14 December, 2006

New US capital controls imposed as China sparks currency meltdown

No, China has not yet decided to dump its Treasury bonds… but give it time.

AsiaPundit closely tracks both the Chinese currency and the US dollar. However, we don’t pay nearly as much attention to global prices for base metals. As such, we are a bit late in bringing you details of a global currency meltdown that is so severe that the United States is passing new capital control measures.:

NickleWASHINGTON — People who melt pennies or nickels to profit from the jump in metals prices could face jail time and pay thousands of dollars in fines, according to new rules out Thursday.
Soaring metals prices mean that the value of the metal in pennies and nickels exceeds the face value of the coins. Based on current metals prices, the value of the metal in a nickel is now 6.99 cents, while the penny’s metal is worth 1.12 cents, according to the U.S. Mint.

Under the new rules, it is illegal to melt pennies and nickels. It is also illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad “for legitimate coinage and numismatic purposes.”

For those who, like ourselves, are deficient in mathematics that means that a US nickel is worth almost 40 percent more melted down than it based on its denomination. Chinese demand for base metals is generally cited as a prime reason for rising prices.

And it is not just the US. This is indeed a global currency meltdown. As this 2003 article notes China has been seeking European coins for melting. Within Asia, there is massive smuggling of the Philippine peso to buyers in China.:

MANILA : With a face value of less than two US cents the humble Philippine one peso coin may be worth next to nothing at home but in metal-hungry China it spells big bucks.

So much so that smuggling of the coins has become something of a growth industry in the Philippines and a major headache for the central bank.

According to local media reports, the coins are sold in China for 1,000 pesos (US$20) per kilogramme and the metal derived from melting them down is used in the manufacture of electronics goods like mobile phones.

YuanAs we have not heard any reports of the melting of the Chinese yuan, we assume that either the nickel-plated steel material is worth more in coin rather than base-metal form or that owners of blast furnaces in China are betting on further appreciation of the local currency.

However, if anyone knows differently please comment — AP may yet consider requesting that our employer pay us in coins.

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by @ 5:55 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia, Southeast Asia, Philippines

25 August, 2006

China’s Rural Banking Crisis

AsiaPundit has been known to criticize the reform of China’s banking sector. For instance, many of the bad assets held by state banks have been shifted to state-held asset management companies (AMCs) and still remain liabilities for the central government. Still, even in our criticism, we have been guilty of paying too much attention to the major state lenders and AMCs.

Occasionally, we are reminded that problems are even worse for the rural banking sector.:

Cn2003Goat FansBEIJING: A village cashier in west China lost 12,500 US dollars of public money after it was eaten by goats.
The incident occurred last May, when the village cashier surnamed Zhang and his wife in Linjiawan village in West China’s Shaanxi province were stunned by the scene when they saw their ten goats chewing the money, the state media reported on Wednesday.
The couple immediately slaughtered the goats and put together the cash debris taken out from the animal’s stomach, saving 297 pieces of notes worth 12.5 US dollars each, reported the Xi’an Daily on Tuesday.
“We are considering exchanging more damaged cash for Zhang and will treat it as a special case after reporting the incident to superiors, in view of reducing farmers’ economic burden,” director of the currency issuance section of the apex bank, People’s Bank of China, Hengshan County branch, Li Shengyang said.

Imagethief comments:

Question: What was a “village cashier” doing hiding money by burying it in a goat pen? Does this strike anyone else as suspicious behavior? If I was thiking about secure places to store public money I don’t think “goat pen” would be the location that leaps to mind. I might consider “banks”, or “enormous steel safe” or even “locked trunk guarded by my shotgun-toting henchman, ah qiang and a brace of rottweilers”. But probably not “goat pen”.

Per “banks” as an option, that seems particularly useful to me. If Hengshan county has a branch of the People’s Bank of China, they probably have retail baking too. Could banks in Shaanxi be so hopelessly corrupt that they can’t even be trusted with deposits? If so, China’s banking system has further to go than I thought.

While this an incident of concern, we do note with relief that the PBoC does seem to have some deposit insurance in place. This should help prevent a full-blown systemic crisis should any individual animal pen be declared insolvent.

(Above image of 2003 goat coins stolen from here.)

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by @ 4:56 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

2 June, 2006

Illiterate Peasants Scam SPDB

The Bank of China’s IPO has exceeded expectations, with the lender’s share price rising 15 percent on the first day of trading. As well as being positive for early investors like Royal Bank of Scotland, it is good news for the country’s banking sector. Increased foreign investment should improve bank management and lending practices while the inflow will help its balance sheet.

This has worked relatively well for the Citigroup-invested Shanghai Pudong Development Bank (SPDB). :

THREE ILLITERATE peasants are in court this week accused of fleecing 82 million RMB from the Shanghai Pudong Development Bank through the use of forged PLA documents. 66 million RMB has already been frittered away, according to reports.

The black hole in the bank’s finances was discovered at the end of 2004 at its Beijing branch. It turns out that the 82 million RMB loan was signed off by the vice-chief of the branch without going through the required approval procedures. The vice-chief, Yu Tianlai, was sentenced to six years in prison last year. He said that he approved the loan because he wanted to take credit for a particularly large piece of business.

Yu admitted that the money was transferred to something called the Shanghai Zhisheng Chemical Company, which had presented accreditation documents from the Central Military Commission, saying that the company was responsible for decommissioning PLA materiel but needed a mortgage.

The man alleged to be responsible is 51 year-old Liu Shulin, a farmer who became a construction worker in Beijing.

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by @ 10:29 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

18 May, 2006

Korean Bills through History

Via The Marmot, a look at Korean currency under Japanese and since independence:


Related, but not Asian, a look at when when US currency was art.

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by @ 11:39 pm. Filed under South Korea, Money, Asia, East Asia, Northeast Asia, North Korea

16 May, 2006

Fake Yuan

AsiaPundit could have used this information a year ago. Via China Rant, advice on how to detect fake Chinese bills.:

 Photos Uncategorized Fakermb

Thanks to for the below picture. Supposedly, “Checking the black vertical line is really black is a good idea, and a quick scratch of Mao’s jacket (which should be slightly ribbed) is usually enough.” The top one is fake.

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by @ 10:43 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

25 April, 2006

got gravity?

AsiaPundit has been an on-and-off admirer of Paul Krugman for many years. AP particularly enjoyed some of his essays prior to and after the Asian FInancial Crisis, although he did find much of Krugman’s non-economic New York Times work excessively polemic.

But all things considered — and whatever your political inclination — when Krugman speaks on currencies he should be listened to.

Via the New Economist, a Krugman essay (not column) on the prospects of a dollar crisis.:

Wile Gravity Small2Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences?

The answer to the first question depends on whether there is investor myopia, a failure to take into account the requirement that the dollar eventually fall enough to stabilize U.S. external debt at a feasible level. Although it’s always dangerous to second guess markets, the data do seem to suggest such myopia… The various rationales and rationalizations for the U.S. current account deficit that have been advanced in recent years don’t seem to help us avoid the conclusion that investors aren’t taking the need for future dollar decline into account. So it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar’s value doesn’t make sense, and that value plunges.

(Image stolen from here.)

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by @ 9:38 pm. Filed under Money, Asia, East Asia, Economy

10 April, 2006

graham selling south carolina to the chinese

Most of the economists AsiaPundit communicates with expect a slow appreciation of the Chinese currency, to a level of around 7.8 to the dollar by year end. This is one of the few outliers.:

Currency Strategists: CLSA’s Walker Forecasts Chinese Yuan Drop

April 10 (Bloomberg) — China’s yuan may fall 2.3 percent by the year-end because economic growth will slow, said chief economist Jim Walker at CLSA Ltd., the Asian investment banking arm of France’s biggest lender by assets, Credit Agricole SA.

