Chinese Central Bank governor Zhou Xiaochuan announced the Chinese yuan will be kept at an appropriate level and no new strategy has been adopted, signaling a continuation of the current strategy. The yuan has been allowed to appreciate 21% against the U.S. dollar since the end of its peg in July 2005. However, the Central Bank has halted any gains since July 2008 signaling a de-facto return to the fixed currency regime.
This has not been lost on U.S. officials as Treasury Secretary Timothy Geithner last month called China a “currency manipulator”, a term not lobbed at the Chinese in the last four years.
Our comment: While the intention of China is to rejuvenate its slowing export market by providing traders with a stable currency, U.S. officials are afraid a return of a pegged yuan will hinder their attempts to rejuvenate their own economy. This can have potentially damaging affects to the U.S. economy as any movement in the dollar will be met with a synchronized movement in the yuan, reducing forex risk to Chinese traders but also limiting any reduction in the U.S. balance of payments. Under normal circumstances, a self stabilizing mechanism exists between a nation’s currency and balance of payments. If the volume of imports is significantly higher than exports, the supply of the country’s currency will be higher than normal thus reducing the value of its currency and making imports more expensive, correcting the initial problem. The reverse is also true for a nation with high exports. However, with the return of the yuan peg, this mechanism will no longer effectively work for China or the United States.
Chinese wholesale inflation fell to negative 3.3% in January compared to a year earlier, effectively ending the inflationary spiral regulators were afraid of in the lead up to the Beijing Olympics last August. However, the latest numbers out of Beijing now bring a threat of deflation to the world’s third-largest economy.
Our comment: The decline is not surprising. And it won’t last: The Chinese government’s intention to spend upwards of 4 trillion yuan on public works projects as part of its fiscal stimulus package, the inherently inflationary nature of government spending will reduce the deflationary threat.
Treasury Secretary Timothy Geithner is due to announce a plan to draw private investors into a U.S. financial rescue package aimed at reducing the toxic assets many commercial banks have on their balance sheets.
In a markedly different approach from the previous administration, Geithner aims to spur the flow of credit through the economy once again not by injecting capital into troubled banks like his predecessor did, but rather by addressing the root cause of the credit crunch; the illiquid assets with continually declining market values. While an announcement was yet to be made, it was widely expected an aggregator bank would be set up with some capital provided by private entities and could be backed by FDIC issued debt.
Our comment: While this latest measure does appear to be rewarding the banks for their mistakes, it also allows banks to restructure with the ultimate aim of using their capital to start lending again.
The Bush administration was criticized for panicking and effectively reverting to socialism when attempting to rescue the financial sector by providing government money to address corporate losses. And rightfully so.
Geithner’s proposal, while similar on the surface, is different in nature – it only provides government backing in what is likely an attempt to gain the confidence of the market. The capital to be injected into the aggregate bank is to come from private investors, signaling a return to market-based economics.
Asian markets extended their pre-weekend rally on Monday as better than expected numbers out of Japan helped investors focus on positive news out of Tokyo and Washington.
Japanese machinery orders in December only dropped 1.7%, a significant improvement over the 8.9% expected by economists polled by Dow Jones Newswires and a drastic improvement over the 16.2% drop witnessed in November. Machinery orders signal capital spending in the next 3 to 6 months. Orders are expected to rise 4.1% in the current quarter that ends in March according to a government survey. Japanese exporters were also buoyed by the expectation of a speedy passage of the economic stimulus package currently being debated in the Senate and the weaker yen which reached its one month low against the dollar on Friday.
While there was no shortage of bad news following last Friday’s announcement U.S. jobless claims rose 598,000 in January, reaching their highest level since 1974, Asian markets appeared to be putting the worst behind them and focusing on positive news. Shares in Nomura fell after it said it may need to raise up to Y300bn as it needs to replenish capital and absorb former Lehman Brothers employees.
by Larry Edelson on February 9, 2009
in General
The Obama administration delayed the announcement of its bank rescue plan until tomorrow as Congress remained focused on the economic stimulus package.
Details of the bank bailout plan were expected today, but the Treasury Department said Timothy Geithner will make the announcement at 11am EST on Tuesday. Details of the plan have been scarce, but it is expected that the Obama Administration’s use of the Troubled Asset Relief Program’s (TARP) remaining $350bn will seek to shore up the nation’s biggest commercial banks.
