Posted by: michaeldavidpower | August 30, 2009

Here are my posts of the last few days which I was unable to post on this Blog from Beijing. (My Blog title – the Thoughts of Power – has uncomfortable connotations in China!)

Wednesday 26th August – Indian Ocean, Hong Kong and en route to Beijing.

  1. The Indian Ocean – underestimated yet on the rise again.

When Vasco da Gama rounded the Cape of Good Hope in 1492, he barged into the richest trading basin on earth. Unique in terms of its winds and tides, the Indian is the only great ocean that can offer a return trip within 6 months where a masted vessel would be able to return to its base taking essentially the same route inbound as it did outbound.  (It is all to do with the Monsoons – a word whose etymology is Arabic: mawsim means seasonal.) Unusual too was that the Portuguese found that nearly every trading boat was unarmed – a form of Pax Arabia governed the high seas when the monsoons did not! Sad to say but predictably too, within 5 years of the arrival of the Portuguese, the Indian Ocean was crawling with European man-o’-wars!

Think about the Indian Ocean today and who and what lies on its shores. It is not short of population – the Indian sub-continent outweighs China on its own without the help of 250m strong Indonesia (rapidly assuming the status of the next Bric – or is it now Brici?). It is not short of money – the oil-rich Middle East sees to this, aided by the budding entrepôts of Dubai and Singapore. As for resources, it is brimming with them – from Africa in the West to Australia in the East and not forgetting Greater Arabia and Indonesia in between. All the key ingredients exist in this basin – is its renaissance the next big economic miracle in the wings?

The Indian Ocean is unique amongst the great oceans in that it is not bordered by a Great Power or a big economy (i.e. G3 or China). In due course, India will surely change all this and it will be “India’s Ocean”. But for now it remains largely “neutral”. The Great Powers are present on a minor scale: the US/UK base at Diego Garcia, variously within the Arabian Gulf, a number of French outposts (notably Djibouti, Reunion and Mayotte) and a Chinese naval port being built in Myanmar may yet upset this relative calm.

  1. “The tragedy of Asia is that Japan is a profoundly socialist country on which capitalism was imposed while China is a profoundly capitalist country on which socialism was imposed”.

Compare this to the title of the Editorial in today’s South China morning post:    An America more like China, and vice versa.

So which is it? China is becoming ‘capitalist’ even as Japan and the US are moving in the opposite direction.

  1. Lead story in Monday’s International Herald Tribune: China seizes lead role as catalyst for recovery. Sub-heading reads “Centre of Gravity shifting as Asian economies lift those in still-fragile West”.

My central scenario this year is that China and its Tiger club together with India and Indonesia will save themselves from being caught up in the Western maelstrom. By the second half of 2009, they would also be reigniting growth amongst the coal trucks and oil tankers of the world – resource rich countries usually found in emerging markets but with the likes of Australia, Canada, New Zealand and Norway also hitching up to Asia’s locomotives and coming along for the ride.

Now I think I may have missed something! It might be hard to believe – given my über bullishness on China – but Asia may re-ignite growth in the biggest capital goods exporters of the West too! This means Germany and Taiwan of course but even France and (wait for it) Japan! Watch this space!

Thursday 27th August

Last night Chris Freund wrote to me about China’s predilection for industrial overcapacity; this morning, China’s policy makers responded by announcing they were stepping up efforts to control it. Chris obvious has friends in very high places in Beijing…

My thoughts

We leave saving to the private investor…. We leave the responsibility for setting production in motion to the businessman…. [T]hese arrangements, being in accord with human nature, have great advantages. John Maynard Keynes, A Tract on Monetary Reform

This quotation captures standard Western orthodoxy for most industrial sectors – the private sector decides how much of a given product to produce, this “being in accord with human nature”. But is it?  Perhaps it was just Keynes’s reflection of a mostly Western nature?

And when Keynes says “we” above, exactly to whom was he referring? “The people” at large? Or is he using a sort of “Royal We” that economists of his era and especially his ilk tended to use in the 1930s: “we” then meant essentially the civil service Mandarin classes that governed Britain and managed its economy? Of course, in this one line, Keynes set up the playing field for Keynesianism – where oversupply did occur, it was because of demand that was insufficient. Hence it needed to be managed upwards by “us”. Solution? Fiscal spending to boost consumption i.e. Keynesianism.

