Friday, January 16, 2009

Daily Sources 1/16

1. James T. Areddy at the China Journal reports that Shanghai firm Data Driven Marketing Asia surveyed 4,500 people in five cities across China and found that 60% of middle class consumers have already cut spending or plan to this year.
"In Shanghai, 64% of respondents to DDM’s survey said yes to the statement 'my company is not as busy as before' and almost a third in China’s commercial capital said their employer has already laid off workers. Forty-two percent of Shanghai consumers furthermore predicted the economy would be 'bad' in the next 12 months, compared with 19% saying so in Beijing, where consumer sentiment remained the strongest in the survey. Over the next five years, 60% of Shanghai residents and 71% of Beijing people said, economic conditions will be good."
And in a Financial Times piece published Monday and reproduced by RGE Economonitor Micheal Pettis argues that US consumers must increase their savings by at least 6% of GDP to bring their balance sheets to the historical midpoint, and that Chinese consumption must grow by 25% in order to offset increased US savings. China has, under this take, considerable excess production capacity which it is likely going to continue to attempt to export--just as the US did in the 1930s. But, attempts to resurrect growth on foreign consumption is likely to result in protectionist measures. Well-worth reading in full.

Ambrose Evans-Pritchard at the UK Telegraph blogs that Albert Edwards--an analyst at Societe General who hews to the Austrian school of economics--recently published a note arguing that the Chinese economy is imploding, which will scare the regime in Beijing, pushing them to devalue the yuan to create export-based jobs, and lead to a trade war.
"Mr Edwards said investors have a "touching faith" that China's authorities are in control of events.

'Could the economic situation in China become so bad that it threatens the regime itself? Of course it could. But before being swept away in a tidal wave of worker unrest it has one key tool in its economic armoury it has used before. MEGA-DEVALUATION. China has a track record of such things. At the end of 1993 the authorities devalued the yuan by 33pc.'

A replay would be the surest route to a Smoot-Hawley II."
Uncharacteristically of Evans-Pritchard, he does not think this alarmist outlook likely, displaying a touching faith in the authorities in Beijing. And Brad Setser at Follow the Money gives a quick take on the just-released November treasury international capital (TIC) data, showing that Beijing has cut down on long term US debt (and cut out agencies altogether), but substantially increased their purchases of short-term US debt. The graph he drew up makes the point eloquently (courtesy of CFR):

Setser calculates that China's total US treasury holdings are up by $29.1 billion, but reallocated from long term to short term instruments. This may have had something with 3 month bills yielding zero for some time last month.

In a response to an analysis by Wang Toa at UBS that I noted at the time (see Daily Sources 1/8 #7), Victor Shih at RGE Economonitor thinks that unemployment will likely reach 50 million people in China by the end of 2009.
"Even if the unemployed force reaches 50 million, the Chinese government would only have to pay (50 million*100dollar*12 months) 60 billion USD (408 billion RMB). That is a substantial sum, but China can surely handle it for two to three years, suffering perhaps slightly lower credit ratings. However, the notion that migrant workers have less ability to act collectively is unfounded based on everything that we know about unrests in China. All of the rebellions in Chinese history were led and carried out by peasants, including the one that put the current regime in power. Besides 1989, the largest domestic disturbance took place in rural Renshou County in the mid 90s, which saw the deployment of tens of thousands of troops. Furthermore, unlike the layoffs in the 90s, which mostly affected middle-age or elderly SOE workers, the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People's Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, "overall investor confidence" will be lost."
Well worth reading in full. And Li Yanping at Bloomberg reports that James McCormack, the Hong Kong-based head of Asian sovereign ratings for Fitch, said in a teleconference today that the Chinese economy likely will face a hard landing.
"'The 6 percent number is already what we would call a hard landing in China, meaning rising unemployment and the need for an aggressive policy response,' McCormack said. 'Social unrest is a big unknown.'"
McCormack thinks that exports might decline as much as 6% in 2009, down from growth of 17.2% in 2008. (h/t Yves Smith at naked capitalism.)

2. Platts reports that Vladimir Putin told the media that the volume of natural gas required to operate Ukraine's pipeline infrastructure would cost $730 million in the first quarter of 2009.
"Putin said Ukraine requested 140 million cubic meters of gas to fill the gas export pipelines and 21 million cu m/day to ensure gas compressing stations operations."
That's 2,030 million cubic meters altogether, or $359.60/thousand cubic meters (tcm) for the so-called "technical gas." Moscow is currently asking Ukraine to pay $450/tcm for natural gas not used to run the pipelines. Gazprom CEO Alexei Miller also told the media today that he was trying to put together a consortium of European companies to pay for the technical gas. Italy's ENI has already agreed to join the consortium, Germany's E.ON Ruhrgas and France's GDF Suez are "actively considering" it, and Austria's OMV, Germany's Wingas, and the Dutch company Gasterra have all been invited to join.

