China on the Rise

I'm now completely taken with my good luck at getting a real test drive from the Chairman, looking back at the BYD booth now 100 feet away. I was convinced that this was the end of the trip and the car would be backed up to the booth. And then the car sped up to about 10 mph, which is an uncomfortable speed in the middle of a convention center. There was only one obstacle in the way: a press conference.

The American Le Mans Series was holding a press conference to discuss the environmental innovations they were making in their racing (including the introduction of E85 ethanol to the racing series). It was fitting then that the chairman of the small chinese automaker, that sells annually in China what Honda sells in a month in the US, was pointing his answer to the environmental question right at them.

And we mean right at them. Right in front of the car was a soon-to-be confused production assistant with a headset going through the sequences of the conference on her walkie-talkie on the area in front of the press, completing the tasks she probably rehearsed all day.

From: Detroit Auto Show: World Exclusive Surreal, Illegal Test Drive Of Chinese Hybrid Through Cobo Arena


PBOC Raises Reserve Requirements Again

China's central bank raised the reserve requirement by 50 basis points on Wednesday, effective January 25. The new reserve requirement will be 15% once the change takes effect.

This graph is from an article by Frank Shostak on the U.S. economy: Will the U.S. economy suffer a downturn?
We suggest that sooner or later the persistent tightening will burst the bubble and plunge China’s economy into an economic downturn. The burst of China’s bubble activities can happen at any time. This in turn could disrupt the flow of real savings to the US. Now if we were to assume that China’s bubble activities may hold for another year then a serious economic downturn in the US and the rest of the world is likely to take place during 2009.

Inflation gets worse; PBOC Tightens

A sure sign that inflation is getting out of hand is when the government tries to blame its own citizens for responding to price signals:
Companies that hoard goods or try to fix prices can be fined up to 1 million yuan, or $130,000, up to 10 times the previous penalty, the cabinet said on its Web site.

When people see pork and cooking oil increasing in price as fast as stocks, they do what comes naturally: buy and hold. China suffers from a meat shortage caused by disease and the global biofuel craze that is pushing agriculture prices ever higher, in addition to rapid money supply growth, courtesy of the U.S. Federal Reserve.

The PBOC is doing what it needs to defeat inflation, but now some analysts are worried that a U.S. slowdown will result in a policy overshoot:
``As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown,'' says Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase & Co. ``If the central bank raised interest rates too much, it would damp domestic demand and increase the danger of economic downturn.''


Jim Rogers on Agriculture

Here's Jim in an October 24, 2007 article from Bloomberg:
``The number of hectares devoted to wheat farming has been declining for 30 years, the inventory levels of food are at the lowest level since 1972,'' Rogers said. ``Suppose we start having droughts again. God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things.''

He added, ``I think I'm going to make more money in agriculture than I make in precious metals.''

Jim's beaten the drums on agricultural commodities on many occasions. One way to play agricultural commodities is PowerShares DB Agriculture. It certainly has a nice chart:

Currency Peg Meets Reality

James Fallows has a good article on the gigantic imbalance between the American and Chinese economies:
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

This paragraph is explains how China's currency policy helps Americans. By artificially lowering the value of its currency, China engages in wealth transfer from poor Chinese to rich Americans. However, as with all artificial market manipulations, eventually the state is unable to continue defying market forces. China's inflation rate is growing faster than the American inflation rate. China's monetary policy has been inflationary and in the long-run, had they kept the peg, China's currency would have declined to the rate of the peg.

As China revalues its currency though, it will shift inflation from itself to the United States (just as the U.S. was able to hold inflation low thanks to the PBOC's policy), assuming the dollars return to the U.S. and do not end up in another foreign central bank.

One cannot evaluate China's reserves, however, without considering its financial sector debt. Steven Hanke discussed China's reserves in 2005:
There's no denying that $769 billion is a big number. But still--and here's another surprise for my friendly congressman--it's not big enough. China must have reserves to accommodate routine foreign transactions. Taking into account the size of the Chinese economy, its money supply and its imports, I estimate these to be $455 billion. In addition, it needs reserves for exigencies beyond normal transactions. Now that the U.S. is demanding a wholesale opening of China's financial sector, China will have to fill in the sinkhole of bad loans that threaten to undermine its banking system. This task, now under way on a timid scale, is ultimately going to cost perhaps $650 billion.
To complete a wholesale opening of the financial sector, China will also have to make the yuan convertible. This will require at least another $200 billion. Add it all up, and you have needs for foreign reserves in the neighborhood of $1.3 trillion. It's only halfway there. Stop complaining.

If Hanke is right, China now has the financial reserves it needs to complete its financial reforms—which means it also has the ability to unwind the reserves. Read James Fallow's article to get a sense of what a change would mean.


Mainland Market Manipulation

Here's a Forbes article on various ways people manipulate the Mainland stock market:
The fastest bucks are to be made by front-running. Known in Chinese as laoshu cang (老鼠藏), or "rat storage," front-running is illegal, just as in Western markets. The rat in question, a manager of a mutual fund, buys shares for himself privately before his fund buys, then sells for a profit after the fund's much bigger purchase helps drive up the share price. The rat stores away some cheese for himself and moves on to the next trade. Or he teams with a Lin sort for a bigger nibble.

Regulators acknowledge front-running to be a widespread problem, but virtually nobody gets caught. The only exception in the last two years proves the rule. Shanghai fund manager Tang Jian, fired last May from China International Fund Management, a joint venture between JPMorgan Fleming and a Shanghai securities company, had raised just about every red flag possible to bring about his own downfall. According to state media reports, within months of taking over a stock fund in 2006, he complained about his salary in an e-mail at work, talked about front-running on firm-monitored telephone calls, opened a trading account with his father's government identity card, bought an expensive home and a BMW, divorced his wife and ran off with an office intern on a quickie honeymoon to Brisbane, Australia. He tallied at least $200,000 for his rat cellar.

Check it out. Then end of the article has a great list showing shares of companies trading with P/S multiples in the hundreds and P/E multiples in the thousands.


New Financial Website

If you can read Chinese, Baidu recently launched a new financial website. I haven't given the site a thorough examination, but the interface appears much cleaner than most other sites. A strong point is a better news feed—timelier and from a wider number of sources. Until now I had been using Google Reader to find Chinese language news because I couldn't find a site that came close to what Yahoo! Finance delivers for domestic stocks.