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China the monster.


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In reply to: MUD on Thursday 22/12/05 06:24am

Hi Muc,


That report highlights one point, at least, figures out of China cannot be trusted.


The truth is China has a huge population and has the capacity of growing an economy larger than the US and EU combined. Right now it has some ways to go to catch up to either. So when it does then propositions about the economy hitting the wall will start to become valid.

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  • 5 months later...

In reply to: dee27 on Monday 26/12/05 04:43pm



Hi Article I just recieved from Stratfor might be of intrest to some




China: Crisis and Implications

By George Friedman


The Chinese government is continuing efforts to cope with its runaway economy. The People's Bank of China has raised interest rates. Banks have been told to curb lending. The government has said that it will implement procedures to rein in foreign acquisitions at low prices -- or, in other words, to block fire-sales of Chinese companies. As a recent headline in the Japan Times put it, "China's Monetary Surge Dooms Its Boom."


A lot of things have gone into dooming China's boom, and the money surge is one of the more immediate problems. However, as we have argued (and this article should be read in the context of past analyses), the end of the Chinese boom was inevitable. The issue now is how all of this will play out in China and in the world.


What must be understood is that China now is moving from an economic problem to a socio-political one. The financial problem is a symptom; the fundamental problem is that tremendous irrationality has been built into the Chinese economy. Enterprises that are not economically viable continue to function through infusions of cash. Some of the cash comes from borrowing, some by exporting at economically unsustainable prices. The result is a squandering of resources. The reasons that this continues have nothing to do with economic rationalism and everything to do with political and social reality.


If interest rates were to rise and lending were to become disciplined, many of China's enterprises would fail. This would bring several consequences.


First, and most important, it would result in a massive increase in unemployment. At this point, the irrationality has been going on for years. It is not only state-owned enterprises that are economically unsustainable; many newer enterprises, including those in which Western companies have invested, are not succeeding. When we look at the figures for nonperforming and troubled loans, they amount to nearly half of China's gross domestic product. That represents a lot of irrationality, a lot of financial failures and a lot of unemployment. And unemployment is a political and social problem. The question is whether China politically can afford the economic solution.


Second, lending has become a system for maintaining the political solidarity of China's elite. Loans have been made not only to avoid the problem of unemployment; they also were made as part of political arrangements that allowed the Chinese Communist Party and regional party organizations to avoid conflict and divisions. As long as the pie was growing, everyone could have a piece. But if the pie starts contracting, there will be losers and winners. The question of who will go bankrupt and who will not will become a highly divisive and potentially destabilizing political crisis. Again, the economic solution -- austerity -- and political reality may run counter to each other.


Obviously, China has massive cash reserves. These may not be massive enough to cover the financial crisis, but they are sufficient to allow the government to put off addressing the problem for a while. China also has the ability to promulgate rules and regulations that allow bankrupt entities to continue functioning. However, it always must be remembered that on the other side of a bad loan is a damaged creditor. A loan that can be deferred by fiat is an asset that can no longer be used. When you avoid economic disaster for the debtor, you transfer the pain -- and potentially the disaster -- to the creditor. And since the creditor is normally the economically healthier entity, you postpone the death of the weak by weakening the strong. The more you do this, the worse it becomes. Thus, whether the Chinese use cash reserves to postpone the problem or use regulation to do so, the net result will be buying time at the cost of increased pain.


China's Likely Path


Asia has been here before. Japan encountered this problem around 1990, and East and Southeast Asia encountered it in 1997. Roughly three models for dealing with the problem exist:


Japan model: Use reserves and formal and informal measures to avoid actions that would trigger massive bankruptcies and unemployment. Accept economic stagnation for the better part of a generation.



South Korea model: Move rapidly to restructure the economy, using economic and political means. Control social unrest with security measures. Move out of the problem in a matter of years.



Indonesia model: Lacking resources to manage the crisis, suffer both financial dysfunction and political strife among the elite and between regions.


Japan was able to do what it did because it is a highly disciplined, cohesive society, in which shared pain is viewed as preferable to social dislocation. South Korea was able to do what it did because the magnitude of its crisis was relatively less than Japan's, and because the state had the means for suppressing unhappiness. Indonesia failed to do what it needed to do because it lacked resources and political power.


