Daily Sources 4/16

1. CHINESE GDP GROWTH BELOW THE MAGIC 8, CHINESE RESOURCE INVESTMENTS CONTINUE, AND THE US DECLINES TO DEEM BEIJING A 'CURRENCY MANIPULATOR'

Terence Poon (what a great name!) and Andrew Batson at the Wall Street Journal report that China reported GDP growth of 6.1% in the first quarter. The number is lower than what many analysts regard as necessary to prevent significant social unrest as the number of entrants to the labor market begins to far exceed the ability of the economy to absorb them. Beijing has made the number official, having a policy dating from the first Asian Crisis of 'bao ba," or "protect the eight"--see Daily Sources 3/18 #6.

Eugene Tang at Bloomberg reports that China will lend Kazakhstan $10 billion in return for a stake in Kazakh oil producer AO Mangistaumunaigas:

"China National Petroleum Corp. and KazMunaiGaz National Co. will buy AO Mangistaumunaigas, according to one of 11 agreements that were signed in the presence of President Hu Jintao and his Kazakhstan counterpart Nursultan Nazarbayev in Beijing today. The $10 billion aid comprises a $5 billion loan from the Export-Import Bank of China to the Development Bank of Kazakhstan and another $5 billion from China National to KazMunaiGaz."

The loan mirrors the recent $10 billion loan agreement struck with Brazil (see Daily Sources 2/19 #1) as well as a number of other deals globally.

Brad Setser at Follow the Money comments on the recent report to Congress by the Treasury which does not name Beijing as a currency manipulator:

"But make no mistake, China’s currency still looks undervalued. It is only a bit higher — according to the BIS index--than it was in 2001 or 2002, back when China was exporting a fraction of what it does now. In other words, the rise in the productivity of China’s economy hasn’t been mirrored by a rise in the external purchasing power of its currency. That is a big reason why China’s current account surplus remains large.

And the underlying issue remains: the biggest driver of moves in China’s real exchange rate remains moves in the dollar. History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus--and thus China’s accumulation of money-losing foreign assets--is going to come down. It will be hard--in my view--to have a stable international monetary system if the currencies of all the major economies but one float against each other. And China is now a major economy by any measure.

But it makes far more sense to have a fight over China’s exchange rate regime when China’s currency is depreciating in real terms and Chinese intervention in the foreign exchange market is rising--not when China’s currency is rising in real terms and Chinese intervention in the foreign exchange market is falling."

Well worth reading in full.

2. POLAND SIGNS LNG DEAL WITH QATAR

Eric Watkins at the Oil & Gas Journal reports that Poland's state-owned Polskie Gornictwo Naftowe i Gazownictwo (PGNIG) has signed a deal with Qatargas to supply 1 million tonnes/year of LNG for 20 years starting 2014.

"In March the Polish government passed legislation to speed construction of the Swinousjcie LNG terminal in northwestern Poland. The law is designed to make the construction of the terminal 'simpler and quicker.'

The Swinousjcie terminal, which is expected to be operational by yearend 2013 or early 2014, will have an initial import capacity of 2.5 billion cu m/year, eventually rising to 7.5 billion cu m/year."

The shipments would meet roughly 6% of Poland's natural gas demand forecast for 2014. Warsaw wants to diversify its natural gas import sources away from Russia, in short:

"According to PGNIG Chairman Michal Szubski, LNG supplies are 'one of the keys' to a diversified gas portfolio in Poland, which meets 30% of its gas needs from its own resources, 40% from Russian imports, and the remaining 30% from other sources."

The Energy Regulatory Office in Poland recently reported that Russia supplies nearly 50% of Polish natural gas consumption as of 2006.

3. OBAMA ADMINISTRATION URGED SUPPORT FOR THE JUDICIARY IN PAKISTAN, ZADARI-PACKED COURT RELEASES MILITANT CLERIC INVOLVED IN STAND OFF WITH THE MILITARY

David Ignatius at the Washington Post has a fascinating piece of reporting on how the US urged the Pakistani military to refuse an order by Pakistani President Zadari to shut down the lawyers' protests which eventually reinstated Chief Justice Chaudhry:

"The lawyers' movement began its march on March 12, pledging to occupy Islamabad until the government restored Chaudhry to his post. Zardari sent a police force known as the Rangers into the streets of Lahore, apparently hoping to intimidate Sharif and the marchers. But Sharif evaded the police and joined the protesters as they headed north toward Islamabad.

[Pakistani Army Chief of Staff General Ashfaq] Kiyani then faced the moment of decision. According to US and Pakistani sources, Zardari asked the army chief to stop the march and protect Islamabad. Kiyani refused, after discussing the dilemma with his friend Mullen, the chairman of the Joint Chiefs of Staff. Meanwhile, Kiyani called Sharif and told him to return home to Lahore, according to one source. And he called the leader of the lawyers' movement, Aitzaz Ahsan, and told him to halt in the city of Gujranwala and wait for a government announcement.

