Obama sets stage for an economic war with China

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Obama sets stage for likely trade war with China



By P. Parameswaran WASHINGTON (AFP) -- US President Barack Obama has set the stage for a possible trade war with China by branding the Asian giant a currency manipulator, a term his predecessor George W. Bush had skillfully avoided despite pressure from lawmakers.

"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," his Treasury secretary-designate Timothy Geithner said Thursday in written testimony to senators quizzing him over his pending confirmation.

Obama, who took office only Tuesday, has pledged to "use aggressively all the diplomatic avenues open to him to seek change in China's currency practices," Geithner said.

Under the Bush administration, the Treasury had stopped short of identifying China a currency manipulator in its semiannual global currency reviews, acknowledging however that the yuan was relatively undervalued against the US dollar.

By directly branding China, Obama has laid the groundwork for trade friction between the key powers, both reeling from global financial turmoil that has slammed the brakes on growth and triggered a host of domestic problems.

"This is definitely setting the stage for some bad blood between the two countries and I anticipate that over the next year or so, trade fiction is going to become somewhat more heated," said Eswar Prasad, former China division head at the International Monetary Fund.

He said Obama's charges came as China used its competitively priced exports to fuel growth and check rising unemployment, disregarding international advice that it wean away from exports by using domestic consumption as a linchpin for economic expansion.

"It signals a much harder line I think the Obama administration is going to take in public," Prasad said, contrasting the new administration's policy with the Bush administration's strategy of prodding Beijing in private to allow the yuan to appreciate.

As an Illinois senator, Obama had co-sponsored legislation aimed at changing how the US government formally determines currency manipulation and authorizes new trade reprisal measures.

During the presidential campaign, he had accused China of suppressing its currency's true strength to make its exports more competitive, echoing some US lawmakers who blamed the snowballing US trade deficit with China on the weak yuan and have sought sanctions against Beijing.

"If there is a rise in trade tensions, it is much more a reflection of deeper reality rather than anything else," said Brad Setser, a former US Treasury official, citing the current economic crisis facing the two powers amid a global trade slump.

"Certainly, it is a signal that the Obama administration is going to put a focus heavily on the Chinese exchange rate regime and make that a key issue in discussions between the US Treasury and the Obama administration and China."

Geithner, who is expected to be confirmed as Treasury chief, hinted that any moves to tighten laws against currency manipulation would ensure that "countries like China cannot continue to get a free pass for undermining fair trade principles."

"The question is how and when to broach the subject in order to do more good than harm," he added.

But heavy US dependence on Chinese capital may limit Obama's options against Beijing.

China has overtaken Japan as America's biggest foreign creditor, and as of October 2008 held 652.9 billion dollars in US Treasury bonds, according to the latest Treasury Department figures.

"To engage in any action that would lead the Chinese to misunderstand actions by the US and therefore sell these holdings would be dangerous," warned Andrew Busch, global forex strategist with BMO Capital Markets.

Busch said that the United States has been reluctant to brand China a currency manipulator for two reasons -- "One, China doesn't meet the Treasury's narrowly defined criteria. Two, China owns a lot of US Treasury, agency and overall debt securities."

US lawmakers had previously proposed legislation aimed at imposing steep tariffs on Chinese products entering the United States if Beijing refused to make its currency flexible.

They also wanted currency manipulation to be classified as an illegal subsidy under US trade law, paving the way for American companies to demand "countervailing duties" on Chinese products.
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	01.23.2009 - 01h35 MESZ
	US-politics-economy-Geithner,WRAP
	Geithner assails China as Treasury confirmation moves closer
	Geithner assails China
	Incoming Treasury secretary Timothy Geithner vowed to get tough with China and redesign the crisis-hit US financial system as his nomination passed a crucial hurdle in the Senate Thursday.
	Washington Report (published), Asia Business (published)

Incoming Treasury secretary Timothy Geithner vowed to get tough with China and redesign the crisis-hit US financial system as his nomination passed a crucial hurdle in the Senate Thursday.

Despite criticism over his personal tax affairs, the Senate's powerful finance committee voted 18-5 to endorse Geithner's appointment to arguably the most crucial job in the new cabinet of President Barack Obama.

While joining fellow Republicans in castigating Geithner's past failure to pay certain US payroll taxes, Republican Olympia Snowe said: "I do believe his resume is essential for this time."

Influential Democrat Kent Conrad said the tax problems arising from Geithner's 2001-2004 employment at the International Monetary Fund were "completely unacceptable."
"In normal times that alone would lead me to oppose his confirmation," he said. "But these are not normal times. I believe we cannot afford further delay in filling this critical position."

Senate Majority Leader Harry Reid has said he will move rapidly to bring the nomination to a vote by the full chamber, as Obama gets to work on tackling the nation's worst economic crisis since the 1930s Great Depression.

The stakes were laid bare Thursday as US stocks swung lower after fresh government data showed weekly jobless claims had shot up to a 26-year high and housing construction starts were on the slide.

Geithner, a senior Treasury official in the 1990s, brings to bear inside knowledge of how the crisis has unfolded from his most recent job as president of the New York Federal Reserve.

At his confirmation hearing Wednesday, he apologized for his "completely unintentional" tax errors, insisting he had paid back 34,000 dollars to the Internal Revenue Service -- which he is now in line to supervise.

Geithner promised a "comprehensive plan" for the economy, starting with the housing market, and vowed to reopen frozen lines of credit by exerting greater pressure on banks that have benefited from a 700-billion-dollar bailout.

Reiterating the cardinal tenet of past administrations, he said "a strong dollar is in America's national interest" as he promised to make wise use of a planned stimulus package worth a whopping 825 billion dollars.

Following up his confirmation hearing, Geithner fleshed out his policy priorities in a 102-page packet of answers to senators' written questions.

On the international front, he wrote that Obama believes China is manipulating its currency, the yuan, and plans aggressive diplomacy to ensure US trading partners play fair.
"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner said.

"President Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices," he said.
Geithner promised "deep engagement" with China but did not commit to continuing a somewhat fitful "strategic economic dialogue" initiated by the former Treasury secretary, Henry Paulson.