Other countries have fallen somewhere along this continuum. China will make its own path. However, it should be pointed out that China is not socially similar to either Japan or South Korea. Like Indonesia, China is a diverse and divided nation. The Communist Party lost its moral standing in the 1970s. As with Suharto's government, its legitimacy now derives from the fact that it has created prosperity. When prosperity slows down or stops, the Party cannot fall back on inherent legitimacy, as was the case with the system in Japan. And the wildly diverse levels of economic development make a single, integrated solution, as was used in South Korea, unlikely. The most likely direction for China, therefore, is massive social and political instability.


Now, the Communist Party may lack moral authority, but it does wield tremendous power. The People's Liberation Army and the various security forces are an enormous presence in China. Indeed, the government already is using its security forces aggressively, cracking down on dissent and against at least some business leaders, in anticipation of coming troubles. The ability to suppress unrest is not trivial. Therefore, the most likely path for China in a post-boom environment is to increase suppression and reimpose systematic dictatorship.


This is not an absolute given. There are many in the Party who now are arguing that China has abandoned its Communist principles and its social base. In other words, they want to reach out to the peasants in the interior, who have benefited little from the boom and who resent the prosperity of the coastal regions. The idea is to use these peasants in a process of renationalization -- or, at least, a process in which the free market is dramatically limited and at least some of the wealth is redistributed.


This goal makes little economic sense, but what China needs economically is unsupportable socially and politically. Imposing a crushing austerity for five to ten years would solve the economic problem, but it is unlikely that the political center could hold. Indeed, if the Chinese were to follow this course, they could do it only with massive political suppression at the same time.


The Party's Tangled Web


Therefore, one likely path is the reimposition of dictatorship, followed by whatever economic solutions the leadership might want to make. But there is a problem here: The interests of Party and People's Liberation Army leaders in Shanghai diverge from those of the central government. These leaders are deeply involved in the financial process of the coastal area, in bringing in foreign investment, in taking advantage of the nonmarket access to capital. They have no inclination to stop. Indeed, their wish is to see the irrational boom continue as long as possible.


There are splits in the interests of regional Party leaders, as well as a split between the regions and Beijing. The interests of coastal leaders lie not with Beijing so much as with Tokyo, New York and London. They have integrated themselves in the international financial system, and they are busy making plans for sustaining their regional enterprises in the event of a crisis. Meanwhile, Party leaders from the interior are demanding that these actions be stopped and that investment flow to their regions instead. Beijing is riding two horses that are running in very different directions.


Beijing well might fall off the horses. China has a history of cycling between a dictatorial system that closes it off from the world (a poor, but equal and stable China) and a system in which China is open to the world but torn apart from the inside out. Consider: Mao marched into the interior, raised a peasant army, came back and liquidated the internationalist bourgeoisie in 1948. He closed off the country and united it, throwing out the foreigners. Under the other model, preceding Mao, the country was open to foreigners, who tore it apart in regional conflicts while the interior starved.


The end result of China's economic crisis, therefore, will be a deep-seated political crisis. Only ever-increasing amounts of money have allowed China to maintain the current political alignment. Without that, it has two options. The first is a return to some sort of dictatorship from Beijing, under which economic problems would be dealt with inefficiently but unambiguously. The other is to accept a split between the coastal regions and the interior, the weakening of Beijing's authority and a period of instability and intense regionalism. It all depends on the political moves Beijing is making now, but our bet would be on the latter course. The instruments of power that Beijing has are too complicit in the financial crisis, and have too many diverging interests, to make the first option likely.


Geopolitics and Ripple Effects


Two possible geopolitical models emerge from this. Under one -- in its extreme form -- China returns to some sort of geopolitical Maoism. It encloses itself from the world, becomes increasingly bellicose but is limited by its own geography in what it can do. Under the other model, China slowly fragments and becomes a cockpit for the ambitions of foreign economic interests -- backed up by political and military power, with regional Chinese officials collaborating with foreigners to continue economic development. Oddly, the latter model would be more destabilizing to the world than the former, inasmuch as everyone will want to maintain their investments in China and expand them. In this scenario, China would again be a magnet for problems.