Efforts are being devoted to cleaning the bank’s toxic assets in addition to further equity investments in the banks themselves and guarantees on loans. It has even been suggested that there may be incentives for private investors to buy the troubled mortgage related assets which lie as the root cause of the current crisis and provide relief to troubled banks.
The administration has also pledged $50bn to $100bn will be used to help people with distressed mortgages. In addition to this, it is also designing a program that would ease borrowers’ mortgage payments to Fannie Mae and Freddie Mac and hopes it provides a model Wall Street will emulate.
by Larry Edelson on February 9, 2009
in General
The U.S. Senate readied itself over the weekend to vote on a huge $780bn stimulus package aimed at giving the economy the short-term jolt it needs to get on the path to recovery. Senators worked over the weekend to trim the hefty package which included amendments that had inflated its size to nearly $1 Trillion.
Debate on the stimulus package is set to resume at 1pm on Monday followed by a vote at 5:30pm to stop any further amendments. Barring any unexpected developments, a final vote on the measure is scheduled for noon on Tuesday. This will then be further reconciled with the earlier stimulus package passed by the House of Representatives into one package.
Senator Ben Nelson from Nevada states the measures include $350bn in tax cuts, providing relief for 95% of Americans. It also contains billions of dollars in infrastructure spending, and boost support for jobless benefits and food aid for the poor.
My cycle work strongly suggests an important low in oil may already be at hand, or at worst, very close. Take a look at this chart, made from my cycle studies on oil. You can clearly see the dominant cycle shown on the chart indicates we may be at a major low RIGHT NOW.
I’ve been working with these cycle studies for 20 years now and they are pretty reliable. In fact, they call important highs or lows better than 70% of the time in just about any market I apply my methods to.
What could soon drive oil higher, possibly much higher? Four main forces:
1. The sudden realization that oil supplies are tighter than ever
2. The potential for a bounce higher in the U.S. and global economy
3. The bursting of the bond market bubble — something few analysts are talking about.
4. The monetization of the U.S. Tower of Debt … the gargantuan fiscal deficit … and the Fed’s massive money-printing, has begun. Long-term, it’s highly inflationary.
My view: If my cycle study is correct, oil could be signaling these forces, and we should soon see an explosive move higher in oil.
I know China has taken its lumps in the last year. But despite all the bad news you’re hearing about China, I maintain that China is not in anywhere near as bad shape as the press and other pundits are leading you to believe. I’m back on-the-ground in Asia now and lots of exciting things are happening over here.
I believe some of the best profit opportunities this year will be found in China. Why? Many reasons. Chief among them: The financial strength now inherent in China’s economy. Take a look at these stats …
* $2 TRILLION in cash in its kitty
* At least $585 billion being spent on infrastructure
* Retail sales still robust, growing at an annual rate of 21%
* Disposable income on the upswing, rising 7% in 2008
* Rural incomes also exploding higher, up 7% for 2008
* Fixed-asset investment growth up 26.8%
* Property investment up 22.7%
Plus, Beijing is slashing interest rates, bank reserve requirements, taxes, tariffs and even implementing relaxed standards for purchases of second homes and investment properties.
Meanwhile, the Chinese stock market is in deeply oversold conditions — and many great Chinese stocks are now trading at very cheap valuations, as low as 2 times earnings!
I expect China’s stock market to head substantially higher this year retracing at least 50% of its decline last year.
Bottom line: Of the select investments I’d make in these wild and crazy times, China is one of them.
To get an in-depth look at my other 2009 forecasts and my core recommendations that will help make you a bundle of money this year, see my Real Wealth Report.
by Larry Edelson on January 7, 2009
in General
Jan 6, 2009 (WALL STREET JOURNAL) — In an early sign that some steel prices may have bottomed out, steelmakers in the U.S., China and some other countries are attempting limited price increases and reopening a handful of mills that were closed because of weak demand a few months ago.
It isn’t clear whether the price increases will stick, however. Steel sellers often announce price increases or special surcharges, only to relent in the face of customer opposition or if rivals don’t follow suit. Nor is it clear whether the price increases reflect more demand or lower inventories.
Troubled auto makers, contractors, appliance and equipment makers have cut back on their steel purchases. The majority of mills closed over the last few months remain shuttered and many around the world are operating below 50% of their capacity.
But steelmakers signaled cautious optimism that there is enough demand to support price increases in some parts of the world. Pittsburgh-based Allegheny Technologies Inc. said it would increase its surcharges on electrical steel by 55% beginning in February to $321 a short ton. (A short ton is about 0.9 metric ton.) Surcharges are tacked on to base prices, typically to account for raw-material costs, and can change monthly.
