A bit too pessimistic I think. Too early to be writing China off, after all up until now it's been the US that has been the ultimate oil based economy. No doubt hc will have some opinion on this one.

"The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.

The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.

No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.

Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.

"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".

Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.

China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.

Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.

North Carolina's furniture industry is coming back from the dead as companies shut plant in China. "We're getting hit with increases up and down the system. It's changing the whole equation of where we produce," said Craftsmaster Furniture.

China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.

Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant. A Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime.

Whether or not this is fair, it is clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers.

Foreign reserves have reached $1.8 trillion, playing havoc with the money supply. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers. "There is a lot more bottled-up inflation in this economy than meets they eye," says Stephen Green, from Standard Chartered.

Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.

Of course, oil prices may fall again. They plunged to $50 a barrel in early 2007 after the Saudis raised production. The scissor effect of slowing global growth and extra crude later this year from Brazil, Azerbaijan, Africa, and the Gulf of Mexico may chill the super-boom.

The US Commodities Futures Trading Commission is on an "emergency" footing, under orders from the Democrats on Capitol Hill to smash speculators. If it is really true that investment funds have run amok, we will soon find out.

I suspect that the energy markets have fallen prey to their own version of the "shadow banking system" that so astonished regulators when the credit bubble burst.

I also suspect that Hank Paulson and his EU colleagues have a surprise up their sleeve for the late-cycle über-bulls. Those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point. The Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism. Futures now set the spot price.

But even if oil comes down for a year or two, the mid-term outlook of the International Energy Agency warns that crude markets will be tighter than ever by 2012. Call it Peak Oil, or just Peak Non-Cooperation by the dictatorships that control most of the world's remaining 5 or 6 trillion barrels (Mankind has used one trillion so far).

Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves."

http://www.telegraph.co.uk/money/main.j ... iew107.xml

Hmmmm. Interesting article. But I think that this "blow up theory" is over dramatized.

In the end it's the good old effect of oil on inflation: it permeates everything that needs to be moved (and grown) hence an increase in oil is felt across the board. Just like the 70s.

As for the price of a container from Shanghai to Rotterdam: it is NOT only the cost of oil, that's for sure. This is an oligopolistic industry that apparently is holding pretty tight together. Further, in the 3Q prices normally start to go up naturally. It's a cycle within a cycle imho. So, I am not sure it validates the claim of the author.

Now, apparently speculators are indeed the responsible parties pumping the price of oil up, or so I read. There are only partial supply risks that justify the increase in price. And demand for sure is in line with what was expected of it to do i.e. there is some undue disturbance in the equation ("political uncertainty", yeah right).

I think that the "hold down" yuan thing is wrong. Plus, considering China is a major importer of oil, it would in theory want it to appreciate faster right? The same Morgan Stanley guys he quotes also mention the Chinese currency policy is spot on.

So. I don't know, sounds very alarmist to my economic knowledge.

As for the Chinese producer: normally these hold the short end of the stick but invariably they will pass the cost increase to everybody else on the supply chain. The buyer needs a supplier. The least productive suppliers will probably perish but hey this is capitalism, with Chinese characteristics or not.

It could end up being the perfect storm for China with a combination of high oil prices and the related economic slowdown being a double whammy for Chinese exports.

I wonder how many structual problems there are in the Chinese economy too with the banks being hit with a lot of bad debts if the growth can't continue at such a pace in the future. I'm not sure these issues are being taken seriously yet in the same way that few people saw how devastating the house price bubble would be to the US.

I think China is in for a rough ride in the next 2-5 years and it will either come out of it in great shape to compete in the future or else it will implode.

hc wrote:As for the Chinese producer: normally these hold the short end of the stick but invariably they will pass the cost increase to everybody else on the supply chain. The buyer needs a supplier. The least productive suppliers will probably perish but hey this is capitalism, with Chinese characteristics or not.

That's the bottom line. Can China remain the supplier of choice?

well, who find the sustainable new energy sources will become another France

others just follow..

I think what will be most interesting is how chinas social structure deals with this. There will be a oil crisis in china and many Chinese are not accustom to things getting worse.