Mind you, these are not absolutes, but represent extremes on a continuum. There is surely a model under which Beijing would muddle through, as have the Japanese or Indonesians. No coherent strategy would emerge; it would all be tactical. It is difficult for us to see how this would not lead to regional destabilization, but then, China might be able to live with that. How it handles the unemployment and displaced peasant issue, however, is yet another question. This is a possible mid-point on the spectrum, but not in itself likely, it would seem.


As for the effects on the international economy, there has been a great deal of discussion about China's ownership of U.S. Treasury instruments and the consequences if that money were withdrawn in a crisis. In fact, this is the last thing that is going to happen. If China has a massive financial crisis, no one -- including the Chinese government -- is going to shift money from a safe haven into an uncertain cauldron. In crisis, the tendency would be a flight to safety. That means that rather than being pulled out, money would surge into the U.S. market -- legally and illegally, from the Chinese standpoint.


It is interesting to correlate the massive U.S. market surges that began in 1991, after the recession, and intensified dramatically in 1997 and 1998, with trends in Asia. In both cases, these surges followed major economic crises in rapidly expanding Asian economies. The events were, in our opinion, linked. The crisis in Japan in 1990 and 1991 led to major capital flight and helped to fuel the U.S. market rise. Similarly, the impending and expected East Asian meltdown in 1997 produced massive capital flight from Taiwan, South Korea and elsewhere to safer havens. A massive withdrawal from the U.S. market is the last thing to be expected.


What are in danger, of course, are foreign investments in China. There is the obvious financial issue: Many of these investments were not economically viable to begin with. But there is a political problem as well. The Party is going to have to blame someone for China's troubles, and it will not be the leadership. The obvious culprits will be corrupt officials and their paymasters in the international banking system. The truth or falsehood of the charge will matter little; corrupt officials and bankers already are being arrested, in the early stages of the crisis. As the situation intensifies, we would not be surprised to see foreigners investigated for corrupt practices as well.


But the bottom line is this: China has a history of nationalization and expropriation, and the party that enacted those measures is still in power. No one would have believed that the Party of Mao possibly could have become what it is today, but one should not assume that the evolution of the Chinese Communist Party is complete. Leaders could find that they have reason to re-enact some of Mao's own economic policies. We would be surprised to see a complete return to Maoism. We would not, however, be surprised to see the Party deliberately reverse some transactions that are no longer in its interests or (as and if things get more intense) take even more radical steps. It is still a Communist Party, it might be useful to recall.


Ultimately, the choice that China is now making is how quickly it will allow the consequences of its economic irrationality to unfold. The economic answer to the problem is to let shaky enterprises fall -- but the political cost of doing so will be too great, and a solution has already been long delayed. The longer an economic solution is delayed, the less one becomes possible and the more intense becomes Beijing's need to address the problem with political and security solutions. The more dependent the Chinese become on such measures, the more catastrophic will be the consequences if these solutions don't work.


China is long past the point of being able to solve the problem easily. The question is simply whether to buy time and pay in intensity, or force the crisis now. At some point, there no longer will be a choice. But the single most important thing to understand is that China does not really have an economic crisis any longer. The time for that has come and gone. There is now a political crisis at hand.

Send questions or comments on this article to analysis@stratfor.com.



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In reply to: MUD on Wednesday 21/06/06 05:26pm

If China has an economic crisis, i wish Australia had the same.


There are plenty of extremist views out there.


China still has a very competitive Yuan backing the economy up.


America has raised their rates sixteen times and they are still alive.


So China raises their rates to cool their economy, hardly a crisis.

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  • 2 months later...

In reply to: jane007wang on Wednesday 13/09/06 07:07pm

jane007wang, my investments are tied to the future of China, however I think you missed the content of the final paragraphs which raise some interesting points..... But the bottom line is this: China has a history of nationalization and expropriation, and the party that enacted those measures is still in power. No one would have believed that the Party of Mao possibly could have become what it is today, but one should not assume that the evolution of the Chinese Communist Party is complete. Leaders could find that they have reason to re-enact some of Mao's own economic policies. We would be surprised to see a complete return to Maoism. We would not, however, be surprised to see the Party deliberately reverse some transactions that are no longer in its interests or (as and if things get more intense) take even more radical steps. It is still a Communist Party, it might be useful to recall.