Expansion in the world’s fastest-growing economy may cool to about 7 percent this year, from 9.9 percent last year, Walker said in an interview March 28. Foreign direct investment in China, which exceeded $60 billion in each of the past two years, may reverse as company earnings and investment drop.

Senators Lindsey Graham and Chuck Schumer would not be happy. Which is a shame, South Carolina’s Graham made great friends during his last visit and had even managed to get Chinese vice premier Wu Yi to go stateside for a ‘pimp my state’ visit .

 English 2006-04 10 Xinsrc 192040310173609303421

South Carolina has a good business environment and has become one of the hotspots for Chinese investment in the United States, Chinese Vice Premier Wu Yi said here on Sunday.

Economic and trade contacts and cooperation between the southeastern U.S. state and China have produced good results in recent years, with South Carolina’s trade with China reaching 3.26 billion U.S. dollars in 2005, Wu said at a meeting with U.S. Senators Lindsey Graham and Jim DeMint, both from the state.

The vice premier said she was deeply impressed by the hospitality of the South Carolina people and the desire of the state’s businesses to cooperate with China.

South Carolina has become a hotspot for Chinese investment. China’s Hai’er Group established a home appliances production base in South Carolina in 1999, its first in North America, creating job opportunities and contributing to local economic development, she said.

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by @ 9:01 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

24 March, 2006

schumer, graham, beijing and shanghai

Chuck Schumer and Lindsey Graham, the two US senators proposing the headline-grabbing 27.5% tariff on all Chinese goods should the country fail to further revalue its currency, have just completed their tour of the mainland. They stopped for a brief press conference and chamber of commerce meeting in Shanghai to cap off the visit.

The two, as noted in an SCMP item linked to by Simon have softened their criticism of the country, but as Simon also notes this is likely a short-lived change.:

The two US senators behind proposed legislation to impose punitive tariffs on Chinese products have shifted from seeing "China as a threat" to a potential "close ally" after meeting top mainland leaders yesterday. New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham said they had achieved significant understanding through their "amazing three days" in Beijing. 

Bowled over by Wu Yi but still hedging their bets. The senators are doing what politicians do best - changing their message according to the crowd. You can bet as soon as they land back in Washington it will be "I’ve seen the enemy up close" again. And the Chinese have very politely told the Americans to piss off; This WaPo article also points out that the senators’ visit and the bid to impose currency and other reforms is backfiring:

AsiaPundit was at the Shanghai press conference and was moderately impressed by the senators’ change of tone. Graham noted that China would need further structural reforms to its financial system ahead of any changes to the currency regime and Schumer repeatedly noted that he would prefer a government-to-government solution rather than passage of the bill - essentially admitting that it is a tool to pressure China.

Still, AP doubt that the China trip was as much of an eye-opener as the senators claim. Surely they could have learned about the banking system by tapping their assistants for research, or by reading the Economist or the Financial Times.

The tour was more of a publicity stunt than a fact-finding mission. But AsiaPundit will say that the pair managed to withstand a 34-minute press conference with local and foreign financial reporters without saying anything profoundly stupid.

The local journalist behind Non-violent resistance was less impressed with their event yesterday in Beijing.:

It’s one thing to read a thousand times and write at least 15 times in the past year about the Schumer-Graham duo and their notorious bill, but quite another to sit on the press bench and hear them actually talk about it at a press conference in Beijing.

They couldn’t remembe vice premier Wu Yi’s name, whom they had just been meeting half an hour ago, ("one tough lady, she would do well in an American courtroom, I like her a lot" was all they could muster), and two and a half years after raising that sorryass China-bashing bill of theirs, Schumer still couldn’t get his pronunciation right ("yuan" with a Y instead of "won" with a W, Chinese instead of Korean currency, your Senatorial High-ness).

"The jury is still out" my ass. To hear them talk, Schumer in his slick baritone and Graham in his southern drawl, about "the bay-est interest of the Una-ited States of Ame-erica", "buka-uz too many people depending on us to get this right", I was so disgusted I didn’t even raise my hand to ask a question. What’s the point of asking anyway? They’re just here for the show.

AsiaPundit has heard enough Chinese officials mangle English to be more accepting of the duo’s language problems. AP also agreed with Schumer when he said he prefers Shanghai to Beijing. AsiaPundit will also note that Schumer, true to form, mentioned New York at least four times during the Shanghai press conference (or roughly once every 9 minutes).

"I will pay Shanghai at least what I consider the ultimate compliment, ‘you’re a lot like New York.’ Shanghai is much more like New York than Beijing - which was the first city we visited - in a whole lot of ways."

This is not a podcast, as TypePad’s podcast-enabled template doesn’t seem to be working, but the presser is on audio below.

Press Conference Audio File

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by @ 9:29 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

14 March, 2006

the new yuan and other proposals

Peter Dorsman at Peaktalk notes a proposal from the China’s legislative advisory body, the CPPCC, for a change to the nation’s banknotes that AsiaPundit would welcome.:

At the moment I am reading Mao : The Unknown Story which even after all that we’ve learned about communism and its depraved despots still is a revealing read. The question is how many copies have made it into mainland China and to what extent it will influence a rethink of the Chairman. Well, he may no longer find himself on Chinese banknotes:

Delegates to an advisory body to China’s parliament have proposed that Deng Xiaoping, architect of the nation’s economic reforms, and Sun Yat-sen, father of the revolution that toppled the last emperor in 1911, should grace the new bills, state media reported on Monday.

It may be a small gesture, but it is a siginificant move in the ongoing process of China rewriting its own history.

While AP is in agreement that the addition of Deng and Sun to the country’s banknotes would be good news, he doesn’t really see the proposal as one of great significance.

But more on that in a moment.

On Peter’s other question, AsiaPundit offers his assurances that there are absolutely no copies of the Chang-Halliday book in China.

And if there were they would certainly not be brought to the Great Hall of the People to be read by journalists ahead of boring press conferences.:


And the book would definitely not be brought anywhere near the Forbidden City.:


There is simply no way to get a copy of such a book in China.

Back to the currency matter. Unfortunately, the proposal on the new notes isn’t a proposal that is imminently likely to pass. Jeremy at Danwei notes some other CPPCC pitches that were made.:

See also gay marriage, the one child policy and edible toothpicks.

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by @ 8:15 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia, Books, Censorship

6 February, 2006

’irrational’ non-exuberance

After the sudden of burst of activity last week, when every second post here was about internet companies in China, AsiaPundit was not going to touch the topic today. However, Tom Zeller Jr today said something in the New York Times that struck a nerve.:

What if Chinese law required Internet companies to reveal the identities of all users who forwarded really bad e-mail jokes, lame chain letters or any messages containing the terms “free speech,” “Tiananmen Square” or “Super Freak,” because such activities carried a 10-year prison term?

“With all due respect to the memory of Rick James, the king of funk,” an executive might say, “we must abide by the laws of the countries in which we operate.”

And what if — as a mark of good faith for being permitted to do business in what any rational observer has to admit is now the most tantalizing Internet and technology market on the planet — an executive from each company were required to assist, mano a mano, in the beating of an imprisoned blogger?

While Tom makes a few interesting points, AsiaPundit is going to be “irrational” and suggest that China’s internet market is far from the most tantalizing on the planet. Off the top of the head, AsiaPundit would suggest that the most-tantalizing internet markets are — in descending order — the wealthy and tech-savvy United States, followed by the EU, e-commerce friendly Japan and possibly then the well-wired South Korea. China would certainly be in the top-10, and maybe even the top five, but it’s not the most tantalizing by a longshot.

Here’s a note from a MarketWatch item on Google’s prospects in China, issued after the China censorship issue was announced but ahead of the company’s earnings announcement. ():

One Wall Street analyst wrote in a report that Google’s China decision could cost more than it’s worth in the short term.

“We do not see meaningful revenue” in China for Google in the near term, UBS analyst Benjamin Schachter told clients Wednesday.

