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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: redfish who wrote (3019)	3/28/2004 1:25:12 PM
From: mishedlo	Respond to of 116555

The yuan's hot and Beijing is worried With so much speculation on the Chinese currency, a sudden outflow could trigger a financial crisis By Tschang Chi-chu BEIJING - When financial analyst Xie Cheng went to Singapore on business recently, she thought of changing some extra yuan into a foreign currency to keep as savings, but then dropped the idea. 'In the end, I only changed as much yuan as I needed to spend because I am firmly convinced that it will appreciate,' said Ms Xie, 27, who works in Royal Dutch/Shell Group's Beijing representative office. With a growing number of Chinese like Ms Xie choosing to keep their savings in yuan instead of foreign currencies, the Chinese government is concerned about a build-up of so-called hot money whose sudden exit could trigger a financial crisis like the one in 1997. Credit ratings agency Standard & Poor's estimates that last year, China attracted US$40 billion (S$68 billion) to US$50 billion in hot money, which flows quickly into countries to take advantage of differences in interest rates or forward contracts. But unlike the Asian financial crisis seven years ago, there is very little hot money coming in from currency speculators seeking to drive up the value of the yuan and then sell at a profit, said Mr Guo Shuqing, director-general of the State Administration of Foreign Exchange. The yuan is only allowed to trade within a wafer-thin range of around 8.28 yuan to the US dollar. Instead, most of the hot money comes from Chinese and overseas Chinese who change their foreign currencies and other assets into yuan. China's foreign exchange savings deposits fell 7.5 per cent to US$83.2 billion at the end of February, according to the People's Bank of China. 'There's a certain amount of blindness to this,' said Mr Guo. 'For example, they don't know why the yuan exchange rate would change. All this talk about the yuan appreciating is coming from overseas.' There is no sign that the speculation will be cooling off anytime soon. Investment banks Merrill Lynch, UBS, HSBC and Lehman Brothers have published reports recently predicting a more flexible exchange rate by the end of this year. 'China's balance of payment surplus has been growing very rapidly,' said Lehman Brothers economist Robert Subbaraman. 'Typically, the way to try and balance that is to use the exchange rate to adjust.' A country's balance of payments, which adds up trade balance, foreign investments and portfolio investments, measure a country's economic activity. Merrill Lynch estimates that China's balance of payments surplus ballooned to US$120 billion last year. US trade manufacturers argue that China's exports are growing at such a strong pace because the Chinese government keeps the yuan pegged to the US dollar, which makes the currency cheaper by as much as 40 per cent. Their argument has been held to be specious by a whole array of experts even within the United States but has refused to fade away, what with this being an election year. Such were the political considerations that US Treasury Secretary John Snow flew to Beijing last September to make a show of urging China to raise the value of the yuan. He pressed his case again when he met People's Bank of China governor Zhou Xiaochuan yesterday, to the dismay of Chinese exporters. 'I hope that the yuan does not appreciate,' said Mr Yin Mingshan, chairman of China's largest motorcycle engine exporter Chongqing Lifan Industry Group. 'After the yuan appreciates, China's exports will plummet for sure and if they fall, the job market will be affected.' Tens of millions of Chinese are out of work in China, with unemployment this year expected to exceed last year's 4.5 per cent. Fortunately for Mr Yin, China's long-standing position has been that it will keep the exchange rate of the yuan 'basically stable'. After having witnessed the collapse of the Thai, Indonesian and South Korean economies when foreign investors pulled out their funds during the Asian financial crisis, China is worried that the same thing will happen if it were to sever the 10-year peg to the US dollar. The shock of billions of dollars worth of hot money fleeing the country would likely bring China's state-owned banks to their knees. The Big Four state-owned commercial banks have been saddled with US$242 billion worth of non-performing loans over the years. Chinese government officials have said many times that they would like to see the yuan fully convertible one day. But the pace of foreign exchange reforms will have to be dictated by progress in banking reforms to make sure that Chinese banks can handle the massive inflows and outflows of hot money that come with a freely convertible currency. straitstimes.asia1.com.sg

To: redfish who wrote (3019)	3/28/2004 1:30:58 PM
From: mishedlo	Respond to of 116555

China tightening moves seen as too little China's fresh clampdown on lending will hit small local banks seen as a key source of over-investment, but may not be enough to ease rapid overall credit growth that has sparked fears of economic overheating. If the milder-than-expected tightening fails to work, Beijing may be pressured to adopt tougher measures, such as its first interest rate hike since the mid-1990s, or even may loosen its grip on the fixed yuan currency, analysts said. Hoping to dampen expectations of an imminent rate hike, the central bank said on Thursday it would keep yuan interest rates stable in the near term. Many analysts were sceptical the latest moves would have much effect, meaning China may tighten the belt a few more notches in the coming months. "I think an interest rate hike is a matter of time, probably sooner rather than later. Overheating of the economy is getting out of control," Dong Tao, chief regional economist at CSFB, told reporters in Hong Kong. Tao estimated rates could rise by as much as two percentage points with inflation shooting towards six percent this year. Beijing could even turn to tinkering with its long-standing fixed currency policy, which pegs the yuan at about 8.28 to the dollar. story.news.yahoo.com