Ultimately, the choice that China is now making is how quickly it will allow the consequences of its economic irrationality to unfold. The economic answer to the problem is to let shaky enterprises fall -- but the political cost of doing so will be too great, and a solution has already been long delayed. The longer an economic solution is delayed, the less one becomes possible and the more intense becomes Beijing's need to address the problem with political and security solutions. The more dependent the Chinese become on such measures, the more catastrophic will be the consequences if these solutions don't work.


China is long past the point of being able to solve the problem easily. The question is simply whether to buy time and pay in intensity, or force the crisis now. At some point, there no longer will be a choice. But the single most important thing to understand is that China does not really have an economic crisis any longer. The time for that has come and gone. There is now a political crisis at hand.


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China's hunger for secure supplies feeds our economy
China is pumping money into our resources sector -- and our companies can't get enough, Robin Bromby reports

September 16, 2006
NOTHING would have concentrated minds in Beijing more than that 71.5 per cent increase in iron ore prices at the start of 2005. Then, this year, Shanghai Baosteel was forced to capitulate again, agreeing to pay BHP Billiton a further 19 per cent hike, setting the price for other iron ore buyers.
The Chinese tried to talk the prices down before the 2006 talks, to no avail - although, as one industry insider points out, they don't want prices to go down too far because so much of their domestic production is from low-grade iron ore mines. Too low a price would put these operations out of business.

So, while the huge price hikes did cause concern, it was really the balance of power in the sector that mattered more.

Long before this, the Chinese steel makers were known to be fed up with the iron ore situation where the three big players - BHP, Rio Tinto and Brazil's CVRD - called the tune and everyone else danced to it.

Now it's clear they're not going to take it any longer than they have to. Chinese companies are either buying deposits, taking substantial stakes in companies or using their enormous foreign exchange resources to buy up emerging mine production. The bottom line: they want some level of control and security of supply.

And it's not just in Australia. This is a worldwide phenomenon. China National Offshore Oil tried to buy Unocal and was thwarted only by political pressure in the US; they tried to get a stake in Canada's oil sands; the China National Nuclear Corp was recently awarded uranium targets in Chad; the Chinese are building a large iron ore mine and railway in Gabon.

Tony Howland-Rose says we should welcome them.

His company, Allegiance Mining, is about to start mining nickel near Zeehan, Tasmania. One of the world's largest buyers of the metal, Jinchuan Group, is to take all the nickel produced at the Avebury mine for 10 years and is expected to soon exercise its option over 25 million Allegiance shares.

Jinchuan is also involved with Fox Resources. There the Chinese came up with financing to help develop Fox's West Whundo copper-zinc project in return for the right to buy all the copper produced.

Furthermore, Jinchuan earlier this year subscribed for shares in the initial public offering by Redstone Resources, which has extensive nickel-copper-platinum group metals targets in the Musgrave region, which straddles the Northern Territory, West Australian and South Australian borders.

Howland-Rose says the Chinese want security of supply, just as the Japanese did when they bought into our coal and other assets back in the 1970s and 80s. Australians should see this as the perfect match: our exploration companies get financing they would otherwise struggle to find, while the Chinese know they are going to get the metal they need to keep their factories humming along.

"Whether we like it or not, we have an interdependency. A lot of good relationships are going to come out of this," Howland-Rose says.

Aurox Resources managing director Charles Schaus could not agree more. His company has just signed a deal whereby Chengde Iron & Steel and China Metallurgical Group will invest in the junior and guarantee to buy the bulk of the output of vanadium and titanomagnite iron ore from the Balla Balla project southwest of Port Hedland.

Customers for such speciality metals are not always easy to find and are also susceptible to sudden price falls.

Precious Metals Australia learned that lesson several years ago when Xstrata decided the Windimurra mine in Western Australia was no longer viable and closed it down - and so chopped off PMA's royalty stream.

Schaus says the deal for Aurox not only guarantees a buyer for mine output, but his company suddenly has access to Chengde's considerable vanadium expertise. Aurox, as a result, is now bullet-proof, he says.

"This is the best thing that could ever have happened to Aurox - we're still getting to grips with the benefits."

Handling the relationship the wrong way can cause deals to fall apart. For evidence of that, look no further than Andrew Forrest

and Fortescue Metals Group wrecking the relationship with Chinese steel makers by the use of some loose words about the deals done. The Chinese have never come back, no matter how much they want FMG's iron ore.

