent a message of opposition to allied intervention in countries experiencing fundamental political change. Their vote was an implicit acknowledgement that such collective action often has unintended consequences, and that it can result in one side being given an undue advantage over another. But a less obvious driver for their position is also the notion that one day such a vote could be cast against one of them.

It is premature to conclude, says a report in Foreign Policy Journal that the collective opposition of the BRIC countries to allied intervention in Libya represents a formal coalition between these countries. While China and Russia have used their Security Council veto with frequency, aspiring permanent Security Council members Brazil, India, and South Africa are still finding their footing on the global stage, appear hesitant to blatantly oppose the collective will of the established five power permanent members of the Security Council. What they share is a long-held mistrust of Western-led military action and a more general stance in favor of non-intervention.

One of the major criticisms of the West’s decision to intervene in Libya by these countries has been the perceived hypocrisy of ‘selective intervention’.

One will find it quite interesting that India, together with other three countries of the bloc has found it expedient to criticize West’s intervention in Libya even though it also has a history of armed intervention in erstwhile East Pakistan. The Maldives and Sri Lanka have all experienced intervention by Indian military forces. Likewise, South Africa, the soon to be “S” in the “BRICS” has intervened numerous times in its post-independence history, most prominently in the Angolan civil war in 1975/6 and in the post-Apartheid era, and participated in multilateral intervention in Lesotho in 1998. After vocally supporting the principle of non-intervention, it eventually voted in favor of allied action in Libya.

The escalation of the Libyan conflict has surely prompted some of the BRICS countries to contemplate what is involved in having a seat at the world’s top table. The Libyan case further highlights the limitations of a global order struggling to reconcile principles of national sovereignty with principles of multilateralism. The modern history of the world has shown that there will always be crises that require multilateral action. The question has become when the BRICS will be willing to step up to the plate and place idealism above self-interest – an admittedly lofty ambition for any nation-state. Not that the U.S. and European nations have a pristine record in that regard, but they certainly do have substantial economic interests in Libya. The difference is that they have proven willing to sacrifice that interest to participate in sometimes distasteful and necessary political decisions. When was the last time the BRICS countries did that?

Related link:

Libya turmoil; Interventionism is West’s new colonialism…

Inflation is reflected in the rise in prices of daily use items and technically indicates that the gap between demand and supply is widening. It is not an economic ill itself; it is a symptom of the fact that a country’s economy is not being managed efficiently and properly. It is measured through various price indices prepared by the statistical organizations. As it is not always possible to increase the supply of goods and services to bridge the gap, central banks try to control inflation through controlling the money supply. This is done through various monetary policy instruments. When there is less money supply and people find other alternatives more attractive to park their money in, the prices come down. This is a conventional instrument.

However, when the increase in prices is due to unconventional factors like hoarding, which is being done in Pakistan in case of Pakistan, the countries need to take unconventional measures. That has recently happened in China. The Economist has reported that the State Council, China’s cabinet, promised “forceful measures” to stabilize prices. It said it would drum up supply and crack down on hoarders and speculators. It even threatened to “interfere” with the prices of daily necessities, which might include grains, cooking oils, sugar and cotton.

Imagine, the scale of inflation is not yet a threat to the republic in China. But consumer prices rose by 4.4% in the year to October, the fastest rise for over two years. Food prices, which account for more than a third of the consumer-price index, are largely to blame: vegetables are almost a third more expensive than they were a year ago. Even the most exotic commodities have been affected. As China’s prices rise, consumer confidence and the stock markets are falling. Shanghai shares have fallen by a tenth since the inflation figures came out. Rising food prices may explain China’s inflation, but what is behind their rise? Floods, including a deluge in Hainan province last month, hurt some crops.