“We are concerned that the inevitable negative PR will damage Google’s brand,” wrote Schachter, who has a buy rating on Google shares.

Schachter downgraded Google to neutral after the earnings announcement, via Dow Jones:

UBS cut Google Inc. (GOOG) to neutral from buy, due to concerns over international revenue growth and the rising investment needed to potentially improve performance in key international markets.

The analysts said that while it agrees with Google that these markets provide important potential opportunities, it may take “longer than expected to effectively monetize them.”

UBS’ China analyst was bearish on the company’s prospects here ahead of the formal launch of the China portal:

Eric Wen, the UBS Internet analyst based in Asia, sums up what he believes are some of the prevailing issues in China for Google in a research report published this month.

Mr. Wen believes that Google is still testing the waters, and does not yet have a clear China strategy. Google has partnered with NetEase and Sina uses Google for some of its technology, but Google.com is facing a dilemma in China. The company recently began conforming to Chinese censorship standards, but Mr. Wen believes that Chinese users chose Google precisely because it was not censored. By conforming to the government standards, Google is trying to enable itself to enter the market in terms of attracting local businesses to advertise. However, by conforming, Google loses its differentiator. This is a dilemma for Google and the reason Mr. Wen believes that Google will not dominate the Chinese search market.

As Bill Bishop noted, China is not an essential market for Google to be in financially:

I am guessing that Google will be happy if they can generate $30M in revenue in China in 2006. Baidu, the market leader, is projected to generate somewhere between $65-70M in revenue in 2006. I believe Google is expected to generate over $8B in revenue worldwide in 2006. If my math is anywhere in the ballpark, China will account for LESS THAN 2 DAYS of Google’s 2006 revenue. And given the economics of the keyword value chain in China, that revenue should be significantly lower margin revenue than is US revenue. So if the China business went away, would investors care?

Perry Wu, in an exceptionally bearish item, says bluntly that Google will have about as much success as its Western rivals who are also getting lambasted on blogs, in the press and Congress. Basically, very little.:

Yahoo (YHOO) tried many times to adapt. As far back as 1998 (or Web 0.98 Beta) when its then-VP, Heather Killen, made high-profile visits to China, the Western Internet company tried to sit at the Chinese banquet table. But Yahoo finally gave up last year when it bought a billion dollar stake in China’s Alibaba.com and then gave Alibaba the rights to run Yahoo! China. There was not even a whimper from the company as its Chinese portal was torn down and replaced with a simple search engine. Sohu (SOHU), Sina (SINA), and Netease (NTES) had finally beaten the foreign interloper.

Lycos tried too. It bought firms like Myrice.com. Netscape tried, via AOL. MSN has also been bobbling along with a few victories here and a few setbacks there–nothing much to be proud of.

All of these companies have one thing in common: they entered China to win, but left only remnants of their power after a few years’ struggle. Chinese history is filled with tales of foreigners coming to the Middle Kingdom with money, but leaving the country poor, confused and embarrassed. Ask Chris Patten.

While the UBS boys, Wu, Bishop and others may be a touch , none are irrational. China’s internet penetration rate is still growing at an impressive pace, but the rate is slowing and the average user is still not deep-pocketed.

There’s a great deal of cash to be made in providing infrastructure for the build out of third-generation networks and broadband capacity, but there’s not a lot yet there for search- or advertising-based business models; certainly not when compared to Western markets.

Zeller is not the first pundit to hype the China market, most commentary seems to assume that the companies that are active here are putting principle at risk over in order to get massive returns. That’s far from true.

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by @ 7:16 pm. Filed under South Korea, Blogs, China, Money, Asia, East Asia, Economy, Northeast Asia, Media, Web/Tech, Weblogs, Censorship

31 January, 2006


That the Chinese love capitalism more than Americans is no surprise. Although the data for the Philippines is eye catching.

YuanThough Mao Tse-tung’s portrait still hangs in Tiananmen Square, a recent poll shows that the Chinese are crazier about capitalism than are Americans. In fact, they top the world-wide rankings in their zeal for free markets. No wonder Mao isn’t smiling.

In a poll conducted for the University of Maryland’s Program on International Policy Attitudes between June and August last year, fully 74% of Chinese citizens said they agreed with the statement "the free enterprise system and free market economy is the best system on which to base the future of the world." The Philippines, at 73%, and the U.S., at 71%, were second and third. The poll, which surveyed 20,791 people in 20 countries, seems like a pretty good snapshot of current sentiment, as such things go.

Remarkable, isn’t it, that residents of the Middle Kingdom have maintained their appreciation of the benefits of free enterprise through six decades of oppression and economic backwardness imposed by their Communist cadres? Then again, for a culture in which common New Year’s greetings include "I wish you happiness and many riches" and "may you make great profits," should we be surprised? Most Hong Kong residents are spending the current Chinese New Year holiday politely distributing packets of crisp new cash to friends and family. They have to earn this gift cash somehow.

(Via East Asia Watch)

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by @ 11:58 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia, Southeast Asia, Philippines

17 January, 2006

prediction: the kospi will crash

As AsiaPundit noted in a recent item, South Korea had a booming equities market in 2005 - with equity returns up 53.96 percent in local currency terms during the year. So why is AP expecting a bust? While many analysts have said the index has overshot in the past year and have used various accounting measures to suggest that it is already overvalued, AP just has a hunch.:

Here’s a great photo found at the blog of Nyquist Capital.  It’s of a rally to encourage people to invest in the stock market.  The up arrows, gigantic bull, and Rally Korea! sign pretty much gets the message across.  In a way it’s not that much different from those Nasdaq-100 ads with the CEOs of Starbucks, Staples and Microsoft, but in Korea it’s been deemed that there’s a pressing need to broaden participation in the market–in 2005 only 8% of the population owned stock.  Too bad, they’ve really missed out.  I guess that’s why they have a need for this kind of public rally.

One of the strange things about South Korea is that public rallies often work. Moreover, they often work so well that they create brand new problems.  In one of the notable recent examples, the government and banks promoted credit card use to encourage domestic consumerism and reduce tax evasion (cards leave a paper trail). That one worked really, really well.

As the above mentioned Nyquist Capital blog notes:

The shocking thing about this photo is the naked embedded marketing message. Buy now or you will be left behind. This is just one picture, but if this is the tone the exchange wants to set, it looks like the birth of an irrational exuberance investor culture. The folks that run the exchange should realize they are running a market, not a casino.

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by @ 9:32 pm. Filed under South Korea, Money, Asia, East Asia, Economy, Northeast Asia

26 December, 2005

north korea makes money

Although its economy has collapsed, the North Korean state still makes money. Lots of it.. And South Korea’s government doesn’t care.

NorkwonThe National Intelligence Service, in a 1998 report … said North Korea forges and circulates US$100 bank notes worth $15 million a year, and that the counterfeiting is carried out by a firm called February Silver Trading in the suburbs of Pyongyang. The NIS said in reports … the same year and the next that the North operates three banknote forging agencies, and that more than $4.6 million in bogus dollar bills were uncovered in circulation on 13 occasions since 1994. “That North Korea is a dollar counterfeiting country was common knowledge among intelligence officials,” said a former senior NIS official.

Yet suddenly, when the U.S. brings up the question of North Korea’s counterfeiting activities, our government says there is insufficient evidence. That has prompted American officials to accuse our government of lying. The reason for the volte-face is that Seoul is afraid of antagonizing Pyongyang while six-party talks aimed at denuclearizing North Korea hang in the balance. But what if the shoe was on the other foot? If a country hostile to South Korea forged a huge number of our banknotes and circulated them around the world, what should our government do? And if an ostensible ally of ours defended that counterfeiting country, what would we think of that ally? …

And it’s not just the Supernotes, as Nomad points out the North Koreans have also been forging Thai baht, Chinese yuan and other regional currencies.:

One U.S. government official said in an interview, “I read an internal report produced by the U.S. intelligence agency. And you may want to think about why a Thailand diplomat was invited to the symposium on counterfeit currency hosted by the U.S. State Department on December 16.” The symposium on counterfeit currency hosted by the State department was attended by diplomats from countries participating in the six-party talks including South Korea, Japan, China, Russia, some EU member countries, Thailand and Singapore. He added, “If North Korea can forge U.S. dollars, which are known to be the most safeguarded from counterfeiting, perfectly, why wouldn’t it want to do the same for other currencies of neighboring countries.” He made clear that currencies of neighboring countries including Thailand have been counterfeited. To the question, “Does that mean that South Korean won have also been forged?” He answered, “Please, don’t ask more. You can just think about which countries North Korea might feel closer to, and which currencies it would think would be easier to circulate.”

