Daily Sources 9/25

1. Kevin Hamlin at Bloomberg has the much commented on story (h/t Naked Capitalism) that Chinese academic Yu Yongding said today that the leaders of the major Asian economies need to come to some sort of agreement whereby they would agree not to dump US debt. I think it is important to stress that Mr. Yu is not speaking for the government of China. He has served as the Director-General of the Institute of World Economics and Politics (IWEP) since 1998 and as the President of the China Society of World Economics since 2001, as Editor of China and World Economy, and Associate Editor of Asian Economic Policy Review.

This is not to say that Dr. Yu is not influential: he was formerly the academic member of the Monetary Policy Committee of the People's Ban of China (PBOC) and a member of National Advisory Committee of the 11th Five Year Plan of the National Reform and Development Commission (NDRC). The NDRC, formerly the State Planning Committee, was expanded into a sort of super-ministry with 26 departments in 2003. It plays the dominant role in setting Chinese energy policy, for example, though this is set to be transferred to the new National Energy Bureau in an effort to centralize Chinese energy policy making and oversight.

Either way, he is not a member of government now. As per Hamlin:

"China is very worried about the safety of its assets," [Yu] said. "If you want China to keep calm, you must ensure China that its assets are safe." ... Yu said China is helping the U.S. "in a very big way" and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
...
"Our export-growth strategy has run its natural course,'' he said. ``We should change course." ... China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. ... If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.
...
"China knows what to do. We don't need your intervention."

... in an evident allusion to the bail out plan. In a related story by Alan Wheatley and Langi Chiang at Reuters, Chinese regulators have allegedly told Chinese banks to stop interbank lending to US banks.


As to Chinese policy going forward, Leslie Hook has an opinion piece at the Wall Street Journal Asia which is mostly an interview with Liu Mingkang, the Chairman of China's Banking Regulation Commission. He thinks that the abandonment of Glass-Steagall was a pivotal mistake by US legislators:

According to Mr. Liu, the chief regulator for China's banking sector, "the problem started a good 10 years ago, when people over there [in the U.S.] thought, 'We've got to boost innovations. So the Glass-Steagall Act is just the last stumbling stone on our way ahead. Move it away.'" ... Mr. Liu isn't "100%" in favor of the Act, which separated commercial and investment banking in the post-Depression era. (The U.S. repealed the law in 1999, under the Clinton administration.) But he maintains that this separation is good for China, where, he says, the capital market is the capital market, and the banking industry is the banking industry.

(Although the Act was repealed during the Clinton Administration, it was repealed by a GOP dominated Congress.)

2. Edmund L. Andrews at the New York Times reports that Ben Bernanke told the Congressional Joint Economic Committee that "economic activity appears to have decelerated broadly" across the spectrum of industries and services.

3. William Branigin, Dan Eggen and Paul Kane at the Washington Post have the story that Congressional negotiators have emerged from off-the-record meetings and announced that they are close to an agreement regarding the bailout proposal. The Dems have apparently gotten the GOP to agree to strict oversight, curbs on executive pay, help for homeowners, and an equity position for taxpayer monies. Headlines aside, the House Minority Leader John A. Boehner, also declared today that there was no deal on the bailout package.

4. Real Time Economics reports that the German Finance Minister, Peer Steinbrueck, in a parliamentary debate said he approved of recent actions by US authorities to stem the financial melt-down, though he argued they were late to act, and added that it's "'not necessary nor reasonable' for Germany or Europe to take similar action because 'the financial market crisis is most of all an American problem.'" He also argued that this meltdown signaled that "The U.S. will lose its status as the super power of the global financial system, not abruptly but it will erode. The global financial system will become more multipolar." What I find odd about this statement is the inferred notion that international finance is national in nature, though perhaps he was merely signaling that the central role of the dollar is going to erode ... further.

5. On Tuesday, Neil MacFarquhar had the story that the UN General Assembly meeting in New York was being used by "one world leader after another" to criticize the US for the financial crisis. Out of those mentioned in the story, the unusual (and significant) suspects are: Brazil and Germany (though the critique came from Berlin, not in NY). The Secretary General of the UN, Ban Ki-Moon, used his opening speech to criticize the notion of free markets.

“What you are seeing here is the letting off of some political steam,” said Mark Malloch Brown, a British cabinet minister and former senior United Nations official. “They are all remembering the very hard, unforgiving advice that they got from American financial institutions” to “deflate your economy, let your banks go to the wall,” he said. “There is a resentment at what they would see as a further evidence of double standards.”

6. Neil MacFarquhar and Thom Shanker at the New York Times report that leaders from Ukraine, Poland, and Latvia urged the UN to "stand up to" Russia in the General Assembly this week. Did other neighbors refrain or was it simply not reported? If they refrained from comment, or joining in assent with the others, that would be interesting to know.