But, as this week's move into uranium by Sinosteel showed, the Chinese game is no longer just about iron ore. They want just about everything - bauxite, nickel, liquefied petroleum gas, copper, rare earths, vanadium, among them. Sinosteel also retains a small stake in Lynas Corp, which is moving to be a producer in Western Australia of rare earths - which will all be processed in China.

And yesterday the Aluminium Corp of China - known as Chalco - got the Queensland Government nod to develop the huge bauxite deposit at Aurukun.

It was the uranium deal that really raised eyebrows. Sinosteel is negotiating to take 60 per cent of the Crocker Well deposit in South Australia. It is known that the Chinese company had approached Marathon Resources, which is also exploring for uranium in South Australia.

Uranex took a more tentative step earlier this year by forming a loose alliance with China National Nuclear Corp. At this stage, this does not involve Chinese ownership - and, anyway, it's thought CNNC is more interested in Uranex's large Tanzanian exploration acreage rather than the Thatcher Soak project in Western Australia, at least while that state bans uranium mining.

Remember, too, there have been hints that the Chinese are interested in investing in Olympic Dam, although BHP has shown no sign of following up on that.

But Resource Capital Research's John Wilson says we should expect China to target more of our uranium.

He says there has been a constant flow of executives from Australian uranium explorers making their way to Beijing in recent months.

"It's an open market - and the Chinese have shown they're the people prepared to pay the most for these resources," Wilson says.

"We don't appreciate their appetite for uranium," he says.

Nor, possibly, for other metals.

Sinosteel owns 40 per cent of Rio Tinto's Channar iron ore mine and is in a joint venture with Midwest Corp on its Weld Range hematite project and Koolanooka magnetite deposit, both in the mid-west region of Western Australia. BHP sliced off 40 per cent of its Jimblebar Pilbara operation to a consortium of four Chinese steel mills.

Back in the mid-west, Anshan Iron & Steel has 50 per cent of Gindalbie Metal's iron ore deposits, the two companies agreeing this week to build a magnetite pellet plant in the Chinese city of Yinkou.

In fact, the Gindalbie experience shows the efficacious side of the Chinese resources land rush. The move by Anshan (usually called AnSteel) plucked what had been a junior explorer and placed the Australian company into the ranks of industry players. The deal was seen by analysts as a company-maker.

The other regional iron ore emerging player, Murchison Metals, opted to do a deal with South Korea's Pohang Iron & Steel - the demand in Korea for steel feedstocks is no less insatiable.

Gindalbie managing director David McSweeney is thrilled to be in business with AnSteel. He knows, because the steel maker is essentially a government agency, that the alliance has the full support of the Chinese Government and that the relationship is rock solid and long term. AnSteel will finance the mining feasibility study, finance the mine development, finance the pellet plant in China - and buy all the mine's output. "Gindalbie couldn't be in a better position," McSweeney says.

In June, Shougang Steel paid $52.5 million to Mt Gibson Iron to take control of the Extension Hill magnetite deposit.

Base metals are of interest, too. Hunan NonFerrous Group is to work with Compass Resources to jointly develop the Browns base metals project in the Northern Territory, Hunan as a first step taking a $30 million placement in the Australian company. The Chinese have agreed to put up $60 million of the development cost, 70 per cent of future exploration and will be a willing buyer for Compass's cobalt output. However, the Compass uranium interests around the old Rum Jungle mine were specifically excluded from the joint venture.

Companies still in the exploration stage are also looking to China for financial and technical lifelines.

David Flanagan heads Pilbara iron ore explorer Atlas Iron.

He is looking for a Chinese partner for both the direct-ship iron ore Atlas has 75km from Port Hedland and for the development of the deeper, and much larger, magnetite deposit.

Flanagan knows the Chinese can provide the infrastructure and expertise needed to get such a project going.

He knows, too, that this is all about our digging up the raw material, shipping it to China where it gets processed and value-added - and then some of that is sold back to us.

"It all makes perfect sense if you come from China."

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  • 2 weeks later...

China-led boom threatens factories
George Megalogenis
September 30, 2006
THE nation's manufacturers face tougher times ahead as the economy switches from making goods to digging up resources to supply the China-led boom, Treasury Secretary Ken Henry has warned.
In an exclusive article for Inquirer, Dr Henry says "not everyone will see themselves as a winner" from the rise of China and India as trading nations.