To: redfish who wrote (3019)	3/28/2004 1:33:12 PM
From: mishedlo	Respond to of 116555

Steve on the FOOL comments on the rigzone oil article ======================================================== The article isn't quite right about gasoline production being dependant on availability of light sweet crude. Refineries can be configured to produce gas from any grade of crude. There is a difference in the output, less gas per barrel and more asphalt, but any grade can be run. Several years ago Amoco configured all their refineries to run on heavy sour crude as the lower value output mix was more than offset by the lower cost of this less desireable feedstock. The author is correct about the lack of refining capacity however, and US enviornmental regs have lead to a variety of specialized formulations, which reduces fungibility of gas, increasing the likelyhood or regional shortages and price spikes. Steve...way long refiners

To: redfish who wrote (3019)	3/28/2004 1:45:24 PM
From: mishedlo	Respond to of 116555

Contrarian Chronicles Low rates are the problem, not the cure Cheap money is why the dollar is falling, precious metals are rising and homebuyers are in danger. The longer the Fed waits, the worse the damage. By Bill Fleckenstein As I have said for nearly two years, I think owning precious metals is a way to protect yourself from the problems the Fed has created and exacerbated. So, I was pleasantly surprised last week when I found the New York Times has come to the same conclusion. In an editorial "The Cost of Cheap Money,” the Gray Lady of Times Square noted that (surprise, surprise) there is such a thing as too much of a good thing. Better, the editorial pointed out the problems that arise when the central bank wants to spike the punch bowl vs. remove it: "Mr. Greenspan should heed the lessons of the stock market bubble of the late 1990's. In the new economy, remember, we were assured that the old speed limits needn't apply. What investors were not warned about enough was the extent to which the virtuous cycle of cheap money, low inflation and strong growth was feeding a speculative financial market bubble, which eventually popped at huge cost to those investors." -- and, I might add, to job holders and future job seekers. The Times sees a housing bubble, too The editorial then cites a potential bubble forming in the housing market (more about housing below), suggesting the Fed consider that wildly unpopular action I have noted for a long time, which is to raise rates: "The Fed should gradually wean the country off such extraordinarily easy money before it is forced to do so abruptly, and painfully. It cannot wait until after the election, nor until it sees inflation pick up. Rates are so low that the Fed has plenty of room to move before being accused of adopting a restrictive monetary policy. It needs to get started." But alas, though The New York Times urged the Fed to act like an adult, it appears not to understand that such behavior is beyond the Fed, whose irresponsibility has only succeeded in postponing the pain and ensuring a much greater wipeout once these bubbles start to burst. Yes, the Fed should raise rates and get it over with. It should stop subsidizing people who spend recklessly at the expense of people willing to save. (The Fed’s Federal Funds rate is 1% and has been at that level since June 25, 2003. Rates on 30-year fixed mortgages are 5.5% and lower.) Having said all that, reading the minutes from the January Federal Open Market Committee meeting released late Thursday, I was stunned to see that more than one unnamed Fed head appears to be having second thoughts about all this easy money. As the minutes state: "A number of members commented that expectations of sustained policy accommodation appeared to have contributed to valuations in financial markets that left little room for downside risks, and the change in wording might prompt those markets to adjust more appropriately to changing economic circumstances in the future." But moving rates higher now is not something Easy Al is going to do. Mr. Market will deal with the chairman and the economy in his own sweet time. Regrettably, that process will involve a tremendous amount of pain, thanks to the wanton recklessness of the Fed. The dangerous loans being made to sell houses The March 16 edition of The Wall Street Journal carried one of the best stories I've read there in quite some time: "Creative Mortgages Fuel Home Sales." Writer Ruth Simon did a pretty fine job of discussing many of what I deem questionable practices in real-estate lending. This is why I sold my shares in Annaly Mortgage (NLY, news, msgs), as I mentioned in last week's Contrarian. I am worried that the value of loans collateralized by real estate will become impaired going forward. I do not want to be lending to that market in any way, shape or form. The level of transparency isn't that great, and when I look at all the things going on, coupled with the leverage at Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and the Federal Home Loan Banks, this looks to me to be a recipe for disaster. I fully expect that the debt backed by those three organizations will be bailed out by the federal government, but, at some point between here and there, I expect things to get messy.

To: redfish who wrote (3019)	3/28/2004 6:39:47 PM
From: mishedlo	Respond to of 116555

failure to hope to failure story.news.yahoo.com This remote Appalachian town doesn't get many visitors, but every day it sends thousands of travelers on their way. If you buy an airline ticket off the Travelocity website and need to call with a change or a question, the phone rings here. The Travelocity call center brought 250 jobs to a community wounded by the decline of coal mining, its mainstay for a century. It plugged the town's 1,500 residents into the global high-tech economy, offering the prospect of a secure future. That illusion crumbled last month when Travelocity fired Clintwood, saying it would close the call center by year-end and move all the jobs to India. The Internet, far from being the town's salvation, is threatening it with collapse.