China's trade surplus falls nearly 12 percent in first half: govt5 hours ago

BEIJING (AFP) — China's trade surplus fell nearly 12 percent to 99.04 billion dollars in the first half of this year, as a struggling US economy hit the country's exporters, official data showed Thursday.

The surplus in June alone was 21.35 billion dollars, the customs bureau said in a statement on its website, a decline of 20.7 percent year-on-year.

Total trade in the first half this year was 1.23 trillion dollars, up 25.7 percent from the same period last year.

Imports from January to June grew 30.6 percent to 567.57 billion dollars, the bureau said on its website. Exports rose by 21.9 percent year-on-year to 666.61 billion dollars.

The trade surplus between January and June this year was 13.48 billion dollars less than the same period last year, a decline of 11.98 percent, based on calculations using data posted on the bureau's website.

The Chinese government said last month the nation's trade surplus was likely to shrink in 2008 for the first time in five years on weakening exports, mainly due to the rising local currency and the US economic slowdown.

The yuan has risen steadily from 8.3 to the dollar about three years ago to roughly 6.85 currently since China loosened its peg to the greenback, placing huge pressure on Chinese exporters and making imports cheaper.

"China's export growth eased notably in June, despite remaining in the double-digit territory," Sherman Chan, an economist at Moody's Economy.com, said in a research note.

"Amid softening US consumption and its contagious effects on the rest of the world, it is perhaps not surprising that China's outbound shipments are losing steam."

Chan said the 8.0-magnitude earthquake in Sichuan province on May 12, which left nearly 88,000 people dead or missing, also had an impact on exports.

"The earthquake in May... disrupted economic activity across the country," Chan said.

"Resources have been relocated to emergency relief and production became more domestic-oriented as demand for aid materials surged. The switch in focus to the domestic sector was in part responsible for the slowdown in exports."

saw this one on Finacial times, went and found it on the internet. perhaps more relavent then the above article. xx

brussels is such an interesting plc... wish i could work there one day

===================================================
The China bubble fuelling record oil prices
Daniel Gros

Published: July 9 2008 18:49 | Last updated: July 9 2008 18:49

What is behind the ever-increasing price of crude oil? Most economists and energy experts argue that even the current sky-high price is justified by fundamentals, namely the high growth in demand by emerging markets, in short “China”. The one important fact usually adduced to support this position is that supply and demand seem finely balanced as inventories are not increasing.

But this argument is wrong. The observation that inventories are not increasing is irrelevant since there is a very convenient way to store oil that is not measured by inventories data: just leave it in the ground!

Many experts also stress the observation that, in spite of very high prices, production has not really increased (last year, for example, saw an increase of only 1 per cent). However, this argument, like the one about inventories, is wrong because it does not take into account the nature of oil as an exhaustible resource.

The big choice for any owner of an ex­haustible resource, such as King Ab­dullah of Saudi Arabia, is only inter-temporal: extract today or extract to­morrow. If the king extracts today, he gets today’s price (minus the extraction cost). If he extracts tomorrow, he will get tomorrow’s price (minus the same extraction costs), discounted at today’s interest rate. The supply of oil today will thus increase only if tomorrow’s price is low relative to the price today.

In other words, the supply of oil will increase not when the price today is high, but only if suppliers expect that prices will be lower in future. This implies that China influences oil prices today not so much because Chinese demand is high today (China currently accounts for less than 10 per cent of global consumption of crude), but because demand in China is projected to increase so much in the future, fuelling expectations of higher prices and thus leading producers to lower their rate of extraction today. In this light, it is no mystery that oil supply has not reacted to higher prices. Rational oil producers are just waiting for even higher prices tomorrow.

Another factor limiting oil supply today (and thus driving up prices) is that the return to oil producers from the dollars they would earn from increasing production has over the past year been greatly reduced by the US Federal Reserve. American interest rates are now negative in real terms. It is thus rational for oil producers to limit their accumulation of rapidly depreciating dollars by limiting the rate at which they extract oil. High oil prices are therefore at least partially a consequence of an expansionary monetary policy in the US.