"Already, there is evidence of disquiet in areas of manufacturing," he writes. "But the adjustment might have a lot further to run yet."

Manufacturing has lost almost 50,000 jobs in the past two years, at a time when total employment expanded by almost 600,000.

The commodities boom is redrawing the nation's economic map. The resource-rich states of Queensland and Western Australian are now propping up the slow states -- NSW and Victoria.

The West Australian economy soared by 14 per cent in the past financial year, and Queensland expanded by 7.3 per cent. NSW and Victoria virtually flatlined with growth of 1.1 per cent each.

Dr Henry says the surge in commodity prices appears more resilient than the previous resources booms.

"China's re-emergence has driven up the global prices of minerals and other inputs to manufacturing and has put considerable downward pressure on the world prices of manufactured products," Dr Henry writes.

"Since we export a lot of the former, and are a net importer of the latter, our terms-of-trade (the ratio of export prices to import prices) have rocketed."

Dr Henry says Australia will experience "a sizeable shift in resources from import-competing manufacturing to resources and other sectors of the Australian economy complementary with China's development needs".

"The period of adjustment will be relatively good for capital and not so good for labour. It could be a period of relatively low labour productivity growth."

Politicians on both sides are troubled by recent job losses in manufacturing. Earlier this month, whitegoods giant Electrolux announced the closure of two of its plants in Adelaide, and the axing of 500 staff. John Howard and the South Australian Labor Government responded with a $35million assistance package for the retrenched workers.

Dr Henry is upbeat about Australia's place in the world economic order. "In the first year of the 21st century, the US stock market experienced a substantial correction and the US economy went into recession, dragging much of the rest of the industrialised world with it," he says.

"Australia did not experience a recession in 2001. Moreover, those who took the time to explore the facts, rather than relying on the hype, discovered that in the second half of the 1990s, Australia's labour productivity growth had actually out-performed the United States."

Dr Henry will deliver the keynote dinner address at the Melbourne Institute-The Australian Making the Boom Pay on November 2.
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  • 5 months later...

Well what a week.


As I said on Tuesday just after the opening what a load. Market hit very closely the support on the ASX 200 at 5,624 with it opening in sheer terror Tuesday at 5,640 but it was all over red rover from that point on.


When the media starts wheeling out someone who was a bear at 3,000 and calling 2,000 to be Mr Bear on various chat shows with a straight face I know I live on a different planet.


So the causes waved around was the correction in China's market. My own reason was not this but the fact a very volatile US number, the durable goods was down and this coupled with China falling 9.6% the very same day the markets around the world caught a 3 day cold.


Added to the mix was Greenspan misquoted talking about chances of a recession. There always is a bloody chance but most economists had it pegged at 33%, eventually after media had misquoted the hell out of Greenspan for a day or two he spelt out his own view was there was a 30% chance of it happening.


As I mentioned the authorities for many years basically since post 1987 have managed markets either via a direct buying into the market or putting pressure on participants or by basically cooking the books with economic numbers. The last thing they need to see is a repeat of a 20% wipeout for the big markets around the globe in a single day. So it was a big data week and big speaking week for the US and all eyes were strained there for any signs of all of a slowdown. No prizes for the manufacturing numbers to contradict the weak durable good orders as they appeared during the week. The beige book from all the fed reserve branches was so soothing it put me to sleep. So last chance for the Bears to come out to play was the Non Farm Payrolls on Friday. Number was exactly as expected but large upward revisions for the two previous months showed at least to anyone with a brain the US economy is rolling along very nicely.


Markets in Australia closed only marginally up on the week and I suppose the media will focus on this tidbit as per normal. Me however, I prefer to look at the sell off and low on Tuesday as a gift from above and we are basically around 50% up from peak to bottom over the last few weeks. Some of the sheer panic seen early Tuesday morning was a clear signal of the bottom. Now certainly we may go back there but its built from a technical perspective 3 more serious support levels between Fridays close and the low. It stopped dead at the first one 5,780 let alone the bigger one at 5,740-50 or the next at 5,700 ish. Not big on technical stuff but the market does tend to behave at times like this with some reliability since it has little else to focus on.