As noted in the originally cited New Economist post, counterfeiting can be considered an act of war. AsiaPundit suggests all offended nations consider it such.

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by @ 10:19 pm. Filed under South Korea, China, Money, Asia, East Asia, Economy, Northeast Asia, Southeast Asia, Thailand, North Korea

20 December, 2005

reduce dollar accumulation

A lot of government and SOE officials in China always seems to fear us Western media folk. Some of the higher-ups (and even the lower-downs) fear we are out to overthrow the government or at the very least misrepresent the country.

Does AsiaPundit want to see a downfall of the Chinese Communist Party? I won’t answer that question directly but I will say that there are more than a few parts of the government that are worth keeping. For instance, some of those guys at the People’s Bank of China are pretty bright.

Member of the PBoC’s monetary policy committee in an undated interview says that China, and East Asia, must reduce its dollar and treasury holdings.:

Yongding…in the first stage we must reduce accumulation, then later we should reduce our reserves….[China and Asian countries] don’t need that large an amount- more than $2 trillion- of foreign exchange reserves…. This is a very big problem and I think the Chinese government should take some action to reduce the growth rate of the accumulation of foreign exchange reserves as we’re still facing the possibility of a big devaluation of the US dollar, so the capital losses will be huge. If that happens, it will be tremendous hit to the Chinese economy."

This is hardly the statement of a gentleman with a benign view toward the US dollar’s valuation. It is instead a gentleman, in a position of authority, with a great deal of concern. He went on: "The trouble is, with such a huge amount of foreign exchange reserves, that there is no way to spend it very quickly and there’s no plan to sell it of course– otherwise that inflicts damage on ourselves. You don’t want to dump shares when the stock market has not collapsed yet and you are the biggest shareholder." Then, he said "all east Asian countries have tremendous foreign exchange reserves and they all want to get rid of them, but if you do this then you cause competitive devaluation, not of their own currencies, but of the US dollar. So we should do this in an orderly fashion. If Asian countries moved too fast, everyone would lose… It would be utterly unfortunate if Japan sells a proportion [of their reserves, for] that causes problems. Then China panics and China sells a proportion — it would be very damaging."

The "nicest possibility" for China, Japan and the US to escape this problem was for further "tightening of US monetary policy so that further dramatic devaluation of the US dollar can be stopped. Then, because of the slowdown in the economy, the US current account deficit would reduce and in this way will create conditions for East Asian countries to get off the hook."

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by @ 12:12 am. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

10 December, 2005

rouge trader redux

Sometimes a personal setback can be so massive that it leads to thoughts of suicide. That’s always a bad way out. Something that Jilin City deputy mayor Wang Wei should have kept in mind is the story of Nick Lesson.

Lesson has quite recovered from bankrupting one of the UK’s most-reknowned banks, a four-year long lock-up in Singapore, a divorce and cancer. He’s now doing quite decently for himself. He’s managing an Irish football club, getting speaking gigs on risk management and has published a book on dealing with stress.:

Coping With StressWith the story of the rogue Chinese copper trader still unfolding, readers may be interested in this interview with former trader Nick Leeson whose incorrect bets on the Nikkei toppled Britain’s famous Barings bank, and landed him in a Singapore prison for over 4 years. While in prison, he was divorced by his wife and developed cancer (they kept him chained to his bed, while he got treatment). Now, he’s living in Ireland and working as the general manager of a football club, doing the occasional speaking gigs on (of course) risk management:

What was it like being at the centre of such a phenomenal manhunt while you were on the run in the Far East?

It was terrifying. The first I knew that the bank had gone under was at the Shangri-La Hotel in Borneo.

I saw the Asian Wall Street Journal and the headline “British bank collapses”. My first thought was: “Someone’s in trouble”. I genuinely didn’t think it was me because I thought Barings could recover

I began speed reading the story and my memory goes blank after that moment because I think I went into shock.

The key plan was to get home. I was very, very scared about being caught and going to prison in Asia. I had to go from Brunei to Bangkok to Abu Dhabi and then Frankfurt. By that time my picture was on every front page and every TV screen in every airport. I had my baseball cap pulled down and a scarf around my face. Only my eyes were showing, so I must have looked very suspicious. I was physically scared, my heart was pounding and I was sweating.

It was an unimaginable nightmare.

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by @ 9:06 pm. Filed under Singapore, China, Money, Asia, East Asia, Economy, Northeast Asia, Southeast Asia

4 December, 2005

roach on china’s looming slowdown

Morgan Stanley’s chief economist Stephen Roach lays out quite well what is wrong with the Chinese economy and, moreover, why it is difficult to judge when a downturn will take place. To simplify, the state may seek to use market-boosting measures to prevent a significant slump. As Roach notes, this will not just forestall the downturn, it will create a more precarious situation for China and the world when an inevitable downturn happens.:

The die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle.

About six weeks ago, I threw in the towel on the ever-elusive China slowdown call (see my 21 October dispatch, “Wrong on the China Slowdown”). In doing so, however, I cautioned that we simply may have been too early in looking for a downshift in Chinese economic activity. Based on intelligence gathered during a recent visit to Beijing, I am increasingly convinced that is, indeed, the case. In my view, the die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle, driven by an important and surprising contraction in bank lending.

YuanChina’s booming investment cycle is on an unsustainable path. For 2005, we estimate that fixed asset investment is likely to exceed 46% of Chinese GDP — astonishing by historical standards for China or any other economy. Given China’s special investment needs as a large developing country — namely, urbanization, industrialization, and infrastructure — there is every reason to look for an investment-led growth dynamic. But the Chinese investment cycle has gone well beyond what those fundamentals might suggest. Even in the heydays of their own development booms, the investment shares of the Japanese and Korean economies never got much above the low-40% range. I very much agree with Andy Xie who recently argued that China is now at a point where its ever-rising investment share is a recipe for excess capacity and deflation (see Andy’s 22 November dispatch, “China: Toward a Deflationary Landing”).

The consensus view in the markets is that China will sustain its investment boom through the 2008 Beijing Olympics — that it will simply not accept the potential embarrassment of a growth slowdown until after that momentous event is over. Old China hands also note that the Chinese economy never slows immediately after the unveiling of a new development plan. With the 11th five-year plan covering the 2006-10 interval, this historical tendency also suggests any slowdown could be deferred until after 2007. Consider the implications of that possibility: If China stays the course of its investment-led boom, then the fixed asset investment share of its GDP could well be in the 55-60% range by 2008 — a recipe for a monstrous overhang of excess capacity. With Chinese inflation already quite low — the CPI increased at only a 1.2% y-o-y rate in October 2005 — China is not that far away from outright deflation. Should its capacity overhang continue to build through 2008, a deflationary endgame in China would be more likely than not, in my view.

If you read the whole thing, you will note that Roach is optimistic that financial sector reforms will mitigate the Chinese tendency or ability to continue to use its state-owned banks (SOBs) for pump-priming. He also notes that cynics doubt that governments will permit the SOBs to act according to shareholder interests when loan and investment growth stalls. AsiaPundit is generally among the cynics, and his cynicism is amplified as ‘the state’ is a far more complex beast than Roach mentions in his note.