Pressure on Zardari was also building within his People's Party. According to a US official, Prime Minister Yousaf Raza Gillani told the president on the night of March 15 that he would resign if Chaudhry wasn't reinstated. (Zardari's camp says it was only a rumor of resignation.) In any event, Gillani went on television at 5 the next morning to announce that the former chief justice would return. The crisis was over."

A success I'd warrant, but the problem, as Ignatius notes, is that the perceived involvement in Pakistani internal affairs is creating serious resentments by important political players in the country--which may have seen their private feud with the Taliban as a guarantee of support. A must read.

In the meantime, Salman Masood at the New York Times reports that the Pakistani Supreme Court ordered yesterday granted bail to a hard-line Islamic cleric--Maulana Abdul Aziz--who allegedly led a standoff with the army two years ago.

"The three-member bench of the Supreme Court that heard the case did not include the newly restored Chief Justice Iftikhar Muhammad Chaudhry.

Analysts said the government of President Asif Ali Zardari lacked the political will to go hard after the Islamists, especially at a time when national sentiment was strongly anti-American."

4. ISLAMIST PARTIES LOST HALF THEIR SHARE OF THE INDONESIAN VOTE IN ELECTIONS LAST WEEK


Sadanand Dhume makes the observation in an opinion piece in today's Wall Street Journal that "Islam-based parties saw their cumulative vote-share shrink to about 20% from 38% five years ago." Worth reading infull.

5. OBAMA IMPOSES FINANCIAL SANCTIONS ON DRUG CARTELS ON EVE OF VISIT TO MEXICO

Spencer S. Hsu at the Washington Post reports that the Obama Administration has reiterated US policy of targeting distribution as opposed to consumption in the war on drugs:

"On the eve of his summit with Mexican President Felipe Calderón today, Obama added the cartels to the list of banned foreign 'drug kingpins,' a move that empowers the federal government to seize their assets, estimated to be in the billions of dollars. It also allows the government to seek criminal penalties against US firms or individuals who provide weapons, launder money or transport drugs or cash for the organizations.

By targeting the cartels--Sinaloa, Los Zetas and La Familia Michoacana--the administration expanded its support for Calderón's crackdown on the narco-traffickers, an effort that has provoked a violent backlash and led to thousands of deaths in the past two years."

The counterproductive, and instability-exporting, policy of prohibition continues.

6. INDUSTRIAL PRODUCTION DOWN THE MOST SINCE V-E DAY, IMF ECHOES REINHART / ROGOFF OBSERVATION THAT FINANCIALLY-LED RECESSIONS ARE DEEP AND LONG

Calculated Risk reported yesterday that:

"[i]ndustrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II."

Here is their graph of industrial capacity utilization since 1967:



Calculated Risk notes that the Federal Reserve observed:

"For the first quarter as a whole, output dropped at an annual rate of 20.0%, the largest quarterly decrease of the current contraction."

Always worth checking out Calculated Risk.

Tom Barkley at Real Time Economics reports that the IMF released the findings of a study of historical recessions:

"'These findings suggest that the current recession is likely to be unusually long and severe, and the recovery sluggish. However, strong countercyclical policy action, combined with action to restore confidence in the financial sector, could improve prospects for recovery,' the fund said.

In a study of 122 recessions across 21 advanced economies since 1960, the IMF found that crises that are globally synchronized and caused by financial shock tend last twice as long as the average recession, at more than seven quarters. They are also more severe, with real gross domestic product contracting 4.8%, versus an average of 2.7%.

Recoveries from such events take twice as long on average - nearly seven quarters - and are weaker in a global financial crisis. GDP tends to rise 2.8%, compared with an average of 4.1%.

In the current crisis, 15 out of the 21 advanced countries covered in the study were in recession by the fourth quarter of 2008 and the downturns 'are already more severe and longer than usual,' the fund said.

'Hence, it is unlikely that overleveraged economies will be able to bounce back quickly via strong growth in domestic private demand--fundamentally, a prolonged period of above-average saving is required,' the report said."

The report more or less echoes the findings of Carmen Reinhart and Kenneth Rogoff in January--see Daily Sources 1/2 #18.

7. MORE SHIPPING DATA

Rebecca Wilder at News N Economics echoes, with reservations, the notion yesterday mooted by Calculated Risk that port activity may be reaching a bottom, noting an article by Ronald D. White in the Los Angeles Times which quotes Port of Los Angeles spokeswoman Lauri Kellman:

"One month isn't much of a benchmark for us, especially a month like March when things are historically slow. But the numbers were up compared to last month, and that is an encouraging sign."

And thoughthe Port of Long Beach numbers don't look so good, showing a yearly decline in volume of 24.9%, they represent a 17.6% increase on February volumes.



February is 10% shorter than March, so another way of putting this would be that average daily TEUs in February were 11,359 TEUs/day against March average daily TEUs of 12,069 TEUs/day or a 6.25% increase in volume month on month. From the LA Times story:

"At the Port of Los Angeles, the nation's busiest cargo container port, about 278,000 containers carrying imported goods arrived in March, down 6.2% from March 2008, port officials said Wednesday. That was the slowest March performance in seven years, but it was substantially better than February, when only 206,000 containers arrived."