That engagement would cover "currency issues, inadequate intellectual property rights protections, product safety, and non-tariff barriers."

"The yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US," Geithner stressed.

He pledged to extend the outgoing administration's offensive of banking sanctions "to prevent Iran from misusing the financial system to engage in proliferation and terrorism."

At home, Obama's economic lieutenant said an overhaul of Wall Street was long overdue, promising to look at regulation of unregistered hedge funds and to shed greater light on the opaque role of credit ratings agencies.

"Our financial system architecture is unsound and outdated. We need a fundamental redesign," he wrote.

"Among other things, this includes better prevention and detection methods, better enforcement authority, (a) resolution regime for systemically important non-banks and better checks on excessive risk."

Copyright © 2009 AFP All Rights Reserved

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US DOLLAR: OBAMA’S NEW CHINA STRATEGY IS USD NEGATIVE

The US dollar and the Japanese Yen, the two lowest yielding G10 currencies continue to be the two best performing.

It is important to remember that the dollar and the Yen are not rallying because investors have grown more optimistic about those currencies but because they are more pessimistic about the outlook for the US and global economy.

We have seen an unusual amount of currency related comments made by central banks and government officials around the world because of the sharp rally in the dollar and the Japanese Yen. As these currencies continue to rise, the risk of a reversal grows.

Tim Geithner has been confirmed as the new US Treasury Secretary but rather than cheer his confirmation, analysts are worried about some of the comments he made at his confirmation hearing.

Obama’s New Strategy on China is USD Negative
According to Geithner, the Obama Adminstration will be saying goodbye to the buddy versus bully approach to China.

He believes that Obama will "aggressively try to change Yuan policy" and that China will no longer get a free pass in trade violations. Geithner even went one step further by saying that Obama believes that China is "manipulating" its currency.

Many people fear that this is rookie rookie mistake.

China does not readily succumb to political pressure. That is why former Treasury Secretary Paulson allowed China to appreciate the Yuan on their own terms. To a large degree this strategy has worked because over the past 3 years, the Yuan has risen more than 15 percent. This is a bad time to ask for Yuan strength because growth in China has slowed materially.

To force China to appreciate its currency means less demand for US Treasuries and US dollars and unfortunately that is not something the US can afford right now when the government needs to spend its way out of recession. Furthermore, turning up the heat on China could lead to an economic war.

Geithner also reiterated that the US has a strong dollar policy which interestingly enough runs completely counter to his calls for a stronger Chinese Yuan. Like his predecessors, Geithner is doing nothing more than paying lip service to the strong dollar policy because in reality he is advocating a weaker dollar against one of the country’s largest trading partners. In addition everything that the US government has done so far to address the economic crisis leads to a weaker dollar.

So there is no real meat to Geithner’s comments on the greenback; the Yuan on the other hand is completely different story.

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Geithner Warning on Yuan May Renew U.S.-China Tension

By Mark Drajem and Rebecca Christie

Jan. 23 (Bloomberg) -- Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency may trigger renewed tensions between two of the world’s three biggest economies.

Geithner, Obama’s nominee for Treasury secretary, also told senators the administration will press China to “adopt a more aggressive stimulus package” to boost its domestic economy. The remarks on manipulation were a shift from President George W. Bush’s team, which stopped short of using the term in criticizing China’s exchange-rate management.

“The signal this sends is not good” for ties between the two nations, said Charles Freeman, a fellow at the Center for Strategic and International Studies and former top trade negotiator for China at the U.S. Trade Representative’s office. “It opens a Pandora’s box. We need the Chinese to hold onto their Treasury and agency debt.”

Geithner’s comments triggered a drop in Treasuries on concern that demand from China, the largest foreign investor in U.S. government debt, may wane. They may also reignite calls among some U.S. lawmakers for measures to punish trading partners perceived to have undervalued exchange rates.

“What they can’t work out diplomatically we can work out legislatively,” said Representative Charles Rangel of New York, who chairs the House Ways and Means Committee, which has jurisdiction over trade issues, in an interview. “The committee has been saying for years” that China has manipulated the yuan’s value, he said.

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The one silent Axis member that has been propping up the U.S. dollar is likely to get fed up and begin to become openly hostile.

Obama Presidency: China Continues Huge Military Build Up

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Chinese Calling On Beijing To Sell U.S. Bonds

BEIJING (Nikkei)--Calls are growing in China for the government to reduce its holdings of U.S. Treasury securities, as some observers expect their prices to decline amid heavy issuance to fund U.S. economic stimulus plans.

Such sentiment -- in part motivated by indignation over recent American assertions that China is partially responsible for the global financial crisis -- threatens to cast a cloud over relations between Beijing and the new U.S. administration.

"China should sell some of its U.S. government bonds and increase its euro and yen assets," Yu Yongding, a former member of the People's Bank of China's policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasurys may far exceed demand in the future.

Such remarks by Yu, who currently serves as director-general of the Chinese Academy of Social Sciences' Institute of World Economics and Politics, has sparked discussion within the government on how to manage its foreign reserves, according to a source familiar with the matter.

On Wednesday, Diyi Caijing Ribao, a Shanghai business daily, reported that China was a net seller of medium- and long-term U.S. bonds in November, but that it also stepped up its purchases of short-term Treasurys.

China's holdings of U.S. government debt rose 29 billion dollars at the end of November to 681.9 billion dollars, but the apparent preference for short-term securities perhaps indicates wariness over a possible decline in prices.

-- Translated from an article written by Nikkei staff writer Tetsushi Takahashi

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Obama's post-recovery move

By citing China as a currency manipulator, he may be heading off another credit bubble.

the Monitor's Editorial Board

from the January 26, 2009 edition

Even as he tries to boost the economy, it's not too early for Barack Obama to prevent another credit bubble during the coming recovery. His Treasury secretary-designate, Timothy Geithner, may have been thinking of that last week when he fingered China as a "currency manipulator," or an unfair export machine whose surplus cash ended up in US subprime mortgages.

Clever move.