Just don't see it back to the low. If it does and breaks 5.600 closing 5,575 all bets are off but rated the chances Tuesday morning of this at 10% when it was less than 1% away so here about 5% unless the world ends.


Basically a 3 day flu for the market. It will stuff around here and probable stop on the top 5,950- ish for the ASX 200 but eventually it will break. I am just not bearish. Our own economy is going fairly well and despite some not so flash balance of account numbers a lot had to do with weather off the WA coast in Dec. Suspect it will again be hurt by the current late season cyclones their this quarter but the building and expansion programs have gone on and despite this weather clouding the issue, if you will excuse the pun, a full quarter without any glitches will be seen Apr-June and I suspect the bears might be stunned at the turnaround in the current account. Some very big projects have come on line in recent months and they have yet to be seen at all in the accounts.


Just to touch on the latest thing the media has got a hold of, problems with a US sub prime lender. Market has slapped all of these in the US and with one main one in trouble my comment is so what. Sub prime what does that mean ? Prime is a rate well above the actual cost of funds. In the US prime rate is normally 3 % above the cash rate and at present its 8.25% as opposed to the fed funds rate at 5.25%. The other main thing one has to explain is a large proportion of US loans for homes are fixed for 30 years as opposed to our own. So a sub prime funds lender in trouble to anyone with a brain is a so what. How many of you out there actually pay 3% over the current cash rate in Australia for your loan. That's 9.25% for the record. I would say virtually none. So a mid sized sub prime lender has cut the margin too fine and is in trouble. US banks smelling blood have chopped off their credit and marked every one in this sector rightly or wrongly down in response. So I did look at the company in question to see how big it was. Well lets just say their share of the market is around 0.1% of the total lending in this sector.


But the media and the markets would worry if a big light appeared in the sky every morning sometimes.


Its just pathetic. Do you really care your lender has gone broke ? No. You owe them money not the other way around. With hundreds of lenders in the US the impact will be zero even if half of them go down. I watched with the S+L crisis in the US late 1990 and predictions the market prices would slump and crash and not recover for 20 years with the glut. They didn't crash and in fact decent gains to the experts calls back then.


China, oh China.


It catches flu and we all crash. Baloney, covered it all on the first post on the China the Monster topic all prior to the rampage we had in metals early 2006 and still going to some extent even now.


The demand will not go away and its not possible it goes away.


So the worry is now with the Chinese market crashing supposedly it will stop everything.

Just to put some things into perspective. In 2006 the Shanghai index rallied by 130%. Since the beginning of 2005 it has gone from 1,000 to 3,000. Average P/E's were in the clouds and still are around 40 down from 45 or so. What is a correction of 9.6% in the face of this ?? Healthy I might call it. Clearly too over the top despite the domestic growth rate in the country.


One cannot look at P/E's in say the US or here at 15 ish and compare the two. Certainly 45 is over the top, but with a domestic growth rate of 10.7% as opposed to our own sub 3%, its justified to expect a higher P/E be applied, all be not 45. But certainly even on fundamentals given the unstoppable train going on there with retail DOMESTIC sales up 18% and various other things going at similar levels a P/E of 25 overall is not out of the question. This growth rate has been going on since 1970 as I mentioned on the Monster thread and despite some calling its all going to end the reality is if anything its now being fueled in a large part by internal domestic growth as more and more break out of the poverty levels and subsistence existence seen by both China and India for large proportions of their huge populations.


Now we have all had a scare. Should we have been scared ? Well the persistence with which our market has pegged large commodity exporters with a sub 10 p/e on actual results being enjoyed right now and expansions coming on line for say BHP of 35% in the next 4 years and an implied P/e of 6 or so for 2009 has been something which frankly has amazed me. We are the lucky country and with vast long life low cost deposits BHP and various others are sitting in the driving seat.


Recently we have seen a well orchestrated anti coal push in Australia, and I suppose thermal coal is dirty and BHP being the big boy should have copped a bit of flack on this front but the target by the Pitt street farmers was always CEY and its Anvil Hill proposed mine. An aside but when you get into your car have a think about what its made of. The high value part of BHP's coal operations is the coking side. It is impossible to form steel without coking coal. Yet the media like the parrots they are repeated the cry to ban coal exports despite the fact without them and 66% by value made up of coking coal not much steel would be around. China is not the main export market for this despite again perceptions it is, Japan and then Korea are our main targets account for over 50% alone and then Taiwan and India and that's 73% in total.