Harvests have also disappointed elsewhere in the world: the UN’s Food and Agriculture Organization said this week that the cost of the world’s food imports may exceed $1 trillion this year, only $5 billion short of the record bill in 2008. The macroeconomic weather has also played a role. China’s banks appear determined to breach their quota of 7.5 trillion Yuan ($1.1 trillion) of new loans this year. The People’s Bank of China raised their reserve requirements this month for the fourth time this year and lifted interest rates in October for the first time since 2007. But neither step will do much to constrain banks swimming in deposits and lending to an economy growing, in nominal terms, by 15% a year.

And so the government is reaching for less conventional weapons. To shield the vulnerable, it urged local governments to raise unemployment benefits, pensions and the minimum wage in line with inflation. It also promises to increase shipments of cotton from the western region of Xinjiang, and to cut the price of electricity, gas and rail transport for fertilizer makers. To keep the population sweet, on November 22nd it will sell 200,000 tonnes of sugar. If extra supplies do not curb prices, the government may set caps. It may repeat the kinds of measures it imposed in 2008, when food inflation topped 23% after an outbreak of disease killed many of China’s pigs. Then, the government required sellers of pork, rice, noodles, cooking oil and other staples to ask permission before raising their prices.

Such controls serve as an “extreme signal” of the government’s determination to fight inflation, note Mark Williams and Qinwei Wang of Capital Economics. That may help quash self-fulfilling expectations of higher prices. But beyond that, price controls have “little to commend them.” If sellers cannot fetch a good price, they will limit the supply of what they offer, or adulterate the quality. Whenever the government stops petrol prices from rising in line with oil prices, queues at the pump merely lengthen.

Inflation undermines capitalism, according to Keynes, in part because it discredits entrepreneurs. They become “profiteers” in the eyes of those hurt by rising prices. China’s leaders promise to hunt down and punish hoarders and speculators. According to Andy Rothman of CLSA, a broker, some traders are taking possession of agricultural commodities in the hopes that prices will rise. But how to stop households buying two bottles of cooking oil rather than one?

Also read:  Rising prices in even the most exotic products

All of us who knew China always thought that bribery and corruption is punishable by death sentence in this emerging economic giant. There were some reports of Chinese businessmen greasing palms here and there, but mostly in foreign countries in order to secure large orders. The Chinese National Audit Office (NAO) is a dreaded organization. But it now seems that China is protecting its own values and stopping its own people from accepting bribes where Chinese money is concerned, they have a free hand in doling out graft money to foreigners. A recent report published by Businessweek, outlines the state of corruption in China. The publication says:

In late June, more than 150 executives from Siemens, the German industrial giant, met in Beijing to discuss compliance with Chinese and U.S. anticorruption laws. That a multinational would spend millions to strategize about avoiding bribery charges in a country where bribery is rampant shows how much business is changing in China.

U.S. prosecutors empowered by the Foreign Corrupt Practices Act of 1977 (FCPA) to investigate allegations of bribery anywhere in the world, have been stepping up their activities in China, where a tradition of gift-giving in business often degenerates into serious graft. The FCPA bans U.S. companies from bribing foreign officials. It also applies to foreign companies like Siemens that list their securities on U.S. exchanges. Companies that violate the FCPA face millions in fines, and executives can go to prison. U.S. authorities have upped the number of bribery cases they pursued to a resolution around the world, from 11 in 2005 to 34 last year, according to Trace International, a nonprofit anti-bribery group based in Annapolis, Md.

In a report released June 17, Trace pointed out that China, with 25 cases completed since enactment of the FCPA, fell behind only Iraq and Nigeria for the most international corruption prosecutions. Citing a World Bank estimate that more than $1 trillion in bribes are paid each year, U.S. Attorney General Eric H. Holder Jr. on May 31 called “combating corruption one of the highest priorities of the Department of Justice.”

Chinese prosecutors, meanwhile, are getting more aggressive under their own anti-bribery laws, says Patrick M. Norton, a partner with Steptoe & Johnson who focuses on international mediation. Earlier this year a Chinese court handed down prison sentences for four employees of London-based mining company Rio Tinto for taking bribes from Chinese buyers of iron ore. In other cases, Norton says, there’s a “blowback” problem when Chinese authorities take note of a U.S. investigation: “You get an FCPA prosecution involving payments in China. The company has paid huge fees to settle. They think it is over, and now they are being pursued in China” on essentially the same charges.