China helped fuel the American housing boom of 2004-07 by recycling billions of export dollars into US debt. It purposely kept its currency undervalued to underprice its products, from toys to tractors.

Little did Americans know that those purchases helped provide inexpensive loans for millions of less-than-creditworthy homebuyers now in foreclosure.

Alarms over this financial imbalance went off during the Bush administration, which cited China's recycled capital as a major cause for the credit bubble.

To lessen pressure from Congress, Bush officials persuaded Beijing to strengthen its currency by 19 percent since 2005. But China stopped that adjustment last July as its own economy slowed. And many economists say the currency is still too low by at least 20 percent.

Now the Obama team has fired a shot across China's bow to warn it to allow its currency to find its true value on global markets. Japan, too, which also intervened in 2004 to devalue its yen and boost its exports, is taking heat to keep it from another antimarket move.

First Japan and later China have long relied on the export model and an undervalued currency to build their economies. But with the resulting bubble contributing to a deep recession, US tolerance for this mercantile sleight of hand has come to an end. The US can no longer, in effect, subsidize Asia's growth. And both those nations need to better stimulate their own consumer societies rather than rely so much on the US.

Mr. Geithner's accusation could result in a formal complaint under US law in March, further embarrassing China and forcing negotiations. But the US has few tools to force China to float its currency without igniting trade protectionism or pushing Beijing toward less cooperation on global issues such as North Korea.

China can also cite its own hefty stimulus package as an example of how it is shifting away from the export model. Beijing may indeed realize, with its exports shrinking, that it must follow a different path to prosperity, including an adequate social safety net for its people, to help prevent another financial imbalance. Its steps to make its currency the standard in Asia – pushing out the US dollar – hint at such a path.

The Bush team avoided a direct confrontation with China on the currency issue. That only worked for a while and only in a small way. A Democratic president with a Democratic Congress may not have the patience for artful persuasion or care much about Beijing's worries over quelling its restless poor. Democrats could again threaten an import tariff on Chinese goods, as they did a few years ago.

The world can hardly withstand these two giant economies in combat over the issue of currency rates. Obama is smart to raise it now before the recovery begins.

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Hyperinflation Will begin In China And It Will Destroy The Dollar

The conventional wisdom on China is dead wrong. Specifically, there is a widespread belief, as expressed by Goldman Sachs, that "China will keep the yuan trading within a narrow range in 2009 due concerns about exporters." Worse still, others are even predicting that China will devalue its currency! The sheer wishful thinking is astounding! The idea that "China will keep the dollar peg to help its exporters" ranks all the way up there with "Housing prices always go up" and "You can spend your way to prosperity".

THERE ARE NO FREE LUNCHES

If you have learned nothing else in the last year and a half, you should have learned that if something sounds too good to be true, that is because it IS too good to be true. The media overwhelmingly presents China's dollar peg as a win-win situation: Americans get cheap imports and low interest rates while China gets a strong manufacturing sector. While commentators do sometimes debates whether China will keep lending us money forever, they never talk about the REAL problem with the dollar peg.

Below is a chart which shows how China's dollar peg works. See if you can spot the downside that the media never seems to mention.

The US's trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China's Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China's base money supply by an amount equal to the increase in its foreign exchange reserves. While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

The true threat to the dollar peg

If there is one development which could force China to drop its dollar peg, it is out of control inflation. Rampant inflation would result in millions of citizens starving and would create widespread social unrest. Keeping food prices low is a matter of political survival for Chinese authorities. So, facing the choice between losing their grip on power and losing the dollar peg, they will not hesitate for a second to sacrifice the dollar to save their own skin.

So far China been able to contain inflation, but…

In recent years, China has been able to contain the inflationary effects of its trade surplus by soaking up or "sterilizing" all the extra liquidity (printed yuan). These sterilization efforts mostly involved:

A) Raising the reserve requirements of commercial banks. In essence, the PBOC (People's Bank of China) prints money to fund its trade surplus and then increases the amount of yuan banks have to keep as reserves at the Central bank, preventing the printed cash from reaching the economy. As of May of last year, commercial banks' reserve requirements were at 16.5 percent

B) Selling RMB-denominated sterilization bills. The state owned and controlled banking system has been forced to absorb the majority of these bills. As of May of last year, the value of sterilization bills reached 10 percent of bank deposits.

Taken together, these two steps have immobilized roughly 26.5 percent of Chinese commercial banks' deposits. This shows the magnitude China has had to intervene so far, as the value of sterilization instruments outstanding has been increasing at roughly the same rate as its foreign reserves.

PBC Foreign Reserves and Sterilization Instruments (US$ Billions)

While China has been able to contain inflation to single digits for the last decade, that is about to change. All economic forces are aligning in China for a surge in inflation.

1) China has abandoned its sterilization operations

Currently, the PBOC has abandoned its sterilization efforts all together:

A) The PBOC has lowered reserve requirements by 2 percentage point for China's big banks and by 4 percentage point for all other banks.

B) The PBOC has scaled back sterilization efforts by reducing liquidity-draining three-month and 52-week bill sales from once a week to once every two weeks. As a result of these decreasing sales, the clearing house for China's interbank bond market expects PBOC's 2009 bill issues to be down over 70%, which will increase the Chinese base money supply by 2 trillion yuan.

These actions signify that the PBOC has ceased sterilizing its currency interventions and is focusing on (imaginary) deflation risks. A flood of cash has been unleashed, and a tsunami of pent-up inflation will soon hit China.

2) China is running record trade surpluses

China's imports are crashing much faster than its exports. In December, Chinese imports fell 21.3% while exports fell only 2.8%. As a result, China has been running record trade surpluses these last three months: $35 billion, $40 billion, and 39 billion.

The reason for China's surplus is obvious when you think about it. Consider the following list of goods a country can exports and ask yourself what would hold up best during a severe global economic downturn.