The PBoC would no doubt be keen to see the end of policy loans, but NDRC economists have already been hinting that pump-priming may be needed. Further down the chain, it must also be considered how much control the central state has over regional banks, and how much control the big state lenders have over their branches (for that matter, AP is also concerned about the head offices).

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by @ 9:21 pm. Filed under China, Money, Asia, Coming collapse, East Asia, Economy, Northeast Asia

the spirit of ‘97

Martyn at the Peking Duck points to a Newsweek item that caught my attention earlier this week. Arguing that China is not necessarily the place to be putting your money right now.:

HindenburgRecently words such as ‘collapse’ have been replaced with, for instance, ‘unsustainable’ and speculation that China’s stunningly successful economic formula of massive domestic investment, cheap money, use of existing technology, export-led growth, cunningly hidden protectionist policies, the hard-selling of the mythical ‘China market’ and huge amounts of FDI cannot last forever and is consequently starting to show cracks. After all, what goes up, must come down, or so says this *must read* article.

Despite “insatiable” domestic demand and government measures to curtail investment in overheating sectors, China now has an overproduction of, for example, steel, cement and cotton - all this during the biggest building boom in history. Likewise, China’s factories are churning out too many finished consumer goods like cars, mobile phones, textiles and clothes. Adding to the gloom includes higher manufacturing costs, sluggish domestic demand, anti-dumping quotas, razor thin profit margins, fierce competition, rampant intellectual-property theft and a weak legal system. Furthermore, fixed-asset investment (infrastructure projects, factories, apartment blocks, office towers etc.) will likely top a staggering 54% of GDP this year. Comparisons with the investment frenzy that led to the 1997 Asian Crisis are inevitable.

AsiaPundit is often asked what he would recommend as an investment strategy for China. AP does not usually offer investment advice, but if he is plied with a few beers he will often offer nuggets such as this.: “China really reminds me of what Korea was like a decade ago, I’d probably wait for the crash and then buy into high-quality distressed assets.”

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by @ 7:33 pm. Filed under China, Money, Asia, Coming collapse, East Asia, Economy, Northeast Asia

5 November, 2005

million-dollar mao

Via Bill’s Due, news that may have made the old commie turn in his grave mausoleum.

A 1972 painting of Mao inspecting the Guangdong countryside (毛主席视察广东农村, by Chen Yanning 陈衍宁 ) sold at the Guardian auction in Beijing Friday for 9.2M RMB.

The Christie’s auction earlier in the week got the attention of the foreign press, but the real action is with the local collecters at the .

 Pic Art3492 X Art34920042

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by @ 4:12 pm. Filed under China, Money, Asia, East Asia, Northeast Asia

25 October, 2005

china’s swelling inventories and bernanke

Chief Morgan Stanley economist Stephen Roach, one of AsiaPundit’s favorite Cassandras, is again warning that debt- and asset-inflation driven US consumer spending is unsustainable and that China is oblivious to the risks.:

HindenburgThe current energy shock is a very different threat to a wealth-based consumer than it is to an income-supported consumer.  That’s especially the case since it hits US households when they are running a negative saving rate.  In the three previous energy shocks — 1973, 1979, and 1990 — the personal saving rate averaged about 8%.  US consumers had a cash cushion they could draw upon in order to support lifestyles.  A negative saving rate offers no such cushion.  Dick Berner has estimated that higher energy product prices are the functional equivalent of an annualized tax of around $130 billion on US consumers, or about 1.4% of total disposable personal income.  With a negative saving rate, a significant portion of that tax will undoubtedly be funded by a retrenchment of discretionary consumption.  The world’s consumer is now facing major cash-flow pressures heading into the all-important holiday buying season.

Meanwhile, halfway around the world, nothing seems to be stopping the Chinese producer (see my 21 October dispatch, “Wrong on the China Slowdown”).  With GDP growth holding above 9% through 3Q05 and industrial output growth continuing to run north of 16%, a seemingly impervious Chinese economy seems all but oblivious to potentially ominous developments in its external sector.  This could be an accident waiting to happen.  In an energy-shocked environment, China’s export-led growth dynamic is at growing risk of decoupling from its major source of end-market demand — the American consumer.  If US consumption slows as I suspect, an inventory overhang could quickly emerge in China that would undermine production support in the months ahead.

The threat of US-China imbalances is a common theme for the Morgan Stanley crowd, and it is one worth noting (Cassandra was, after all, right).

In a separate note. not yet on the Morgan Stanley website (though I am posting it here under the impression that it will be), Roach offers his impressions on the man (pending confirmation) who will have to deal with the possible downturn, nominee for Federal Reserve Chairman Ben Bernanke:

BernenkeIt’s easy to celebrate the man and his pedigree. We all know that Ben Bernanke is a solid MIT-trained economist. What we don’t know is his ability to provide institutional leadership for a central bank that is facing a unique confluence of domestic and international imbalances — the asset-bubble-current-account nexus.

Every Fed chairman that I ever worked with or observed over the past 33 years has had to face unique circumstances that he was unprepared for — Burns (inflation), Miller (everything), Volcker (the cost of disinflation), and Greenspan (the legacy of the Asset Economy and the imbalances it has fostered). And each of those past four chairmen were challenged repeatedly by problems outside their comfort zones. Burns was a business cycle expert unprepared to cope with inflation. Volcker was a financial expert who struggled with a wrenching recession. Greenspan was a business consultant who was quickly thrust into the thicket of financial crisis management. Ultimately, Volcker and Greenspan learned to adapt and cope — but not without initially going through wrenching financial market corrections — bonds for Volcker and stocks for Greenspan.

Why should we presume that Bernanke will be spared the same test that his predecessors faced — especially given America’s monstrous current account deficit? Why should we also presume that Bernanke will be challenged by the one problem that is in his comfort zone — namely, inflation? Markets have an uncanny knack of finding the weak link in the new guy’s chain. That remains the risk for the Fed and its new chairman, especially since the origins and funding of America’s external imbalances challenge central bankers still steeped in a pre-globalization, closed-economy mindset.

Bottom line: Like his predecessors, Bernanke’s skillset has not prepared him for the challenges he faces. It will be "learning by doing" — and quite possibly indoctrination under fire. It wouldn’t be the first time either.

Bernanke is considered a top-choice for the Fed position. But it’s worth noting that a change at the Fed right now itself presents a risk. As the Economist noted last month, even Maestro Greenspan had a rocky start (link may be premium content).:

Financial markets are typically more volatile during the first year after the handover to a new chairman than during the rest of his tenure. In October 1987, barely two months after Mr Greenspan took office, the stockmarket crashed. Current conditions for a handover are hardly ideal. America’s economy has never looked so unbalanced, with a negative household savings rate, a housing bubble, a hefty budget deficit, a record current-account deficit and rising inflation. Figures due on October 14th are expected to show that the 12-month rate of inflation has risen above 4%—its highest since 1991.

Although Bernanke comes from the White House, he is a respected Economist and was tipped as the front-runner for the Fed by the Economist and other sources.  This is not  like the recent nomination of GWB’s personal lawyer for the Supreme Court, and AsiaPundit hopes that partisan attempts to paint him as a crony will not emerge to shake market confidence.

(For what it’s worth, and for TTLB, "I oppose the Miers nomination for the Supreme Court.")

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by @ 12:19 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia, Comment policy

24 October, 2005

bad money chasing out good

Reforming China’s currency is not a new problem, Alex Baumler at group history blog Frog in a Well posts a poem from the 1350s.:

The Great Yuan—how grave and dignified,

Its authority by the crafty and duplicitous monopolized.

‘Repairing’ the Yellow River dikes [1351],
‘reforming’ the
paper currency [1350],

These calamities set off the Red Turbans by the host.

Too many laws, punishments too harsh
that’s incited
the people’s wrath.

People eating people, cheap money buying out dear
Nothing like this seen in former years.