When it comes to oil prices, and how much oil is produced today, it might be best to listen less to traders on commodity markets and more to the suppliers. King Abdullah has recently been quoted as saying that if additional oil were to be found in his country, he would advise leaving it in the ground because “with the grace of God our children might have a better use of it”.

This suggests that suppliers have the impression that it is better for them to delay extraction.

The expectation that prices can only go up (and the fact that the return on capital remains low) is the real culprit, not the trading among speculators who are simply betting against each other so that one side’s gain is the other side’s loss. Regulating oil derivative markets might affect the amount of “speculative” trading, but it will not induce oil producers to increase extraction.

If speculators are not to blame, does it follow that there is no bubble in the oil market? Not necessarily. A bubble starts when past price increases lead to expectations of future price increases. It could very well be that prices will not increase as much as expected if China’s future demand for oil is lower than expected today, or if alternative energy supply sources become as cheap as some suggest.

Sky-high oil prices are likely to lead over time to a massive substitution away from oil, even in China. This is what happened after the first two oil shocks. But it will take years for this scenario to materialise.

In the meantime, the best explanation of oil prices is neither “bubble” nor “China”, but a “China bubble” – in the sense that speculators and oil producers are gambling on China’s sustaining high prices for ever.


The writer is director of the Centre for European Policy Studies in Brussels

does this article make sense to anyone.....
i struggle. who wants to help a bit

==================================

The right way to beat Chinese inflation
WASHINGTON: High inflation is threatening social stability in China, soaring from 3.3% in March 2007 to 8.3% in March 2008. As a result, the People’s Bank of China has raised interest rates substantially and increased banks’ reserve requirements. The trick for the Chinese government will be to quell inflation in a way that does not compromise its long-term goal of continued strong economic growth. The risks are high.

China’s accelerating inflation reflects a similar climb in its GDP growth rate, from the already high 11% in 2006 to 11.5 % in 2007. The proximate cause of price growth since mid-2007 is the appearance of production bottlenecks as domestic demand exceeds supply in an increasing number of sectors, such as power generation, transportation, and intermediate-goods industries.

Sustained robust growth and rising aggregate demand have also caused production bottlenecks outside of China, most notably in the agricultural commodity and mining sectors, which have helped lift oil prices to more than $100 per barrel.

In these circumstances, continuing to raise borrowing costs would be a mistake. To be sure, the prolonged rapid increase in Chinese aggregate demand has been fueled by an investment boom, as well as a growing trade surplus. Thus, lowering inflation would require reducing the growth rate (if not the level) of these two demand components. But Chinese policymakers should focus more on reducing the trade surplus and less on reducing investment spending, that is, they should emphasize renminbi (RMB) appreciation over higher interest rates to cool the economy.

A sizeable reduction in aggregate demand through RMB appreciation is achievable without being imprudent, because the current-account surplus in 2007 was 9.5 % of GDP. Investment (especially in infrastructure in backward areas and social investments) should not bear the brunt of the expenditure squeeze, because today’s investment is also tomorrow’s growth in production capacity; and the production of more goods tomorrow would reduce inflation.

Using RMB appreciation as the primary tool to fight inflation implies accepting a temporarily higher unemployment rate now in exchange for a permanently lower unemployment rate in the future. This is because manufactured exports are typically more labor-intensive than investment projects. As a result, a RMB1 billion reduction in exports would create more unemployment than a RMB1 billion reduction in investment spending. But tomorrow’s capacity expansion from today’s investment would mean a permanent increase in the number of jobs created from tomorrow onward.

Nevertheless, China must be careful when implementing RMB appreciation. Policy makers should closely monitor potential changes in the economic conditions in the G-7. A deep recession in the United States resulting from the sub-prime crisis would significantly lower Chinese exports and cut the prices of oil and other primary commodities. In that case, a large RMB appreciation undertaken now would be overkill.

Moreover, the authorities should recognize that RMB appreciation is unlikely to reduce US-China trade tensions. Consider the experience of Japan-bashing in the 1980’s, when the Yen-Dollar end-year exchange rate plunged from 248 in 1984 to 162 in 1986, and then to 123 in 1988. While Japan’s overall current-account surplus declined significantly, from 3.7% of GDP in 1985 to 2.7% in 1988, the overall US current-account deficit only fell from 2.8% of GDP to 2.4%, because Japanese companies started investing in production facilities in Southeast Asia for export to the US. So Japan-bashing continued under a new guise: the additional demand that Japan must remove its “structural impediments” to import.