On an average daily basis, container volume in March was 8,968 TEUs/day versus February's 7,357 TEUs/day, or a fairly strong 21.9% increase.

The Baltic Dry Index shows a small uptick, though it is still down about 85% from the highs seen in 2008:



8. US COMMERCIAL CRUDE STOCKS UP 5.6 MILLION BARRELS, CRUDE IMPORTS DOWN, MARKET SHRUGS

The EIA yesterday reported that crude oil stocks built by 5.6 million barrels to 366.7 million barrels for the week ended April 10, the biggest number seen since September 1990. According to a Bloomberg survey, analysts had expected an increase of 1.75 million barrels. Gasoline stocks fell by 900 kb. Distillate stocks fell 1.2 million barrels. Taken in isolation, these numbers should be pretty bearish for the price of crude. Margot Habiby and Mark Shenk at Bloomberg note that the report showed that overall fuel demand in the last four weeks was down 5% for the same period last year.

"Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, fell 742,000 barrels to 29.2 million last week, the lowest since the week end Dec. 26.

'The Cushing drop is really important,' said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. 'That will keep crude from falling out of bed. It will keep the spot month steady.'"

Meanwhile, Alaric Nightingale yesterday reported that Jens Martin Jensen, CEO of Frontline Ltd., the largest operator of supertankers globally, thinks that orders for new supertankers are about to face massive cancellations and that many ships in the current fleet will be scrapped.

"Supertankers are making $4,335 a day after fuel costs for delivering Middle East crude to Asia and the US, according to data from the London-based Baltic Exchange. Hamilton, Bermuda-based Frontline said Feb. 26 it needs $12,000 to cover costs such as repairs, crew, insurance and lubricants for engines. Interest on loans takes the figure to $32,100.
...
Shipyards in South Korea, China and Japan have all but two of the 146 orders for very large crude carriers, according to Lloyd’s Register-Fairplay data on Bloomberg. Daewoo Shipbuilding & Marine Engineering Co., based in Seoul, has the most, with 26 orders, the data show. Hyundai Heavy Industries Co., the world’s largest shipbuilder by market value, has orders for 16."

Platts reports that US February crude imports were down 649 kb/d to 9.203 mb/d from January, or about 6.6%.

"Preliminary data from the EIA show Canada retaining the lead supplier slot with 1.913 mb/d, down from 1.946 mb/d in January and 2.033 mb/d in December.

Mexico climbed to second place, pushing Saudi Arabia back into third place despite a fall to 1.219 million b/d from January's 1.299 mb/d.

Crude imports from Saudi Arabia fell to 1.135 mb/d from 1.337 mb/d the previous month, a drop of 200 kb/d."

The US imported 962 kb/d from Venezuela, 671 kb/d from Angola, 519 kb/d from Iraq, 457 kb/d from Nigeria, 365 kb/d from Brazil, 251 kb/d from Kuwait, and 243 kb/d from Ecuador.

9. THE TENTH AMENDMENT

In a movement I regarded merely as a way for the GOP to rebrand itself some time back--see Daily Sources 2/6 #11--a rather large number of states have seen similar bills introduced. I predicted that the bills were unlikely to pass, and though they have failed in several states, one has apparently passed in Idaho. I haven't had time to explore which of these are petitions and which are law, but it is certainly an interesting development. The site hosting the movement is quite explicitly secessionist, see the item in the lower left hand corner which has a fictional account of the US post-secession. I still doubt that the movement will gain enough support to represent a serious threat to the Union, but would make the note that I can think of quite a few liberal ideas and states which could arguably be put into effect by recourse to the Tenth Amendment, should the courts recognize the various legislatures' interpretation of the document. The movement seems to entertain the somewhat laughable notion that the economies of certain oil and gas states would have a major renaissance as federal environmental and concessions limitations were lifted. Of course, the additional supply wouldn't be all that great for those stripper wells. (h/t Gregor.us)

10. SPANISH PROSECUTORS MOVING AHEAD WITH PROSECUTION OF BUSH ADMINISTRATION OFFICIALS

Juan Cole notes that Spanish prosecutors appear to be moving ahead with the prosecution of Attorney General Alberto Gonzales and other Bush Administration officials and that others are likely to be indited according to Scott Horton include:

"Federal Appeals Court Judge and former Assistant Attorney General Jay Bybee, University of California law professor and former Deputy Assistant Attorney General John Yoo, former Defense Department general counsel and current Chevron lawyer William J. Haynes II, Vice President Cheney’s former chief of staff David Addington, and former Undersecretary of Defense Douglas J. Feith"

Cole also links to an Al Jazeera interview of Richard Armitrage where he states that he and Colin Powell lost the battle inside the Administration to ensure that the Geneva Conventions were applied to enemy combatants in the "war on terror."



Prof. Cole's summary and analysis are worth reading.