Bandits in office, officials in gangs;
Alas! What a pity,

Muddling together the worthy and the dumb.

While AsiaPundit will not pretend to be a long-time student of Chinese history, the history of money is something that I’ve long had more than a passing interest in. Baumler notes the application of Gresham’s Law and how Chinese views on monetarism and the use of coin as a store of value differ from contemporary thinking.:

ChinacoinThe thing that really struck me about this one was the fairly clear statement of Gresham’s Law in the fourth line from the end. Actually, a bit of googling quickly showed that Gresham’s law (Bad money drives out good) is older in the West than I had thought. More interestingly, this does not really seem to be Gresham’s Law, or at least it was not understood that way by the Chinese authors who wrote about it. According to wikipedia Gresham applies when two forms of money are available, one (bad money) with a larger spread between the face value and the commodity value. This was not how Chinese economic thinkers looked at it, however. According to von Glahn Fountain of Fortune: Money and Monetary Policy in China, 1000-1700 California U.P. 1996 Chinese monetary theory usually assumed that “the purchasing power of the medium of exchange was solely a result of its quantity, in the form of money, in relationship to the supply of all other commodities.”(p.33) That paper money had no intrinsic value was not a problem, since Chinese money was usually seen as fiat. This explains why the Chinese started using paper money so much earlier than anyone else.

There were strains of metalism, the idea that the value of money was based on the metal in it, in Chinese thought, and apparently especially among the commoners. Keeping the volume of money appropriate and making paper convertible to coin were the mainstays of policy when the paper currency was functioning well. I get the impression that convertibility was seen as more of a sop to the commoners, who favored coin as a better store of value, a use of money that the state was not as concerned with. So yes, the currency was collapsing, and yes the quote seems to be Gresham’s Law, but the understanding of money is completely different.

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by @ 2:07 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia

20 October, 2005

2005 corruption index

Most of Asia still retains poor rankings in the Transparency International (TI) annual corruption index.

Singapore, Hong Kong retain solid low-corruption rankings and of the 159 states surveyed they are the only Asian states among the top-20 least corrupt nations. Japan almost makes the top-20, but shares 21st place due to a tie with Chile. Taiwan and Malaysia are the only remaining nations to score above the mid-way point for corruption while South Korea hits the median five points.

The results largely correspond with wealth of each country, with the developed states performing better than the developing states - and with high-growth China being seen as less corrupt than India, despite the latter’s more-developed justice system and democratic institutions.

Still, TI notes that wealth is not a prerequisite for control of corruption, singling out my native Canada for some targeted criticism.:

Worldmap 38Kb

Wealth is not a prerequisite for successful control of corruption. New long-term analysis of the CPI carried out by Prof. Dr. Johann Graf Lambsdorff shows that the perception of corruption has decreased significantly in lower-income countries such as Estonia, Colombia and Bulgaria over the past decade.

In the case of higher-income countries such as Canada and Ireland, however, there has been a marked increase in the perception of corruption over the past ten years, showing that even wealthy, high-scoring countries must work to maintain a climate of integrity.

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by @ 8:14 am. Filed under Japan, South Korea, Singapore, China, Money, India, Malaysia, Hong Kong, Asia, East Asia, Economy, Northeast Asia, Southeast Asia, South Asia, Central Asia

10 October, 2005

one woman stands up against north korea

The continuing saga involving Hyundai Asan Tours and the North Korean government has taken a new twist with rival South Korean conglomerate Lotte offering to take over the North Korean tourism project that Hyundai Asan has been exclusively operating since the late 1990’s:

The tourism arm of the Lotte Group is ready to take over from rival conglomerate Hyundai in running tours to the North Korean border city of Kaesong if Pyongyang decides to dump its long-term business partner, company executives said over the weekend.

“We plan to actively discuss it if the North contacts us again,’’ an executive at Lotte Tours said on condition of anonymity, referring to the troubled tour project currently headed by Hyundai Asan.

The announcement comes after Lotte Tours revealed last month it received a fax from North Korea inviting it to run the Kaesong tour project.

Kimyoon The dispute between North Korea and Hyundai occurred after an internal audit of Hyundai Vice-Chairman Kim Yoon-kyu revealed numerous accounting irregularities:

A Hyundai Asan source said, “Last July, during Hyundai Groups internal audits, Kim was accused of 10 instances of malfeasance including receiving kickbacks from construction in Mt.Kumgang, subcontracting corruption related to two joint construction projects and putting exorbitant sums of money on company expenses.”

Hyun The ill gotten money is believed to have been embezzled to North Korea continuing a disturbing trend of embezzling South Korean money to North Korea started by former President Kim Dae-jung in order to get Kim Jong-il to agree to the joint 2000 Inter-Korean Summit in Pyongyang.   Hyundai Chairwoman Hyun Jeong-eun angered by the corruption fired Kim, and North Korea responded in kind by slashing the amount of tours available in North Korea and by even harassing Chairwoman Hyun during a business trip to North Korea to discuss the Hyundai and North Korean business relationship:

Hyundai Group chairwoman Hyun Jeong-eun on Monday publicly rejected a North Korean demand to reinstate Kim Yoon-kyu, the disgraced vice chairman of Hyundai Asan who had dealt with the North for many years in arranging their joint tourism projects. “I now seem to stand at a crossroads of whether to continue or quit our North Korea projects,” she said. Since Hyundai’s ouster of Kim, Pyongyang has applied pressure on the group by slashing the quota for the Asan’s Kumgang Mountains tours and blanking requests for negotiations on stalled projects to Kaesong and Mt. Baekdu. When Hyun visited the Kumgang Mountains, she says, authorities forced her to open her handbag, a gesture she interpreted as contempt, and she concluded, “I’ll choose honest conscience rather than opportunistic servility.”

Chung This spat of course got the South Korean Unification Minister Chung Dong-young to try and mediate the dispute between Hyun Jeong-eun and the North Korean government.  Chung is what I like to call one of Kim Jong-il’s useful idiots and unsurprisingly called for the corrupt Kim Yoon-kyu to be reinstated:

Unification Minister Chung Dong-young met with Hyundai Group chairwoman Hyun Jeong-eun on Sunday to discuss a spat between the company and North Korea over a tourism project Hyundai Asan operates in the Kumgang Mountains.

A source connected to the matter said Wednesday the two discussed North Korean demands to reinstate Hyundai Asan vice chairman Kim Yoon-kyu, who was ousted over corruption charges, but the differences in opinion were wide. That suggests Chung asked for the disgraced executive to be reinstated.

It was the following day that Hyun posted a statement on the Hyundai Asan homepage saying that Kim had been removed due to corruption and rejected calls to reinstate the man who had for many years coordinated the tourism projects with the North.

Let’s try to understand this.  The Korean government wants to have a corrupt corporate leader reinstated to continue his corrupt business activities because the North Koreans are unhappy that he was fired and are not receiving any more illegal kickbacks. 

For those not accustomed to the South Korean government’s handling of inter-Korean affairs this may seem silly, but this is in fact the standard operating procedure of the South Korean government.  The North Koreans make demands and throw a tantrum and the South Koreans give in and give them what they want to get them to behave.  In the recent past the South Korean government has given the North Koreans food, fertilizer, oil, and other goods with little to show for it all in the name of keeping the status quo on the peninsula.  The current six way nuclear talks is the macro example of this trend where the South Korean government has gone out of it’s way to assist the North Koreans during the negotiations to the point of even alienating their military ally the United States.

The demand that Kim be reinstated is just another example of this and allowing Lotte to run the joint tourism project will allow the North Koreans an opportunity to begin another business relationship that will undoubtedly feature more corruption and embezzlement to North Korea that will keep the elites in power and the North Korean masses starving all in the name of inter-Korean cooperation.  Chairwoman Hyun is one woman who has finally drawn a line against the North Korean’s provocations, however the South Korean government is not likely to follow suit.