Now in the case of China it doesn't import much coking coal but Iron ore is another matter.

In fact the growth in demand has been exponential and shows no signs of abating. From 100 million tons in 2002 to over 2006 and over 300 million tons.


My point being some products China has its own domestic reserves and resources but for most raw commodities it has to tap the global export market. China yes has its own Iron ore reserves and is a large producer by itself, but generally they are lower FE content and are producing at 100% with limited reserves compared to say BHP and RIO's 100 year plus reserve numbers.


As a percentage of the global commodity export market, when a large once in a lifetime shift happens as say when Japan post WW2 became a massive industrial nation the export market which it had to rely on doubled and doubled again to meet the need. China just reaching this point and India some years behind but as a proportion of the total export market despite having announced a capacity increase of well over 50% coming on line 2007-2008 its likely they will have to double production to meet needs yet again by 2010 or 2011.


The proportion of the export market to total usage of any commodity is usually only 20% exported verses the whole number even now. This proportion has doubled in 5 years, and I strongly suspect doubles again in the coming 5 years. Whilst the expansion has yet to hit from our exporters and come into their profits the outlook despite the markets perception it all ends can only be one way. By 2014 I would bet iron ore exports from Australia are in fact 4 times what they were back in 2002. Right now there is a clear shortage on the global stage for Iron ore and china is being forced in some areas to mine sub standard deposits despite the costs because it needs the steel. All the expansion will do when it comes on line is fill this need. Its far more expensive to make steel with a very low FE content than one 60% ish and above.


I see absolutely no change to anything on a world stage for the outlook from my views back in 2005. It's very much a stronger for longer outlook.


Now I can hear all the bears growling, what if this happened or that happened.


Simple facts over and above my original thoughts and the population one is even suggesting it is absurd. Certainly they might slow things down a bit but the demand inside China and growth in the main is being driven internally at least for a large proportion of it. Domestic retail sales up 18%, GDP growth as a whole official numbers had a 10.7% estimate but many have called this way too low and most agree the real probable rate was 14%.


So we had a scare .....

Now 7 weeks ago when the Shanghai index dropped 6% in a day not a single person blinked. But yes they took notice this time. Does it really matter ? I went over the rises past 2 years before.


I ask myself the same stupid questions over and over again. Why would the market persist with very low P/E's for our main exporters when their export markets are clearly in short supply and the demand as a proportion of these export markets is going to rise by around 20% per year I suspect for the next 5 years at least. Remember export markets only represent 20% of the total usage of most products and eventually domestic supplies run out and in a lot of cases Australia holds top known reserves in these products.


Doesn't make sense to me ... Unless I go the other side.


All this demand is going to go away. China with a growth rate of 9% for 37 years and likely even higher is going to stop. India which is showing similar early growth signs is going to stop. All the populations are going to go away ? Even if it halved demand would still be 5% higher and demand from the export market to grow at least double if not triple that number.


So I ask myself how can one stop China with at least half of its growth domestically produced and demand along with that. Raise rates ? Well it has low inflation and massive growth so no reason to. If it changed its exchange rate I doubt this would make things any better. Make exports more expensive but the other side commodity imports for the raw materials it need would become cheaper.


I cannot come up with any way to stop this freight train short of a meteor striking in the middle of the country. One half of country with very low rural incomes see's the other with much higher incomes and I cant see labour costs going up with another 700 million yet to make the move. Even of the 600 million already there only a very few consuming anything near western levels and a scary thought 100 million new cars by 2012 which require roads and hence the domestic grown growth outlook. Many at lower levels buying new electrical goods we take for granted.


To finish this different view on things. Maybe the US astronomers have seen a meteor just like the movie Armageddon and it will slow things down in China. But outside this I cannot come up with any way for the longer term outlook for well placed commodity exporters to change. If the US economy slows down, well perceptions might change but since we don't export there to any great degree does the demand from China or Japan or South Korea or India or Taiwan change.


We jump with the US economy as per normal, but are in reality so removed from it I wonder why.


Good Luck

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