In the meantime, Platts reports that Yevgeniy Fedorov, the head of the State Duma committee for economic policy and enterprise, told journalists that the inauguration of President-elect Obama will likely bring an end to the gas dispute. The MP said,
"A political calculation shows that after January 20, when Obama and (incoming US secretary of state Hillary) Clinton take office, the US pressure will considerably ease and this will create conditions for solving the gas conflict."
Russians are evidently extremely suspicious of an agreement signed between DC and Kiev just as the gas negotiations were taking place. Reportedly France has declined to take part in the summit this weekend saying that sufficient conditions for negotiations were not there. Meanwhile, Alexander Medvedev, deputy chairman of Gazprom, has an opinion piece in the Wall Street Journal giving his case.
"What the world has witnessed recently is arguably the most serious breach of transit obligations ever, creating a stranglehold over the supply of gas to the whole of Europe."
Worth reading, but when all is said and done, Gazprom really did not do enough to try and affect the tenor of the narrative of the dispute in the American media, which was, I think, a grave miscalculation.

3. Joel Kurtzman of the Milken Institute has an op ed in the Wall Street Journal where he argues that Mexico is in danger of becoming a failed state as it loses its drug war. (This echoes a similar op ed in the Los Angeles Times which appeared yesterday by Denise Dresser.)
"But the path forward will be a difficult one. Not only must Mexico fight its drug lords, it must do so while putting its institutional house in order. That means firing government employees who are either corrupt or not willing to do the job required to root out corruption. It will also likely require putting hundreds, or even thousands, of police officers in jail."
Fair enough, but all this talk ignores the white elephant in the room: the root of the problem is US drug law itself, which targets providers and not consumers, and by refusing to come to terms with a failed policy of prohibition, the US is exporting instability to its neighbors.

4. Jens Erik Gould and Hugh Collins at Bloomberg report that the Banco de Mexico reduced the benchmark interest rate by 0.5% to 7.75%.

5. Richard Katz, the editor of the Oriental Economist Alert, has an opinion piece in Wall Street Journal Asia in which he argues that the Japanese stimulus program is far too small.
"Since September, two successive prime ministers have offered two small stimulus plans. The second package, just passed by the Lower House of the Diet on January 13, provides for an actual increase in deficit spending of a mere 1% of GDP. That's a drop in the bucket compared to Japan's downturn. Worse yet, the proposed fiscal 2009 budget -- to begin on April 1 -- provides no new stimulus. Talk of an increase in spending by 6.5% is misleading because it compares fiscal year 2009 to the initial budget for fiscal year 2008. The final budget for fiscal 2008, including the two supplementary budgets, is actually a bit higher than proposed spending in fiscal 2009."
Well worth reading in full.

6. Mark Shenk at Bloomberg reports that the IEA estimates consumption will shrink by 0.6% to 85.3 mb/d in 2009.

7. Glenn R. Simpson and Jay Solomon at the Wall Street Journal report that Iran is trying to import from China treated metals which can potentially be used in missile weapons systems. Among the metals sought are tungsten copper, titanium, and specialized aluminum sheets. The UAE have apparently intercepted more than one of these shipments and reported them to US officials. Given that Iran is one of the UAE's larger trade partners, this is very significant, perhaps showing that the Emirates are uncomfortable with Iran's nuclear program, or perhaps showing that they want to curry favor with Washington as they pursue a nuclear power deal with the US. There is no way to conclude from the metals themselves that they have the sole end use of weapons systems, they merely can be used for such.

8. Richard Meade at Lloyd's List reports that the United States and Kenya are nearing a deal where piracy suspects captured off Somalia would be delivered to Nairobi for prosecution.

9. Mary Jordan at the Washington Post reports that Americans abroad now have a new cachet with the election of Barack Obama, reversing hostility seen for a long time under the Bush Administration. In a way it's a silly piece, and popularity isn't necessarily a good in and of itself, however, it does mean that the US will have an easier time building international coalitions and political will for action dealing with international problems than it has in a long time. And that is a good in and of itself if you are primarily concerned with the national interest.

10. Reuters reports that US headline consumer price inflation fell by 0.7% in December. On a year over year basis they rose by 0.1%.

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