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by @ 1:02 pm. Filed under South Korea, Money, Asia, East Asia, Economy, Northeast Asia, North Korea

29 August, 2005

china economic roundup (xi)

AsiaPundit must give a tip of his akubra to CSR Asia for introducing me to Brian Schawarz’s blog
and to this article by Schwarz in The American Thinker.

In recent months
the mainstream media has been overflowing with articles discussing the
economic threat that China poses to the global economy in industries
ranging from textiles to autos. In response to these anxieties and
fears, many politicians on both the left and right are pressing for
ill-conceived tariffs on Chinese exports and limitations on Chinese
investment into key industries.
While it is true
many Americans and Europeans face the possibility of layoffs and lower
wages caused by intense Chinese competition, I have watched this
growing backlash against China with a mixture concern and dismay.  As
an American instructor of business management in Beijing and Shanghai
for the last five years, I’m becoming increasing convinced that the
Chinese economy in the years ahead will not be as strong as many
so-called Western experts would like readers to believe.
Westerners get carried away with irrational exuberance about the number
of new Shanghai skyscrapers going up or the millions of new cars
clogging the streets of Beijing, foreigners would do well to gain a
greater understanding of the massive economic challenges its Communist
leaders need to tackle in the next few years.

I’ve long argued that the hype about China’s promise - as well as the hype on the China threat - is all overdone. Schwarz has a good round up on why. On a similar theme, another must read is this MacLean’s article reproduced by Shanghai’s NYT bureau chief Howard French.:

At its apex, Japan’s economy crumbled like a house of cards. The yen,
which had been kept weak to promote exports, was engineered upward to
rein in fast growth, igniting a speculative real estate bubble. When it
burst, the banks, which had lent money to companies based on their real
estate equity, were left virtually bankrupt. Trillions in personal and
corporate wealth disappeared overnight. The implosion revealed
structural rot beneath the economy’s seemingly ironclad exterior. The
upshot was 15 years of stagnation that Japan is only just now emerging
China is, in many ways, following in the footsteps of Japan’s early
success. Nobel prize-winning economist Robert Mundell recently compared
China’s ramp-up to Japan’s beginnings as a low cost manufacturer in the
1950s and ’60s. And now, like Japan was in the 1980s, China is focused
on expanding into international markets and on developing its own
technology for sale to the world.
But other similarities are more disturbing. Andy Xie, chief Asia
economist with U.S. investment bank Morgan Stanley, points to the
US$350 billion in speculative “hot money” that has poured into China in
recent years on the expectation that its currency, the renminbi (or
yuan), would appreciate. Much of that money has been parked in real
estate as the recently privatized housing market goes through an
unprecedented boom. In Shanghai, prices skyrocketed by 28 per cent last
year, with sleek condo towers, office high-rises, hotels and malls
being thrown up at a breakneck pace. The vacancy rate officially stands
at 2.7 per cent, but anecdotal evidence suggests up to 40 per cent of
the new space sits empty.

And with those cheerful thoughts in mind, this week’s comment from Morgan Stanley’s Stephen Roach has left me feeling a bit more bearish than usual.:

Non-Japan Asia… which accounts for fully 28% of world GDP as
measured on a purchasing power parity basis — is likely to be hit
especially hard by the combined impacts of its inefficient energy
consumption technology as well as its excessive dependence on the
American consumer.
is the most obvious case in point.  Its oil consumption per unit of GDP
was double that of the developed-world average in 2004.  China, like
many Asian countries, tends to subsidize the price of retail energy
products. While that means the cost of higher oil prices is deflected
away from
Chinese consumers, the impact falls more acutely on its government
finances.  At the same time, in the face of
soaring energy costs, China’s subsidy structure has already caused
serious disruptions to retail supply — resulting in long petrol lines
that are strikingly reminiscent of those experienced in the 1970s.
Moreover, about a third of China’s total exports go to the  United States.
That means one of China’s largest and most dynamic sectors — exports
currently account for more than 35% of Chinese GDP and were still
surging at close to a 30% y-o-y rate through July — is very much a
levered play on the staying power of the overly-extended American
consumer.  That’s a tough place to be for any economy in an energy shock — even China.
With the possible exception of Japan and India, the rest of Asia may not be in much better shape.

Also oil-related, Ben Muse looks at China’s energy security, and exposes part of the reason why it’s looking at Central Asia and nearby sources. Currently, about 80 percent of China’s oil has to travel through the Malacca Straits, if Canada’s oil sands become viable they’ll have to pass through an area that’s free of pirates, but closer to the US military.:

Grt_circ_rte_2_2Because the earth is round, the shortest route from Canada’s west coast
to East Asia passes  across the Gulf of Alaska and through the
Aleutians into the Bering Sea at Unimak Pass, returning to the North
Pacific through the far western Aleutians.  Once past the Aleutians,
shipping would still have to pass around or between the Japanese
Islands, and between Japan and Korea.
It’s hard to imagine the U.S., Japan, or Korea interfering with the
rights of innocent passage through these waters.  But the Chinese can’t
be entirely comfortable about this source and route.   Canadian oil
would certainly be vulnerable in the event of a conflict over Taiwan.

AsiaPundit earlier agreed with Bingfeng’s analysis that the problems with healthcare in China are not caused my the growing privatization of services, but that market-oriented services are still developing. Sun Bin has further evidence.:

Shanghaihospital"When Gao Qiang, China’s health minister, responded to scathing
criticism of his country’s health system this month he turned his ire
on local hospitals, saying they had put profits ahead patients. Mr Gao
raged that patients were being billed for drugs to cover the cost of
everything from wages to building maintenance, leaving an increasing
number of citizens unable to afford to see a doctor.
From the hospital’s perspective, however, the picture is very
different. A squeeze on government funding and strict price controls on
most services mean they are forced to rely on drug sales for up to 70
per cent of their budgets.
"The problem with hospitals centres on the draconian capping of
doctors’ fees and in-patient beds," said a foreign pharmaceuticals
executive. "The result is that they run these services at a loss and
have to make up the money elsewhere." The cost of a bed in China’s
hospitals, even in large cities, can be as little as Dollars 1 a day.
Prices are kept low in the name of maintaining what the government
calls "social stability".

Peking Duck guest blogger Martyn really should have his own site. The latest offering takes a look at China’s swelling foreign exchange reserves.:

Some Chinese officials argue that the money would be better spent
recapitalizing the state banks or to import oil and build up strategic
reserves, of which it has none. Others say the money should be used to
fund overseas acquisitions by Chinese firms.Conservatives want to keep
the money in financial instruments. They say, quite rightly, that the
inflow of hot money is only a temporary phenomenon and point to the
billions of dollars of liabilities in bad loans held by the state
banks, pension and welfare liabilities and debts owed by securities
firms.There is also the possibility of trade disputes or a trade war
with the US or the EU, which would sharply reduce the trade surplus, or
a financial crisis at home or in Asia.

Further on China’s reserves, Brad Setser points to some useful posts on the end of Bretton Woods II.

It seems like some in Asia are a bit worried that so much of the
world’s wealth is denominated in the currency of the world’s largest
debtor. Cynic’s Delight highlights their concerns well in a recent

"Chalongphob Sussangkarn, president of the Thailand
Development Research Institute, a Bangkok based think-tank, said, "It
is quite hard to understand why the world’s largest debtor (the United
States) is the one that controls the world’s financial system. We (East
Asia) always monitor what the US Federal Reserve says about interest
rate movements. (East Asian) creditors should be the ones who determine
the world’s fate."
Frankly, the United States’ Asian
creditors should be worried.  The Fed has made it clear that its
preferred solution to the US trade deficit is a big dollar
depreciation.  And the required depreciation could be large indeed.
See Rogoff and Obstfeld.