*** Commodities (Oil, gas, steel, etc)
*** Capital goods (Airplanes, Caterpillars, Machinery for new factories, Machinery for new mining/oil exploration projects, etc)
*** Durable goods (SUVs, CARs, appliances, business equipment, electronic equipment, home furnishings, etc)
*** Luxury goods (brand name products, designer clothing, artwork, etc...)
*** Cheap consumer goods (everything you buy at Wal-Mart)

The answer is that the demand for cheap consumer goods will hold up better than anything else. This can easily be seen in the retail sales this holiday shopping season. Wal-Mart, which imports 70% of its products from China, was the only retail to post a year-on-year increase in sales. So while the world economy might be imploding spectacularly, demand for Wal-Mart's cheap Chinese goods is holding up quite well. The implications of this is that while China's exports will fall, they will fall less than those of any other country.

The current trade surplus is still completely unsustainable. If China's continues running a 40 billion dollar trade surplus all year, its base money supply will double by the end of 2009. Also, since China has halted the appreciation of the yuan, its trade surplus is unlikely to shrink as demand for cheap consumer goods is set to remain strong.

3) The Chinese economy will shrink in 2009

Consistently amazing economic growth is the biggest factor which has helped China contain inflation. Inflation happens when the money supply is growing faster than the economy, and china's economy has been growing fast. This economic growth has helped absorb the enormous quantities of yuan that have been printed to support the dollar. However, this will change in 2009. Due to falling global demand, China's economy is set for zero, if not negative, growth which will remove a significant mitigating force against inflation and amplify the inflationary impact of China's printing press.

Side note: China's economic strength is underestimated

It is important to note that, while economic growth will go probably go negative, China's economy will not crash. The strength of the Chinese economy is widely underestimate in the media today. In addition to the resilient worldwide demand for its cheap consumer goods, China is also benefiting for import substitution at home. This is why imports to China are falling so fast: Chinese are switching to cheap domestic product instead of expensive foreign imports. So while there has been a sharp drop in Chinese demand for big-ticket brands (Dior, Chanel, Hermes, etc…) and others luxury items, knock-offs and other cheap goods are still flying off the shelves. Chinese consumers are downshifting, but they are still spending strong, as reflected by the 21% year-over-year growth in 2008.

However, despite China's strong fundamentals, the current worldwide downturn is too strong for it to escape. The worldwide financial carnage is so severe that even the demand for cheap consumer goods will decrease. As a result, while China may outperform every country on Earth, its economy will still suffer in 2009.

4) Deflation in China would be too good to be true

China has been in a constant war with the inflation caused by the dollar peg. Economic growth and sterilization operations alone have not been enough to absorb the growing liquidity, and China has been forced to turn to ever more drastic steps in its efforts to contain inflation. These stifling policy measures together with its sterilization efforts have enormously suppressed domestic demand and have distracting the government from developing key services enjoyed by other developed nations. This suppressed domestic demand has also distorted China's economy, as reflected by the undersized service sector, and has lowered the quality of life for Chinese citizens.

Chinese financial repression and market socialism

In its losing battle with inflation, China has adopted stifling policy measures to suppress domestic demand and keep prices down:

(these are only a few of the anti-inflation measures China has adopted)

A) Strict price controls. (ie: Large wholesalers must seek central government approval if they want to raise prices by 6 percent within the space of 10 days or by 10 percent within a month.)
B) Credit ceilings. (limits on how much commercial banks can lend)
C) Floors on lending rates and ceilings on deposit rates
D) Strict rules governing lending decisions
E) Tight land purchase and lending requirements
F) Direct government intervention to limited expansion in certain industries (ie: aluminum, steel, autos and textiles sectors in 2004)
G) Penalty taxes on anyone buying and selling real estate in a short period of time.
H) Forcing local government to cut back spending by delaying approval of their investment projects
I) High sales taxes.
J) Etc...

Suppressed domestic demand has distorted China's economy

The distortions caused by sterilization operations and stifling policy measures are best seen when comparing China's and the US's economy:

A) US home buyers get tax incentives VS Chinese home buyers get tax penalties
B) US gets artificially low interest rates VS China's artificially high interest rates
C) US's "service economy" VS China's "service-less economy"
D) Etc…

In the US, the overvalued dollar and easy credit environment have caused the service sector to become oversized, artificially raising America's standard of living. In contrast, China's suppressed domestic demand has led its service sector to become undersized, artificially decreasing its standard of living.

Focus on inflation has lead to a lack of key government services

With Chinese authorities sidetracked by their export oriented focus and battle with overheating, the development of key government services enjoyed by other developed nations has been neglected. As a result, Chinese citizens' lack of social security, free education, and available consumer credit, which has forced them to save far more than their Western counterparts, leaving them with less disposable income.

Deflation would be a godsend to China

Chinese authorities must be thrilled about the prospect of fighting deflation instead of inflation. Fighting deflation would allow China to:

A) Scale back its increasingly costly sterilization efforts.
B) Lower interest rates.
C) Get rid of all the controls which are distorting domestic property markets.
D) Promote consumer spending without worrying about the inflationary impact.
E) Develop a comprehensive social security net.
F) Increase funding of public education.
E) Accelerate the development of a system to rate people's credit.
F) Encourage growth in underdeveloped domestic sectors (housing, health care, education, entertainment, etc)
G) Etc…

Most of the steps above are already being taken by Chinese authorities. Unfortunately, there are no free lunches. The possibility that China can maintain a highly inflationary currency peg, reverse years of anti-inflation policies, release a flood of sterilized yuan back into circulation, and go on a Western-style stimulus/bailout binge without experiencing double digit inflation is zero.

5) No deleveraging

There is no chance of real deflation happening in China. None. The Strength of China's Banking System makes it impossible.

A) Apart from Bank of China, Chinese banks have little exposure to overseas debt. So, although toxic US securities were sold to banks around the world, China's capital controls protected its banking system from America's bad debt

B) As a side effect of the country's sterilization operations, 26.5 percent of Chinese commercial banks' deposits were placed with the central bank last year (reserve requirements and forced underwriting of PBOC bills).

C) Unlike Western banks, who have been enjoying a credit bonanza for decades, Chinese banks have only recently gotten into the credit game, after years of being ridiculed for being overly cash-centric. Because of this late entry, Chinese banks completely missed the subprime party.