Today’s headline news item in Beijing is one that focuses on the decision by the Chinese Government to curb overinvestment in sectors they deem to be oversupplied. It seems as if the original Mandarins beg to differ with Mr Keynes: Chinese policy makers believe they too have a responsibility for determining the level of production.

In a different but related and very topical sphere, Mandarin policy makers have shown that their conventional wisdom also differs from the Western approach.

Before the recent Western economic crisis, the “Greenspan Doctrine” suggested that Western central banking should not intervene to deflate an emerging asset bubble; rather, once it had popped, then only should central banks get active in helping to clean up the resultant mess. (This doctrine is – hardly surprisingly – likely to be thoroughly overhauled in future.)

In China, the authorities think differently; if there are bubbles emerging in the likes of the property market or the stockmarket, the real Mandarins think it is their duty to launch a pre-emptive strike even at some cost to their economy so as to save  it from far greater damage later on. Beijing does not seem to like it when both demand or supply get too far ahead of the fundementals – and fundamentally the Chinese Government wants to maintain a degree of harmony even within an economy that is growing at 8%+. So they signal – usually via the banks – their displeasure and usually the bubble then deflates.

Another case of “killing the chicken to scare the monkeys”? In view of who seems to be making most progress at the moment, perhaps the real Mandarins have a point, Mr Keynes.

Friday 28th August

Red Flags over the Dollar…and the Contract Price Mechanism for Iron Ore

Here is an extract from the Ascent of Money by Niall Ferguson:

“The trouble is that the Chinese clearly feel they have enough US government bonds. Their great anxiety is that the Obama administration’s very lax fiscal policy, plus the Federal Reserve’s policy of quantitative easing (in laymen’s terms, printing money) are going to cause one of two things to happen: the price of US bonds could fall and/or the purchasing power of the dollar could fall. Either way, the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn’t address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the US has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the dollar. Then their economy tanked.

Yesterday, Philip Yeung and I visited the China Africa Development Fund here in Beijing. The meeting went very well but that is not the point of this comment. When we arrived, the receptionist at the front desk was deeply engrossed in the above-mentioned book: Currency Wars by Chinese economist Song Hongbing. No wonder the students at Beijing University laughed derisively at U.S. Treasury Secretary Timothy Geithner when he asserted boldly (or was it baldly?!) that “Chinese assets are safe“. It seems as if virtually every relatively well educated Chinese man and woman – which in China includes receptionists – knows this porky to be a bare-faced lie.

I have long maintained that the US and its Dollar are living on borrowed money and borrowed time. And then we hear that the US budget deficit is set to soar to almost $2 trillion this year – its highest on record.

So what does Fergusson say might happen as a result of this growing bankruptcy of the US? (As the US only issues Treasuries in US Dollars, it does not suffer from “original sin”; this means technically it does not default: it simply devalues.)

“What is China’s alternative if it seeks a divorce from America? Call it the empire option. Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (according to Goldman Sachs, China’s GDP could equal that of the US by 2027) to buy them global power in their own right. In some ways, they’ve already begun doing this. Their naval strategy clearly implies a challenge to US hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial too. And now the official line from Prime Minister Wen Jiaobao is to hasten the implementation of our ‘going out’ strategy and combine the utilization of foreign-exchange reserves with the ‘going out’ of our enterprises. That sounds like a Chinese campaign to buy foreign assets — exchanging dodgy dollars for copper mines.”

I do not agree with Fergusson in his use of the term “imperial”. (And neither does he if you use his definition of ‘empire’ in his book Empire!) But as for his belief that they will accelerate “exchanging dodgy dollars for copper mines”, that is precisely the story I am “on tour” with throughout Asia, Australia, Latin America and the good ol’ U. S. of A!

Meanwhile, from this morning’s Business section in The Australian:

Perth-based Aquila Resources announced today that it had reached a strategic co-operation agreement with Baosteel, China’s largest steel mill, to fast-track the development of Aquila’s key steel raw materials projects, including iron ore, coal, and manganese.

Baosteel will invest as much as $285.6 million in Aquila via a placement of up to 43.95m shares at $6.50 a share, giving the state-owned company a 15 per cent stake in the Australian miner.

As an aside, guess who’s face greets you as you arrive in Beijing’s larger than the Pentagon T3 airport terminal? Ronaldo, and he’s promoting Brazil’s Vale. I hope he has created lots of goodwill in the process – as of yesterday, Brazil too is leaning towards breaking with the annually negotiated contract pricing mechanism annually that has long characterised the iron ore market. As always, the Ozzies have a lot to answer for; they started this break with tradition!