U.S. investigators have notched a number of recent victories. In 2008, Siemens pled guilty to FCPA violations in China and numerous other countries. It agreed to pay a $450 million fine. In 2009, U.S. label and reflective material maker Avery Dennison agreed to pay a civil penalty of $200,000 after the Securities & Exchange Commission filed a civil action alleging violation of the FCPA. Avery’s Chinese subsidiary had bankrolled sightseeing trips for local officials.

In another case last year, UTStarcom, a telecom equipment manufacturer, resolved U.S. investigations by agreeing to pay $3 million in fines and penalties. Its Chinese unit had spent almost $7 million on 225 trips for Chinese government employees. This spring cosmetics marketer Avon Products suspended four executives as part of an internal investigation into possible bribery in its China division. Avon had already alerted U.S. authorities to its in-house probe in 2008.

And in late June, the Chinese press reported that Johnson & Johnson was under investigation by local prosecutors for allegedly bribing a Chinese drug regulator. J&J says it has not heard anything from the Chinese government. A person familiar with the matter says the U.S. is investigating J&J’s medical device unit. Neither the SEC nor the Justice Dept. would comment. “One of the problems companies run into is reconciling Chinese customs of entertainment and gift-giving with the culture of compliance,” says Mark F. Mendelsohn, who from 2005 until earlier this year oversaw Justice Dept. FCPA prosecutions and now works at the law firm Paul Weiss in Washington. The customs can be as harmless as giving lunar cakes during the autumn moon festival. Some companies, though, go a lot further. Lucent Technologies provided 315 trips for Chinese officials to the Grand Canyon, Universal Studios, and Disneyland. The company characterized the travel as factory inspections and training. In 2007 it was charged under the FCPA. Ultimately, Lucent entered into a settlement with Justice and agreed to pay a $1 million fine.

U.S. companies must also heed the Sarbanes-Oxley Act of 2002, which made it harder to hide bribery by keeping separate books. In 2005 the medical-test maker Diagnostic Products was charged with paying $4.8 million in bribes to Chinese hospitals and administrators and violating record-keeping rules. The company agreed to pay $2 million as part of a plea agreement.

Foreign companies sometimes can get tripped up by using local middlemen to help secure deals. Hiring representatives can be an entirely legitimate way to cut through red tape. It can also lead to questionable practices. “Often the third party is created solely for paying the bribe; there is no other business reason,” said Nathaniel B. Edmonds, assistant chief of the Justice Dept.’s fraud section, during a talk at an anticorruption conference in Shanghai on June 23. What’s more, under FCPA a U.S. company is as liable for the actions of a middleman as it is for its own employees.

The temptation to offer a bribe in China is strong because the practice is so common. The risks of getting caught, however, are increasing rapidly.

Businessweek has reported that Pakistan has finalized a deal with China to buy 100,000 metric tons of white sugar at $558 per ton. This comes to less than Rs 50 per kg. Will it ease the pressure on the market and lower the prices or sugar barons will prevail again? Only time will tell. In the meantime please read on….

Pakistan’s Trading Corp. purchased 100,000 tons of white sugar from China’s Yunnan Coal & Chemical Industry Group Co. Ltd. at $558 a ton, according to a statement issued by the corporation.

The trading body bought 725,000 metric tons and will buy another 475,000 metric tons by the end of June as it purchases 1.2 million tons of sugar to overcome shortages and control prices.
The tender today for importing 200,000 metric tons of sugar was the last one in May, S Anjum Bashir, chairman of Trading Corp. said May 25. The company will look at the bids and decide whether more sugar could be bought in the same price, he said.
“We will buy the full quantity of the tender, or even more if prices are attractive,” Bashir said in a telephone interview from Islamabad. “If prices are high, I would buy the minimum required quantity of 50,000 tons.”
The Trading Corp. may invite fresh bids in June to help meet the target, Bashir said.