D) China is also in the enviable position of being one of the few countries which doesn't need to deleverage. While Western banks were going insane with high leverage and off-balance sheet financial vehicles, Chinese banks were doing the opposite, as can be seen on the chart below (from Tao Wang of UBS).



E) China has been waging a war against NPLs (non-performing loans) in the last few years. For example, with heavy penalties having been imposed on bank managers responsible for new NPLs, Chinese banks have become much more concerned about the loan safety than profitability. This battle again NPLs has paid off. As of September 30, 2008, nonperforming loans totaled only 2 percent for Chinese banks, compared to the 2.3 percent for FDIC-insured banks in the US. Loan loss provisions have also improved substantially, with provisions of Chinese banks amounting to an impressive 123 percent of their NPLs.

F) Finally, China's money supply itself is underleveraged when compared to the rest of the world. For example, the US's M2 to M1 ratio is 65% higher than China's. The Chinese M2 to GDP ratio is also more 160 percent, perhaps, the highest in the world.

When considering the strength of Chinese Banks and underlying strength of China's economy, no debt deflation is possible.

If there is no chance of deflation, then why is China's cpi slowing down?

There are three main reasons for the slowdown in China's cpi:

A) The bursting of the commodity bubble. Because of speculator dominated futures markets in the US, commodity prices were boosted to artificial level going into the summer of 2008. As these inflated commodity prices fell back down to Earth, they caused a temporary worldwide slowdown in inflation.

B) In the second half of the year, deleveraging and hedge fund redemption caused the outflow of a large amount of hot money from China. This outflow temporary depressed asset prices.

C) The unwinding of the commodity bubble spread deflation fears worldwide and caused the velocity of money to drop.

6) Deflation fears are paralyzing China's money supply

"deflation fears" have slowed the Chinese money supply to a crawl. While they are still spending, Chinese consumers are delaying big purchases and downshifting to discount stores. Businesses are strapped for cash, and scared Chinese banks are dumping riskier borrowers, like credit-card holders. China is experiencing one of the brief deflationary periods which typically precede hyperinflation.

Deflation fears in China also provide the perfect example of how a slowdown in the "velocity of money" and makes prices fall. Right now, Chinese banks are hoarding cash and delaying payments on personal credit cards. Only a year ago, most banks paid credit-card transactions in 14 days, but now merchants are having to have to wait 20, 40 or even 90 days to get paid. With lenders making credit-card transactions as unattractive as possible, many merchants are refusing to take credit cards from Chinese consumers. Think about that for a second, all that purchasing power from Chinese credit cards wiped out due to nothing but fear itself.

The important point to note about the price deflation caused by the deflation fears is that it will reverse sharply once inflation picks up. Banks will begin paying credit cards normally, and merchants will start accepting them again. The enormous amount of purchasing power which disappeared will reappear just as suddenly, causing a wild jump in inflation.

7) Sterilization operations have become a loss generating ventures

Until last year, China's sterilization operations had been profitable, since the rate of interest that Beijing earned on foreign exchange reserves (mainly US Treasuries) had been higher than the rates it was paying on its yuan-denominated sterilization bills at home. However, now that the fed has lowered US interest rates to zero for the foreseeable future, China's dollar peg has become a loss-making policy. When inflation hits china and interest rates rise again, China's losses from its currency sterilization will become staggering.

8 ) China likely to attract a flood of hot money in 2009

China has had a problem with hot money inflows in the past, and those problems are likely to get worse this year. Hot money refers to the money that flows regularly between financial markets in search for the highest short term interest rates possible. This hot money has found ways around China's capital controls and flows freely in and out of China to the authorities great frustration.

When hot money flows into china, it forces the PBOC to print money the same way as the trade surplus does. At the beginning of last year, these hot money inflows were one of China's biggest problems, bringing inflation up to 8.6 despite the authorities best efforts. The country's hot money problem ended temporarily with the bursting of the commodity bubble.

In the second half of last year, deflation fears and hedge fund deleveraging cause much of this hot money to leave China and seek the "safety" of US treasuries. This small exodus is what is responsible for the brief fall in China's foreign reserves. However, the outflow of hot money from China has ended, and it now looks set to reverse.

In the next month or so, rising inflation will start pushing up Chinese interest rates at a time when central banks around the world have set their rates at or near zero. Since the entire world knows that the yuan is undervalued, these higher rates will make China the most attractive destination on Earth for those seeking safe high yielding interest rates, and the hot money problem will return with a vengeance.

9) Chinese authorities are pulling out all the stops

Chinese authorities are pulling out all the stops to get the country back on track. In order to prop up economic growth, Chinese authorities have:

A) Raised tax rebates for exporters of everything from high-tech and electronic products (motorcycles, sewing machines and robots, etc) to some rubber and wood products.
B) scraped export taxes for some steel products, aluminum, rice, wheat, flour and fertilizers
C) Cut the lock-up period beyond which people can resell their property without paying a business tax from five years to two years.
D) scraped the urban property tax for foreign firms and individuals
E) Allowed people to buy second homes on the same preferential terms normally reserved for first time buyers.
F) Announced plan to spend 900 billion yuan over three years to build affordable housing
G) Cut the deed tax payable by first-time buyers of homes smaller than 90 sq m is to 1 percent.
H) Announced measures such as cash subsidies and tax cuts to encourage home purchases
I) Announced plans for a 4 trillion yuan (586 billion) stimulus package to boost domestic demand through 2010.
J) Announced plans to invest 5 trillion yuan roads, waterways and ports in the next three to five years (over 2 trillion yuan more than originally planned).
K) Approved 2 trillion yuan for railway investment
M) Announced a tax break for public infrastructure projects.
N) Abolished the 5 percent withholding tax on interest income.
O) Scraped the 0.1 percent tax on purchases of equities.
P) Instructed Central Huijin (a government investment arm) to buy shares of listed Chinese firms.
Q) Encouraged state-owned firms to buy back shares.
R) Raised minimum grain purchase prices by 15 percent
S) Approved landmark reforms that give peasants the right to lease or transfer their land-use rights
T) Issued a stimulus package for its auto sector, including a tax cut
U) Set a price floor for air tickets
V) Handed out cash gifts to brighten their mood before the Chinese New Year
W) Etc...

