Daily Sources 11/10

1. Andrew Batson at the Wall Street Journal reports that China unveiled a $586 billion stimulus plan this weekend. The sum is equal to about 16% of China's GDP in 2007. "The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies." US Treasury Undersecretary for International Affairs David McCormick responded to the initiative Sunday, calling it "a welcome step." (The move to stimulate domestic demand had been recommended by various American economists, perhaps most significantly in an op-ed by the New York Times.) Chinese President Hu Jintao will be in Washington this Saturday for the G-20 summit and is expected to meet with President-elect Barack Obama at some point during his stay.

Brad Setser at Follow the Money has a post today arguing that the stimulus is a move in the right direction. He points out that large booms are often followed by big busts, and that China has been in a sustained export boom for six years. Thus, the Chinese needed to do something to offset a large export bust. Setser asks two questions. One: Is the announced stimulus package entirely new money or were already planned infrastructure expenditures part of the announced number? If it is all money on top of regular budgeted infrastructure developments, it should have an effect, he argues, if not, it will likely fall short. Two: Given that it is new money, can the stimulus be implemented quickly enough to offset the coming, large, downturn? The post is worth reading in its entirety.

These stories come on the back of an article by Leo Lewis published Saturday in the London Times that the chief economist of CLSA, an Asia specialist brokerage firm, argued that even with aggressive government action, growth in China could fall to as low as 5.5%.

"More than 70 per cent of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage."

Nonetheless, Julie Crust at Reuters reports that base metals are up on news of the stimulus plan. Copper jumped 9.7% on the London Metals Exchange. Nickel rose 13%, aluminum 4.1%, zinc 7.2%, lead 6.2% and tin 4.8%. The currencies of major commodity exporting countries also rose on news of the plan, with Adriana Brasileiro at Bloomberg reporting on the rise in Brazil's real and Andrea Jaramillo and Drew Benson also of Bloomberg reporting on rises in the currencies of Chile, Colombia, Argentina, and Venezuela.

2. Alexei Barrionuevo at the New York Times reports that the Brazilian President, Luiz Inácio Lula da Silva, blamed the developed world for the current financial crisis at the G20 meeting in Sao Paolo this weekend. The Brazilian delegation was at pains to urge the developed world to give the emerging markets a larger say in forthcoming international economic decisions and institutions. Many at the meeting suggested that the developed world should offer more money to the emerging economies in order to help them weather a crisis they argue originated in the developed world. In particular, India has argued that the US should be willing to shoulder more of the burden, as reported by Joshua Partlow in the Washington Post.

3. Edward Cody writes in an article published by the Washington Post Saturday that on Friday the leaders of the European Union released a statement urging the United States to implement strong regulatory measures within 100 days.

"Chief among the demands agreed on by the EU heads of state and government was tighter regulation of banking and investment markets. 'No financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight,' they said in a statement. The regulations must also cover rating agencies and speculative hedge funds, they added."

February 15--100 days from now--will be 26 days into Barak Obama's presidency. Cody reports that the 100 day time limit is designed to prevent the Bush Administration from passing off hard politically unpalatable choices to the Democrats.

I suspect that time limit is mostly aimed at the rest of the world, joining it in labeling the US as the cause of the problem, and demonstrating some solidarity with the notion of removing the US from its position as lynchpin in the international financial world--and signaling to Obama that his election has not changed their determination to create a more multipolar world. Obviously domestic political considerations are also in operation, and the possibility of selling to their publics the notion that the coming economic slide as the sole fault of the Americans and no doing of their own is probably very attractive. A 100 day deadline has the neat quality of being very unlikely of being met.

4. David Osler's blog at Lloyd's List has a very interesting post on how Warsaw is furious that Brussels has ruled that it must sell the Gdynia and Szczecin shipyards. Poland then must take the proceeds and "repay" the Union for illegal subsidies distributed to the two shipyards. The situation is exacerbated by French President Sarkozy's decision to take stakes in companies it regards as strategic, in order to defend them from foreign investors, looking to purchase them on the cheap. One of those companies is STX France, in which Paris has taken a 33% blocking minority, and which owns Chantiers de l’Atlantique--a major shipyard by the French port city of Nantes, the "Venice of the West." I think that Osler is right to think that the Poles will probably not let this happen and suspect they might try the "strategic industry" angle. Worth reading in full.