Weekend of 29th and 30th August

Beijing, China

For all the fame of Beijing’s salty skies, they were nowhere to be seen this last week. The weather was a mix of glorious late summer sunshine and, in the mornings, the first hints of that cooler autumn that will soon be here. The humidity was restrained – nothing like the sweaty, soupy diet that I will no doubt be fed on in Hong Kong, Taipei and especially Singapore during the rest of this week. Perhaps the Olympic clean-up of Beijing’s air has left a lasting impression – many of the smoking factories of a different era were closed down temporarily ahead of the summer of 2008 only to find that temporary meant forever.

The highest praise I can give Beijing is that every time I come here, it is becoming more “normal” and less “remarkable”. True, the transport system has got no less efficient, nor the people any less polite and friendly – though God forbid if you are dawdling at anything less than 118kph in the 120kph fast lane on the motorways: drivers obey the rules of the road in China but they do push those laws to the limit! Rather “normalization” is best seen in the everyday ordinariness that increasingly characterises life in the capital city of the world’s most populous country.

And for the English speaker, Beijing is an increasingly user friendly city. Signs are everywhere bi-lingual, the underground cleverly designed, clean, well-lit and a pleasure to use. All announcements are in English as well as Mandarin. And, as much as you might try to use your seven words of Mandarin, Beijingers are super keen to show off their 107 words of English. They win!

Newspapers, television and the internet still show the finger-prints of the heavy hand of the state not being able to update this blog in Beijing being one: I am updating it now that I am in Hong Kong!) But even in this regard, the cracks are showing. Some topics – especially where the degradation of the environment is concerned – are fair game. The internet is where most dissent is recorded and the newspapers now report it as such: their favourite tactic is to introduce a dissenter as “A netizen atavared as…”. China may be short of “citizens” but it has 200m plus “netizens” and their voice is increasingly being heard. The latest campaign in China is to close down factories leaking lead into the atmosphere or, even worse, nearby rivers. And heaven help food companies producing sub-standard fare as did the company that produced doctored milk last year! They are lynched via the web!

Normality also shows up in restaurants – kids on cellphones – and metros – stylishly dressed girls watching ‘show me’ ads on onboard TV monitors showing how best to apply mascara – and sidewalks – skateboards competing with roller skates. Real China can be glimpsed in the early morning tai chi ballets in the parks or the occasional kite flying many hundreds of feet above the increasingly impressive skyline . Back on the ground, these skyscrapers compete for space with the embattled hutongs, the traditional suburbs with narrow streets  that have lately become THE trendy place to live.

Beijing may not have a dividing river like the Seine in Paris or the Chao Phraya in Bangkok as its centrepoint, or even a seafront like Beirut or Dar es Salaaam, but despite the relative blandness of its physical location, it is an increasingly stylish city. The main boulevards are broad, the main attractions well preserved. The mass beautification of the city that preceded 2008 is starting to bloom – literally. In a few years time, Beijing will be a noticeably green city, water permitting.

Anybody truly interested in the evolution of the global economy owes themselves a visit to Beijing (and if you are in the ‘neighbourhood’, Shanghai is a must too though for different reasons). Beijing is set to be the most important economic hub in the world within 15 years. And, if there is one thing that a visit to Beijing will teach you, it is this: be not afraid of the changes that are coming. Things will be different, unfamiliar even. And Mandarin will become (in fact it almost already is) a dominant language with a worldwide reach.  But given the atmosphere of Beijing today – which I would imagine can only ease up further in the next decade – the prospects of a post-American world no longer feel in the slight bit scary to me in the sense that they did only a decade ago .

I may be proved wrong on this but in many ways – for Africa in particular – a Sino-centric world is something to which we can look forward.

Quote – more accurately quip – of the day. When Deng Xiao Ping was quizzed as to what his policy of “Opening the Door”  to the winds of a freer market meant, he replied it was “Capitalism with Chinese Characteristics“.  Educated Beijingers look on the current plight of the US with barely disguised pity: one dubbed the economic doctrine of the US to be “Socialism with American characteristics“!

Beijing Joke: Three great leaders are each being driven in their state limousines and approaching a T-junction. The driver of each asks which way to turn. Stalin replies “Left, of course”. Reagan replies “Right, of course”. Deng Xiao Ping says “Indicate left, turn right”!


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