10) Banks are flooding the economy with new loans

Chinese authorities are pushing banks to extend credit and help fight "deflation". To encourage this money supply growth and new lending, the PBOC (the People's Bank Of China) has halted sterilization operations and has cut the benchmark one-year lending rate by 2.16 percent and the deposit rate by 1.89 percent. Also, as part of these efforts, Chinese officials are reversing decades of financial repression and freeing up their banking system.

As China lifts restrictions on lending, banks are flooding the economy with new loans. Credit ceilings under which commercial banks have been operating have now been removed, and credit controls have been relaxed to give banks more leeway in making lending decisions. Chinese lenders will now be able to restructure loans and adjust the types and maturities of debt. Banks are being pressured to use this new financial freedom to "promote and consolidate the expansion of consumer credit".

In addition to stimulating consumption, credit constraints are being relaxed to give loan access to small and medium privately owned businesses, which have until now been mostly shut out of credit by the state-owned financial system. As part of this effort and in order to help banks overcome their deflation fears, China has said it will tolerate more bad debt. This step is particularly significant, as the heavy penalties imposed for the creation of new non-performing loans has been a big restraint on credit expansion.

Finally, the commitment of Chinese authorities to fight deflation is so great that regulators have stated they will support the sale and securitization of loans. I repeat, China is moving towards securitization of loans! The adoption of securitization holds the potential to enormously accelerate money supply growth.

China's efforts to boost lending are working. In December, China's M2 money and loan growth soared. Just look at the graph of Chinese money supply growth below.



Does it look like China is headed towards deflation to you? (this chart will become much scarier once January's numbers are added in)

Conclusion

I view hyperinflation in China as absolutely guaranteed. Zero doubt. China is dismantling all the measures it has put in place over the years to fight inflation. It is dropping restrictions on purchasing property, eliminating price controls, getting rid of loan quotas, lowering interest rates, ceasing its sterilization efforts, etc… It is also pulling out all the stops to boost government spending and new loan creation.

Meanwhile, China's 40 billion dollar trade surplus means that its base money supply looks set to double in 2009. There is also the fact that China's money supply is frozen due to cash hoarding and will cause inflation to increase when it accelerates. Finally, the commodity bubble has finished bursting, and China's economy looks set to shrink.

Every economic factor in China suggests an enormous wave of hyperinflation will begin early this year. While I have written about the threats facing the dollar, this will be the event that finally ends the US's borrowing binge and destroys our currency.

Hyperinflation in China will be a monumental event

Because China makes most of the world cheap consumer goods, it will export its hyperinflation around the world. This means that no fiat/paper currencies will survive this with its purchasing power intact. Some will lose all value (dollar) while others will survive while experiencing a loss of purchasing power (yuan, euro, yen, etc...). The only money that will retain its full value in the face of Chinese hyperinflation is gold.

China will sink the dollar to save the yuan

Once hyperinflation kicks into gear, Chinese authorities will find it impossible to bring it under control without sacrificing the dollar. Since hyperinflation would hurt Chinese exporters as much as losing their US exports, China will face a clear cut decision. By dumping the dollar peg and selling its USD holdings, China will help contain domestic inflation in many ways:

1) China will no longer be printing massive quantities of yuan to support the dollar.
2) By selling dollars in exchange for yuan, China will be able to take those yuan out of circulation, shrinking its monetary base.
3) Since the yuan will strengthen enormously again foreign currencies, Chinese exports will fall and that means there will be a lot more goods available for domestic consumption.
4) Since the yuan will be stronger against foreign currencies like the dollar, Chinese imports will rise. That means cheaper commodity prices across the board.
5) Dropping the dollar peg will make the yuan a major reserve currency. That means lower interests rates in China as foreign central banks build up yuan reserves.

Those expecting deflation are in for a surprise

Western nations who are lowering interest rate very sharply, without fearing inflation, are mainly concentrating on the domestic dynamics of their economies and the value of their currency. My bet is that no one is even considering the possibility that inflation could be imported from China, and, when cheap Chinese imports stop being cheap anymore, it will catch everybody completely by surprise.

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China tells United States to handle ties with care

By Chris Buckley Chris Buckley Fri Jan 23, 10:43 pm ET

BEIJING (Reuters) – China's Foreign Minister has urged U.S. Secretary of State Hillary Clinton to be careful with sensitive issues that could strain ties, calling the relationship between their two nations one of the world's most important.

Foreign Minister Yang Jiechi made the remarks to Clinton, settling into her new job as Washington's top diplomat, in a phone call on Friday, the Chinese Foreign Ministry website (www.fmprc.gov.cn) reported on Saturday.

But Yang's published remarks did not mention the yuan currency issue, which has become the first test for ties between his government and the new Obama administration.

"The China-U.S. relationship is one of the world's most important bilateral relations," Yang told Clinton, according to the report.

Each side should "respect and show consideration for the other's core interests and appropriately handle differences and sensitive issues," he said.

The report did not specify those issues, but Beijing considers Taiwan its most sensitive topic in dealings with Washington.

Beijing says self-ruled Taiwan must accept eventual reunification with the mainland and objects to Washington's military aid to and political support for the island. China has also been angered by U.S. pressure over human rights and Tibet.

Yang, a former ambassador to Washington, said the two powers should "handle bilateral relations by adhering to a strategic high-point and a long-term perspective."

TRADE DISPUTES
Ties between the United States, the world's biggest economy, and China, with its bulging exports and foreign exchange reserves, have also been strained by trade disputes that could worsen during the global economic slowdown.

But in the published comments, Yang did not mention the yuan currency exchange policies, which have already become a sparring point between China and the new Obama administration.

U.S. Treasury Secretary-designate Timothy Geithner said on Thursday that China was manipulating its currency to shore up unfair trade advantages.

China's Commerce Ministry, in a statement to Agence France Presse on Friday, said the Beijing government "has never used so-called currency manipulation.