In short, substantial RMB appreciation would reduce the bilateral US-China trade deficit and China’s overall trade surplus significantly, but it would do little to reduce the overall US trade deficit. In the absence of a generalized appreciation of all Asian currencies and unchanged American policies, possibly only a deep recession could reduce the overall US current-account deficit. A stronger RMB can help only the overheated Chinese economy. And it has the virtue of doing so without hurting China’s future production capacity.



Wing Thye Woo is the New Century Chair in International Trade and Economics and a senior fellow at the Brookings Institution.

wink2::

--------------------------------------------------------------------------------
Hey BlackBird...
Read some here
http://seekingalpha.com/article/84756-i ... to-loose-n ot-tight

here too http://seekingalpha.com/article/84742-c ... ncial-cris is

Personally, I love Michael Pettis articles...

You have to read a little bit more between the lines, specially from financial news papers, NYtimes..etc..... For example, that 200 billions a year in surplus money in China cannot be accounted for...
And also that most chinese companies now have to turn to "underground: banks to get financing...
Just yesterday, the SEC has slapped wall street broker houses to stop spreading rumours...The practice is of course not limited to WS....

hey totomolo the thing is i try to read but it is very hard to make sense of whatever i read. it only confuses me more :(:(
im a silly monkey ...

but i think the two articles you have up there are a bit easier to read because it uses less jargons... xx

just a quick question about how drawing out hot money will do damage and how china has been relying on uk/us/europe for profit. china is a large enough market itself. when the RMB appreciate enough, isnt it possible for the chinese govt to reinvest its own reserve on its own domestic market? (instead of linking it to uk/us/europe economy as what it is investing now) or am i just being silly as a layman...

i hope eventually china will develope its own other type of industry apart from manufacturing and the people of china will have more buying power.....

ps u r right about the underground banks etc

thanks for the above.

mmmmm.......but wouldnt u argue it was overconfidence on spending that caused the credit fillflop on housing in the US today?

so there is no way to save the downfall for the chinese in your opinion?




i must go and get myself a basic economics book to read..... so that i can at least understand what people are on about... but the trouble is those boooks are hard to swallow and confusing with no real case studies as examples.... do u have anything simple to recommend? even an article typa thing would do thx in advance!

[

This is the basic and only economic truth: work hard, spend less, create more...

this sounds like the chinese!!!!

the traditional chinese would accumulate wealth and die and leave the wealth to the next generation. but where is lifes pleasures...........

After 1989, when the doors were opened, they got loose and started to reverse the trend...

this is so me!!!:) i go shopshopshop for shoes and bags after my payrise!

but at least japan korea taiwan and singapore all made it before it starts falling....

The real problem now is that the only thing people all over the world trust is "real stuff": oil, iron, copper, coal... The countries with natural resources are doing fine: Brazil, Russia, Middle east...

china often has good relation with 3rd tier countries. but i guess who has the money wins when it comes to getting resources. or, fire a few missiles!!

china is poor in resource. only coal nothing else. (pollution = coal, cost adding) not even water. what will happen after food price skyrise. and its sad china only has comparative advantage on cheap labour

i argue if the govtment spend the money at the right place perhaps we could have a different industry apart from cheap labour. when you think about dubai you dont think about cheap labour, you think about shopping and beach. taiwan used to be good at computers hardware. if we could develope techonology based products? if the investment from govt reserve is going to the right place not just to bubblie real estate and stock and so on.

poor wife! she is like a nun in the monk's house! i think the guys who love making money is because they get the pleasure out of making money process, not like me getting the pleasure of a pair of cute shoes.

hence theoretically the more$ the happier even thou money is just a number. its like god is just a figure the more believe the happier for the monk.

if we dont develop a 2nd industry its much like winning lottery, rich over night but not sustainable.

corrupted officers sure spend a lot. this is really sad. the low class people really suffers in china. nite