5. Ingrid Melander and Mark John at Reuters report that the European Union has agreed to deploy an air and sea anti-piracy force off the coast of Somalia. The force will be led from Northwood, England. Michelle Wiese Bockmann at Lloyd's List reports that the world’s leading shipping companies, "traders and charterers will gather in London for an urgent meeting on November 19 to discuss the financial crisis enveloping the dry bulk shipping industry." Shipping rates have fallen sharply since the commodity peak seen in June-July, "spot rates for capesize bulk carriers are around $4,500 per day -- less than half the accepted breakeven cost of around $12,000-$13,000 per day."

6. Anna Shiryaevskaya at Platts reports that the five largest oil and gas companies in Russia officially joined an exploration and production consortium for Venezuela on Saturady. Rosneft President Sergei Bogdanchikov told reporters over the weekend that Rosneft, Gazprom, Lukoil, TNK-BP and Surgutneftegaz will each take 20% and that the company will have a rotating operatorship. Rosneft has sent a request to Caracas for rights to develop the Delta Centro block in Orinoco province, a concession with much lighter oil than most of the Orinoco belt and which wouldn't require a bitumen upgrader. PdVSA will join the consortium in another vehicle before any operations begin.

7. The Wall Street Journal's Mary Anastasia O'Grady has a piece on the Miami trial of Venezuelan businessman Franklin Durán and what it has revealed about Chavez's foreign policy. Evidently Chavez made available considerable sums to Peronist candidate Cristina Kirchner during the 2007 presidential campaign in Argentina. The Venezuelan ambassador to Bolivia is alleged to have said he had $100 million to spend on that country in support of Evo Morales. In El Salvador, the FLMN receives petroleum products at large discount to market from PdVSA and then sells it at a small discount, capturing a large profit and filling its campaign coffers. Venezuela is evidently supplying 60-70% of Nicaragua's crude oil requirements via a scheme whereby Nicaragua pays for half of the shipments directly, and the other half via a 25 year loan from Caracas on very favorable terms. Since the main oil company in Nicaragua is the state-owned company, Petronic, Sandanista party officials control the revenues. What O'Grady omits from this story is that the program allowing the governments of El Salvador and Nicaragua to profit so handsomely is a joint program with Mexico--a close ally of the United States of course--under the San Jose accord. Both countries provide crude under favorable terms to Barbados, Belize, Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama and the Dominican Republic.(1) Still, the direct involvement in its neighbors' internal politics is an embarrassing revelation for Chavez--anti-imperialist rhetoric doesn't jive so well with overseas political slush funds--and O'Grady's piece is well-worth reading in full.

8. Michelle Faul at the Associated Press reports that Angolan troops have reportedly joined Congolese troops in the defense of the city of Goma in eastern Congo against the rebels. As the map below demonstrates, Goma is quite far from the Angolan/Congo border, and large troop movements from Angola to Goma would represent a serious logistical feat demonstrating very strong resolve to support Kinshasa.



"The involvement of Angolans could spread the conflict beyond Congo's borders. Neighboring Rwanda probably would consider Angolan troops a provocation. Rwanda's government is accused of supporting the Congolese rebels."

9. Pakistan's Online International News Network reports that Saudi Arabia guaranteed six months of oil supplies to Islamabad recently. Prime Minister Yousuf Raza Gilani told reporters that he hoped that the guarantee added to additional economic aid promised by the "friends of Pakistan" group meant that Pakistan would not be forced to go to the IMF for aid. The Prime Minister also announced that the government will fix wheat prices to ensure profitable planting. However, Sahar Ahmed at Reuters reports that Pakistani government officials are giving reporters an idea of the potential IMF deal, which would include a $15 - 20 billion loan for two years against a rise in the discount rate of at least 1 to 1.5%.

10. Aresu Eqbali at Platts reports that the Iranian oil minister, Gholamhossein Nozari, told reporters there was a "probability that we will have another meeting before December," if oil continues its downward trajectory. The next OPEC meeting is scheduled for December 17.

(1) EIA country analysis of Nicaragua: Discounted Oil Programs.