China's Foreign Ministry generally avoids wading into trade issues. But the country's official media were not so reticent.

The China Daily, an English-language paper that often reflects official policy, said Geithner's position was "a clear move away from the stance of the Bush administration," which avoided calling Beijing a currency manipulator.

The official Xinhua news agency echoed that view.

"This may signal that with the Obama administration in office, China faces growing pressure from U.S. trade protectionism," it said, citing Beijing economists.
The People's Bank of China, the central bank, was preparing a response to Geithner's remarks, Xinhua said.


The yuan closed lower against the dollar on Friday and traded mostly below the Chinese central bank's mid-point, with speculation that Geithner's comments could spark a brief period of modest yuan depreciation.
(Editing by Jerry Norton and Alex Richardson)

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American exporters in last-ditch attempt to stop Obama raising the trade barriers

From The Times
January 26, 2009

Carl Mortished and Suzy Jagger

A coalition of leading American exporters, including Boeing, Caterpillar and General Electric, is trying to stop a “Buy America” clause being included in President Obama's $825 billion stimulus package.

The American Steel First Act would ensure that only US-made steel was used in $64 billion of federally funded infrastructure projects. The money, earmarked for roads, bridges and waterways, is aimed at kickstarting the economy, but the initiative by steelmakers, which secured support last week in the House of Representatives Appropriations Committee, is opposed by American exporters, who fear retaliation by foreign governments.

Their concern is given credence by the European Commission and by Eurofer, the association of European steelmakers, which said that it would urge the European Union to challenge the “Buy America” clause at the World Trade Organisation.

Gordon Moffat, director-general of Eurofer, said that the clause was a clear case of protectionism. “It looks like they are trying to shut out imports. If we have the means to attack that under WTO rules, we would urge the Commission to do so.”

A spokesman for the European Commission said that America was a signatory to the Government Procurement Agreement, a WTO treaty aimed at ensuring fair access to state investment programmes. He said: “We would be entitled to retaliate and would certainly do so if they withdraw from [the treaty].”

Mounting evidence that governments are taking steps to shut out imports and protect domestic jobs is arousing concern at the Geneva-based trade organisation. Pascal Lamy, the WTO director-general, will today publish a report on protectionism, highlighting a profusion of recent initiatives taken by governments, including tariffs, subsidies and a 39 per cent increase in anti-dumping cases between WTO members.

The global recession has led to a slowdown in international trade, exacerbated by the banking crisis. Last month, the World Bank warned that trade volumes would contract in 2009 for the first time since 1982.

Efforts by governments to prop up the flagging automotive sectors have been hedged by undertakings to protect domestic jobs. Last week, François Fillon, the French Prime Minister, promised up to €6 billion (£5.6 billion) in aid to Renault and PSA, the owner of Peugeot-Citroen, provided that they gave a commitment to French suppliers and French employment. “There is no question of the State helping a manufacturer which would purely and simply decide to close one or more plants in France,” Mr Fillon said.

In a letter to Nancy Pelosi, the Speaker of the House of Representatives, trade bodies such as the US Chamber of Commerce, the National Foreign Trade Council and the Aerospace Industries' Association wrote last week: “If the United States further restricts access to our market [that is overseas consumers], these other countries will certainly follow our lead, shutting US exporters and their workers out of hundreds of billions of dollars of new business, while propping up their own national champions, to the detriment of the United States.”

The letter continued: “One issue we urge you to bear in mind as you prepare this legislation is the vitally important role that international markets play in sustaining US jobs and the role they will play in economic recovery. Without sales abroad and access to inputs, many US workers would be out of a job.”

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China emboldened to lay the law on West

Glenda Korporaal | January 31, 2009
Article from: The Australian

YOU have to hand it to Chinese Premier Wen Jiabao. He gave the Western financial system - particularly as it operates in the US - a huge serve when he spoke at the annual World Economic Forum at Davos in Switzerland this week.

As a leader of the country to which Australia and the rest of the world are looking as a means of cushioning the impact of the great recession of 2009, Wen could afford to make some hard points about the system that got the world into its financial mess, now widely agreed to be the worst since the Depression of the 1930s.

Wen did not mince his words when he blamed the present situation on "inappropriate macro-economic policies of some economies and their unsustainable model of development, characterised by prolonged low savings and high consumption, excessive expansion of financial institutions in blind pursuit of profit; lack of self-discipline among financial institutions and ratings agencies and ensuing distortion of risk information and asset pricing; and the failure of financial supervision and regulation to keep up with financial innovations, which allowed the risk of derivatives to build and spread".

It's a sign of the times that a leader of China -- with a Government not all that prone to launch public criticisms of friendly countries -- has had the confidence to speak so directly, and aptly, about the shortcomings of the Western financial system.

US billionaire investor Warren Buffett has been calling derivatives the financial equivalent of toxic waste for years, but it's a very different thing when China starts lecturing the West on the subject.

China's leaders are far from perfect. But the irony of the past few years has been that China has been able to move towards cleaning up its banking system, which was only a few years ago groaning under the weight of bad loans, while some of the big Western banks have been playing risky financial games, which has sharply eroded their capital base.

A combination of long economic growth, the opening up of its financial system through joining the World Trade Organisation, and capital raised from Western and other investors via the listing of the big Chinese banks has helped reduce bad loans in the country's banks to about 2.5 per cent (Wen claimed) as opposed to levels of 25 to 30 per cent and more a decade ago.

In his speech Wen was able to paint the much maligned Chinese banks as islands of stability while once proud Western banks in the US, Britain and Europe were on their knees, running to governments and anyone else with large amounts of capital for assistance.

But Wen's outspoken words also have to be seen against the backdrop of the aggressive comments made the previous week in Washington, DC by incoming US Treasury Secretary, Timothy Geithner, who lashed out at China during congressional hearings for deliberately holding down the value of its currency, giving it an unfair advantage when selling its exports into the US market.

"President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency," said Geithner, the former head of the New York Federal Reserve Board, written testimony to senators on his confirmation hearings.