Yu Yongding is always worth listening
to as well
- and while his voice is only one of many that matter in
China, the fact that he think China already has too many reserves is

The New Economist points to a Bank of Japan paper on China’s revaluation, which endorses the PBoC’s cautious approach.:

YuanWe analyze the impact of Japan’s exit from its peg
on exports and investment.  The results point to sizeable effects of
the yen’s revaluation on both variables, especially investment.  While
our analysis suggests that a rapidly-growing, export-oriented economy
can operate a heavily managed float despite the presence of capital
controls and the absence of sophisticated foreign currency forward
markets, it underscores the importance of managing the exchange rate
with domestic conditions in mind and avoiding the kind of large real
appreciation that would sharply compress profits and damage investment.

For China this suggests starting with a modest band widening and
a limited increase in flexibility, and not with a large step
revaluation which could have a sharp negative impact on investment and
growth.  Our results thus provide support for the kind of measures
taken at the end of July

The Economists View and the Globalization Institute both point to a WaPo item on China’s stock market reforms.:

Prosper Analysts emphasized that the plan should not be construed as an
indication that the government has embraced wholesale privatization.
The majority of the companies that trade on the Shanghai and Shenzhen
exchanges are small arms of giant firms that remain wholly controlled
by the state, or inconsequential and poorly managed firms … The
government’s decision to put more of these shares into private hands
does not signal an intent to relinquish control over the largest and
most strategically important state-owned firms, which still dominate
key sectors of the Chinese economy such as steel, auto-making,
telecommunications and commercial aviation. "This is basically a
mechanism to get the stock market to function, which it has not done in
four years," said Arthur Kroeber, managing editor of the China Economic
Quarterly. "This is the state privatizing junk that it’s not interested
in but retaining control over the core companies.

Also of interest: Tyler Rooker looks at China’s GDP and purchasing power parity; Danwar ponders a link between China’s bank bailouts and the revaluation; and Logan Wright examines recent statements from the People’s Bank of China, and tries to weigh how much the central bank is intervening in the currency market.:

by @ 1:32 pm. Filed under China, Money, Asia, Coming collapse, East Asia, Economy, North Korea, Economic roundup

26 August, 2005

china economic roundup (x)

Peter Mandelson "Protectionist of the Month" August 2005


Peter Mandelson went to Brussels riding a wave of goodwill for a new liberalising agenda, promising an era of "free and fair" trade
as EU trade commissioner. Less than a year later he has managed to land
Europe in a protectionist mess. A continent of 450 million people is
permitted to import only 105 million pairs of trousers from China.
As one wit put it, "a shortage of trousers and a surplus of wine is a great strategy for a party, but a crazy way to run Europe’s economy".
Mandelson’s plan for clothes rationing means that domestic producers,
who had 10 years to prepare for the opening of the textiles trade to
international competition, will be able to continue to charge Europe’s
consumers high prices for products.

The fact that western businesses and bureaucrats had a decade to prepare for the end of the quota regime is a point that’s worth making. Many businesses did prepare, mostly by moving their production and sourcing operations to China, and the quotas are now punishing them for it while rewarding those who lacked long-term strategic planning skills.

On which, Sun Bin has excellent observations on how the EU still has no long-term, or even immediate-term, vision:

The problem EU encountered today is a direct result of lacking
a clear and longer term rule. How can you impose quota all at a sudden,
leaving no time for merchants to plan? They need to at least waive
quota for all those who have already signed the contract prior the
quota implementation.
I thought this is common sense for any
policy setter, apparently not for the EU bureaucrats. Prior this year
exporters need to "buy" quota before they could ship out the
merchandise, and the buyers are clearly aware of and prepared for that.
Now all of a sudden the quota is set at the EU border and no one knows
when it is filled. Importers just continue with their orders. Perhaps
the Chinese negotiators already saw through this a couple months ago
but they just kept quiet.

In spite of strict capital controls, or more properly because of them, China has a problem with money laundering.

MoneylaunderWe’ve heard many stories, told second and third hand, usually over a
cocktail or two (or three), of outrageous sums of Chinese cash,
laundered transationally. The "invoice trick,"
a common and ancient method, involves a domestic company purchasing
overpriced product sold by an overseas "seller." The outflow of cash
over and above the instrinsic value of the product, being, of course,
the laundered sum. Taiwanese authorities in the 1980s became rather
expert at spotting these value discrepancies.
Of greater concern are the major cases — and in China there have
been an extraordinary number. Take the train shipments case as an
example. Originating at the Luo Wu station in Shenzhen, cardboard boxes
filled with RMB 8 Million (US$ 1 million) were transported daily to a
Hong Kong bank for nearly a year. A cool million a day for a year. One
can hear the clinking of the glasses and shouts of "A toast to China Rail!"

Via CDT, Robert Shiller looks at whether the Chinese economy is overheating and gives high praise to regulators.:

Pudong… maybe the word “overheated” is misleading. It might be more accurate
to say that public attention is over-focused on some recent price
changes, or over-accepting of some high market values. Whatever one
calls it, it is a problem.
Fortunately, people also tend to
trust their national leaders. For this reason, it is all the more
important that the leaders not remain silent when a climate of
speculation develops. Silence can be presumed to be tacit acceptance
that rapid increases in long-term asset price are warranted. National
leaders must speak out, and they must match their words with concrete
actions, to help signal to the public that the speculative bubble
cannot be expected to continue.
That is what the Chinese
government has begun to do. The real-estate boom appears to be cooling.
If the government continues to pursue this policy, the salutary effects
in terms of public trust in the country’s businesses and institutions
will help ensure stable, sustainable economic growth for years to come.

I’m not as convinced and think the slowing property market may be arriving after the damage is done. I lean toward the Andy Xie point of view that the cooling property market, and over investment and overcapacities in materials production, will help tip the country into a corrective slowdown .

Further on property, the Big Picture picks up on yesterday’s top item, Asian buying into the US property bubble, and notes:

Front page story in yesterday’s WSJ, titled "
Housing-Bubble Talk Doesn’t Scare Off Foreigners
Funny thing is, foreigners are notorious for their bad timing in buying both equities and real estate in the U.S.
Examples:  Rockefeller Center purchased by the Japanese at
the top of the 1980s Real Estate run; Foreigners dumped U.S. equities
in the summer of 2002, after piling into them in 1999.

An interesting post at the Oil Drum argues that China has bought into the peak oil theory, or at least has decided that oil isn’t fungible.:

OilAt that point China may well get what it needs, only if it has the
rights to the oil through the companies that it controls.  And that may
become an issue.  Countries such as Indonesia are already having
problems because "their" oil is leaving, and they can’t afford to buy
it back.   This may lead to different national policies.  After all, in
the past, a number of countries took over the oil from foreign
operators, and there is nothing to say that existing arrangements
cannot be changed, by state fiat in many cases.

AsiaPundit doesn’t buy the peak oil theory, or at least not yet. I had the pleasure of living in Kuwait when prices crashed in the late 1990s and I see conditions for another crash around the corner. For the second time in a post, I’m in agreement with Andy Xie.:

China’s total oil imports eased 1.2 percent in the first five
months of 2005, Xie said, and they could fall further next year as new
power plants help prevent the electricity outages that inflated demand
for diesel and fuel oil in 2004.
Last year’s fall in the U.S.
dollar was often cited as a factor behind higher oil prices, since it
makes fuel less expensive in non-dollar economies and as it wooed
investment from speculative hedge funds. But with the greenback near an
eight-month high versus the euro, that too has faded.
As all
these factors gather pace, the market may ultimately be doomed to crash
by the growing dependence of financial institutions on oil trading
profits, Xie writes.
"As oil has worked for so long, the
financial community is hanging on to this position," he says.
Speculative funds have been increasingly active in commodity markets
over the past two years and are often blamed by OPEC for keeping prices
"They will likely keep prices up until an oil market
collapse. That day is not too far away, I believe… What is occurring
now is probably the final frenzy, in my view.

by @ 1:48 pm. Filed under China, Money, Asia, East Asia, Economy, Northeast Asia, Economic roundup

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