AK Steel Holding Corp., based in West Chester, Ohio, said it is raising the surcharge on February shipments of electrical steel to $165 a short ton from $10 a short ton. The percentage can’t be calculated because the company doesn’t reveal its base prices.
ArcelorMittal, the world’s largest steelmaker by output, said it will reopen its wire rod mill in Georgetown, S.C., next Tuesday. The Luxembourg-based company on December 5 shut down much of the mill, laying off 300 workers, citing slack demand and low prices.
In China, several steel mills have announced price increases ranging from 5% to 25% for a variety of products. Baosteel Group Co. and Anshan Iron & Steel Group Corp. said that they will raise their prices for hot-rolled coil steel, a basic product that is processed into many steel applications. Baosteel also said it will increase production at some of its mills.
Japanese steel-industry executives said Tuesday they expect the steel market to start recovering around midyear as inventories decline and steelmakers reduce output.
Steel is a bellwether industry for the world economy. The proposed price increases and isolated plant openings indicate that parts of the global industrial base might be less anemic than they were.
Steel analysts, noting that the market remains generally weak, said the proposed price increases may reflect decreased inventories rather than stronger demand. “Steel demand will likely remain weak in 2009,” according to Moody’s Investors Service. “We expect that the rate of downward movement will slow and that a level of stabilization should occur in the second half.”
Jan 5, 2009 (WALL STREET JOURNAL) — As the U.S. seeks to stockpile oil, China has been doing the same, observers say, and is expected to quicken the pace — a development that already may be helping to boost oil prices.
On Friday, the U.S. Department of Energy said that amid low oil prices, it aims to fill the country’s Strategic Petroleum Reserve to capacity this year.
That news followed a rare public statement last week from China’s top energy official, Zhang Guobao, head of the National Energy Administration, in the People’s Daily newspaper that China should take advantage of the falling global energy demand to increase its oil reserves. Mr Zhang said China will “encourage companies to utilize idle storage capacity to increase inventories.”
Oil prices have been rising lately. On Friday, oil closed up 3.9% to $46.34 a barrel on the New York Mercantile Exchange.
Though China doesn’t disclose its oil inventories on a regular basis, some energy watchers think the country has been building its stockpiles for some time. China has increased crude oil imports in recent months, and “the increase of imports is certainly caused by them filling” the strategic reserve, said John Kingston, global director of oil at Platts, an energy-reporting service.
Paul Ting, a U.S.-based energy analyst, estimates that about 25 million barrels of crude oil have been injected into China’s strategic tanks since August.
The U.S. buying isn’t expected to significantly affect oil prices over the long term. The U.S. Energy Information Administration expects global oil consumption to fall to 85.3 million barrels a day.
But the Chinese government’s hunger for oil has more potential to influence prices. “In our opinion, China’s inventory policy will be a critically important factor in determining global oil price,” said Mr. Ting.
The U.S. suspended adding oil to the emergency reserve in May 2008 after oil prices soared to over $100 a barrel. It is widely believed that China stopped its filling efforts after oil prices reached $70 a barrel around August 2007, according to industry observers.
China recently completed construction of four oil-reserve bases — together representing the first phase of its strategic oil-reserve plan. Those bases can hold 102 million barrels of crude oil, and China is now pushing ahead with the construction of the second phase, which could store an additional 170 million barrels, Mr. Zhang said in the article.
In the next few months, China is likely to fill the fourth base — in Dalian — from the first phase, for 19 million barrels, says Kang Wu, a senior fellow who follows China’s energy policies at East-West Center, a Honolulu-based think tank.
Meanwhile, hundreds of nonstate oil distributors and refiners in China are currently sitting on what could amount to more than one billion barrels of idle storage capacity, according to the petroleum distribution committee of the China General Chamber of Commerce, an industry group. Massive storage facilities have been built up by oil companies since the mid-1990s after China opened up its oil markets to nonstate and foreign players. However, oil-importing licenses are basically controlled by state-owned companies, and private companies ended up sitting on empty tanks.
Analysts now expect the government might facilitate consolidation between state-run companies and private ones to use the idle capacity. Still, changes aren’t expected immediately, given that policy modifications can take time and that storage is often scattered and small scale.
In mid-December, the petroleum-distribution committee submitted a proposal to various government agencies, asking to contribute to the state petroleum reserve, according to Zhao Youshan, the committee director. He said in an interview the agencies have yet to respond.