7. Colum Lynch at the Washington Post has the story that the Russian Foreign Minister, Sergei Lavrov, said yesterday that Russia has refused to attend a high level meeting to discuss options regarding Iran in retaliation for not being invited to the meeting held by the G-7 to discuss the financial meltdown. And Philip P. Pan at the Washington Post reports that a former Chechen rebel leader who switched sides and helped bring Chechnya under control, so to speak, was assassinated in Moscow yesterday. Though it seems to fall on deaf ears, as I keep on reiterating, American and Russian interests are more aligned than, say, Russian and Iranian, or even Chinese, interests. I wish the relevant authorities would begin to act on that hypothesis, at least.

8. Seeking Alpha has an analysis of ENI's (Italy's largest oil company) evident strategy of long term and close cooperation with Gazprom. I would add that American sound and fury about oil diplomacy notwithstanding, it still appears that Europe as a whole is continuing to pursue a policy of energy interdependence with Russia as their view to security.

9. Russian Energy Minister Sergei Shmatko said, apropos the high level delegation Moscow will send to OPEC's December meeting, "Russia must deal [more] actively with issues of influencing the level of crude prices. A Russian factor must appear." He said Russia might best do this by providing more regular production forecasts from its fields. (So this could either mean for manipulation or for improved transparency.) Shmatko made clear that Russia was not contemplating joint actions with OPEC.

10. Ronald Buchanan at Platts reports that Mexico's state oil company, Pemex, has shut in 250 kb/d of crude production because US refineries shut down for Hurricane Ike has meant a lack of demand. Storage tanks were full. Two tankers were to arrive yesterday to help free up some storage. This is on top of reduced overall crude production from Mexico.

11. Tom Doggett at Reuters has the very interesting story that the head of the IEA, Nobuo Tanaka, appeared to agree with the US decision not to draw on IEA emergency gasoline stockpiles, saying that the market was taking care of the issue.

"We have consulted very closely with the Department of Energy on the current situation," Tanaka said, adding that the U.S. oil industry was "much better prepared" to handle the supply disruption caused by hurricanes Gustav and Ike than it was when Hurricane Katrina hit three years ago. ... "If the disruption continues in a very serious level, we definitely will use our (petroleum reserves) ... activate them, if necessary," he said."

Second guessing these statements is a bit of a dog's game, but the IEA is a particularly political organization and cannot really be seen to be publicly disagreeing with its member nations--and the US is a member nation. The clear signal that IEA was ready to supply gasoline should be good for the markets. But I would point out that gasoline lines are growing in the American south-east and that the lowest stock levels since 1967 should increase gasoline prices significantly.

12. Eric Schmitt at the New York Times reports that Pakistani and American forces exchanged fire on the Afghan border today. This is becoming worrisome.

13. Geoff Dyer and Benedict Mander of the Financial Times reported yesterday that Hugo Chavez struck a deal in Beijing to jointly build a refinery in Venezuela. He also announced that the two would double the size of their joint investment fund to $12 billion (€8.2bn, £6.5bn). Chavez announced before he set foot there that Venezuela would purchase 24 military air craft from China and was set to sign some 30 agreements while there, including the construction of four oil tankers and projects in agriculture, telecommunications, agriculture and electronics. Bilateral trade between the two is expected to exceed $8 billion, up from under $200 a decade ago. Nonetheless, announcements that refineries are going to be built are made all the time. They very rarely are actually made, and there aren't a lot of reasons for China to think it likely to be worth the effort. As I wrote to a buddy of mine last night:

I don't really see why China would think Venezuela attractive. Refineries cost several billion dollars, even small ones, and especially ones complicated enough to handle venezuelan crudes cost even more, and require lots of technical expertise. That's the technical expertise which the Venezuelans basically announced via recent prerequisite of technology transfer in all joint efforts that they didn't have themselves. Therefore, Chavez is asking China to:

a) pony up money
b) pony up expertise
c) pony up technology

and

d) trust that Chavez will not nationalize the effort once China has sunk all of the above into the effort,

even though China has

e) no ability to really project power into the region.

(After all, Chavez would still be protected behind an American umbrella of power. Venezuela has a history, actually, of utilizing the Monroe Doctrine to their advantage with colonial powers.)

But you pays your monies you makes your choice.

Daily Sources 9/9

1. In a moment that I completely missed, but which apparently folks in Chechnya heard loud and clear, presidential candidate John McCain on August 26th said that Western countries ought to think of the independence of Chechnya. Andrei Smirnov at the North Caucasus Weekly--which is a James Foundation publication--writes that this has encouraged many secessionists in Chechnya, which Smirnov believes represents the great majority of Chechens. (h/t to the Tel'nik.) I suspect he is right about that. I would point out however, that the Chechnyan liberation movement has strong ties to Al-Qaeda, ties which pre-date 9/11 and the second Gulf War. The Taliban forged strong ties with the Chechen liberation movement quite early on, and Chechnyan secession has been a cause celeb in the Islamic world for some time now.(1) Which is to say that by making this statement, McCain may have been presenting a face which refuses to "appease" Russian aggression, but that, in doing so, he also provided a morale boost to a movement with close ties to al-Qaeda. One wonders how the Democrats would have been handled in the media--and by GOP media men--had they made a similar mistake. The Caucasus is a tremendously complicated place. The lesson to be learned here, in my opinion at least, is that escalation is what is in neither America's, Europe's, nor Russia's interests, rhetorically or otherwise. Isn't it time the leadership of all three began reflecting that fact?

2. John Helmer at Mineweb reports that Moscow has reacted with calm to last week's threat of the Australian government to cancel the agreement signed last year to export uranium concentrate to Russia. Russia needs a source of uranium to power its ambitious nuclear power plans going forward. Uranium wasn't set to move until 2015. Nota bene: Sergei Kirienko, now the head of Russian Agency for Nuclear Power (Rosatom), was for a time the Prime Minister of Russia. Also puts the story on Washington removing Russian nuclear deal from the consideration of Congress into context.

3. Brahma Chellaney, professor of strategic studies at the Center for Policy Research in New Delhi, has an interesting analysis in Wall Street Journal Asia of how the Indian-US nuclear deal has been oversold by both Administrations. He argues that the hype may throw the broader issues of ongoing cooperation into jeopardy.

4. The Islamabad Daily Mail reports that China is advocating a similar deal with the nuclear suppliers group for Pakistan that the US has advocated for India.

5. Luke Pachymuthu and Alex Lawler at Reuters report that Iranian Oil Minister Gholamhossein Nozari has said that Iran is close to concluding negotiations with (China's) CNPC and (India's) ONGC to develop oil and gas reserves in the Caspian Sea. He also said that Iran was looking at various countries in Africa where they might strike an agreement to establish strategic crude storage, so that they could capture opportunities by being closer to their customer base.

6. Horand Knaup at Der Spiegel has a very interesting article on the rush to invest in Africa's biofuel potential. Neo-colonialism, it may well be. Given China's Africa Policy of 2006, the Russian push to invest in African OPEC countries, and Middle Eastern Sovereign Wealth Funds pursuing agricultural investments there, I'd say it was a fair characterization of the situation. Whether or not the western venture capitalists will be more accountable than the state backed investors will be interesting to see.

7. Max Henderson at the London Times reports that Professor Sir David King, president of the British Association for the Advancement of Science, will deliver a keynote speech tonight where he will argue that environmental organizations are responsible for preventing an agricultural revolution taking place in Africa. By extension, the argument is that they are "keeping the continent poor" and allowing starvation to continue. Very disturbing instance of unintended consequences, if true.

8. Celia W. Dugger at the New York Times reports that the incumbent party, the MPLA, in Uganda won the election--which were carried over for a day--by a landslide. EU election observers said that the election fell short of international standards. Nonetheless, UNITA has conceded, which probably means that the election's results will be accepted peacefully.

9. John Kingston at Platt's blog "the Barrel" has a good piece giving the supply numbers OPEC is considering in their meeting today. Jad Mouawad at the New York Times writes that Saudi Arabia has "dashed talks of a reduction in output."

10. Yu-chin Chen, Kenneth Rogoff, and Barbara Rossi at Vox have an interesting academic article on where commodity prices are headed next. (h/t Mark Thoma at Economist's View.) Pretty interesting given that the answer to that question will tell us where the bottom is likely to be in Asia, and other manufacturing exporter economies. They suggest that currency futures are more likely to be predictive of commodities prices than otherwise, because futures are more forward-looking, and commodities more sensitive to current conditions. I have my doubts, but it is still very interesting.

11. Jesse's Cafe Americain has a piece today which argues that the current dollar rally against the Euro is going to be short lived, and that the dollar will continue its decline. Jesse believes that there is a strong chance of a "significant stock market decline" starting in the next thirty days.

12. And, to continue the thought experiment on where commodity prices will take the export economies of Asia, the editors of Wall Street Journal Asia have a piece lauding Indonesia's President Susilo Bambang Yudhoyono for cutting taxes. They note that last week, South Korea announced it was going to corporate, income and death taxes. Last year, Hong Kong and Singapore cut corporate taxes.

13. 5 day track for Hurricane Ike, courtesy the NOAA:



(1) "Bin Laden's man in Chechnya: The Al-Qaeda Link," by Trevor Royle, The Sunday Herald, 27 Oct 2002.