He said the Obama administration would "aggressively" use all its diplomatic tools to press Beijing for currency reform. While the theme of US criticism of China's currency controls is not new, coming so clear and strong in the first days of the Obama administration, Geithner's words angered Chinese leaders.

They have sparked off concern that the US Government could be laying the ground for a trade war with China, scoring domestic political points by hitting out at cheap foreign exports.

"China is going to be extremely unhappy, to say the least," Tao Xie, an expert on US-China relations at the Beijing Foreign Studies University predicted soon after.

"For administration officials, I do not think anyone has ever pointed the finger so strongly at China."

In an interview with The Deal magazine last November, News Corporation chief Rupert Murdoch expressed concern that an Obama administration could succumb to pressures from Democratic politicians in Congress to resort to protectionist measures that spark off a '30s-style trade war, which could worsen the world economic downturn.

That concern is why Geithner's comments were taken so seriously around the world and in Beijing, where the Commerce Ministry issued a statement declaring that "directing unsubstantiated criticism at China on the exchange rate issue will only help US protectionism and will not help towards a real solution to the issue".

Relations between China and the US have become much closer and more complex than many appreciate. Small countries such as Australia have much at stake in ensuring good relations on both sides. China is now the US's second-largest trading partner, behind only Canada in the strength of its trade ties. In the year to November 2008 total import and export trade between China and the US came in at $US380 billion ($588.5 billion), ahead of America's $US343 billion trade with Mexico over the same period and double its $US191 billion trade with Japan.

But more importantly, China has overtaken Japan as America's largest foreign creditor and now holds a massive $US653 billion in US Treasury bonds.

Clint Eastwood's new movie, Gran Turino, based in US car manufacturing capital, Detroit, is a reminder of how Americans used to blame Japan and cheap Japanese cars for their economic woes.

As with Eastwood's ageing Dirty Harry-type character, there is a populist rump in the US -- which is always closer to the Democratic side of politics -- that would love to point the trigger finger at China (or any foreigners) for its own economic problems.

But, as Wen's speech reminds us, there are fundamental flaws in the Western capital system, including the unbridled pursuit of profit, that are now causing worldwide problems. In the year since the last Davos forum when US investment bankers strutted the stage and US leaders told the world all was fine, there has been a distinct shift of economic power from the US to China.

China is battling with its own economic issues which is why Premier Wen also made it clear this week that he would prefer ties between Beijing and the new regime in Washington to get off to a co-operative start. Middle-ranking countries such as Australia have much at stake in this.

Protectionists such as Dirty Harry have to move on.

Glenda Korporaal is deputy editor of The Deal magazine which appears in The Australian on the third Friday of every month. Next issue appears on February 20.

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China slams the door on Coca-Cola

Commentary: Antitrust concerns or an assault on free trade?

By MarketWatch
Last update: 2:31 p.m. EDT March 18, 2009
Comments: 14

SAN FRANCISCO (MarketWatch) -- The drumbeat of protectionism heard across the United States was answered overnight by a mighty gong from China.

Coca-Cola's $2.4 billion takeover bid for China Huiyuan Juice Group, the nation's biggest juice maker, hit the wall when government officials said it violated Chinese antitrust law. See full story.
Their concern, at least for the record, is that the deal would have given Coca-Cola (KO:The Coca-Cola Company
News , chart , profile , more
Last: 41.65+0.20+0.48%
4:00pm 03/18/2009
Delayed quote dataAdd to portfolio

KO 41.65, +0.20, +0.5%) an unfair advantage in the world's biggest beverage market -- a market any foreign company would love to tap.
This is the latest overseas trade salvo aimed at the United States. Earlier this week neighboring Mexico slapped import tariffs on about 90 U.S. agricultural and industrial products, a move triggered by fresh U.S. legislation designed to keep teamsters happy by keeping Mexican semi-trucks off our roads. Pure payback.

There's a nagging feeling that China's antitrust ruling against Coke is much the same thing. Almost four years ago, the U.S. shut down China's efforts to buy Unocal.

Lawmakers in Washington, outraged that China would dare bid on an American oil company, hastily threw up a barrier that deflected China National Offshore Oil Corporation (CNOOC) and steered Unocal into the hands of fellow California oil giant Chevron (CVX:CVX
News , chart , profile , more

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NOW Stimulus Threatens to Cause ‘Full-Blown Trade War’ With CANADA

by Michael Grabell and Amanda Michel, ProPublica - June 12, 2009 4:40 pm EDT June 16: This post has been corrected [1].



The U.S. flag flies at the U.S. Capitol. (Stan Honda/AFP/Getty Images)

The construction industry’s biggest trade organization blasted provisions in the stimulus plan that require contractors to certify that their projects are built with U.S.-produced iron, steel and other materials.

Associated General Contractors, whose members represent about 7 million workers, says the “Buy American” mandate is sowing confusion, creating delays and heaping costs on some major stimulus projects.

From AGC’s latest press release [2]:
“Certain key water and wastewater equipment is available only from foreign suppliers. Other items come from a single U.S. source. In some cases, contractors cannot get a certification as whether all of the components of a piece of installed equipment are U.S.-made. These problems have reportedly held up some project awards and led other water and sewer agencies to forgo stimulus money altogether. In addition, Canadian municipalities have threatened to retaliate against cities that use Buy American to keep out Canadian-made items. This step could escalate to a full-blown trade war that would lose jobs for contractors and many other businesses.”


In a conference call arranged by the trade group last week, Mike Welch of BRB Contractors cited the example of a wastewater project it was doing in Topeka. Before the stimulus, the plan was to include a co-generation unit that would take methane from the wastewater and produce electricity for the plant, to cut down on the carbon footprint.

But the $2 million unit is made in Austria; buying one from a U.S. manufacturer would cost 30 percent more, he said.

“We’re having problems getting any of the people up the line of command to make a decision on whether or not this is OK for us to go ahead and buy this thing,” Welch said.


Here’s the latest newsfeed [3] on the “Buy American” provision. 

For background on what prompted the organization to act today, check out BusinessWeek’s “Joint U.S.-Canadian Protest of Buy American.” [4]

Correction: This post originally stated that Associated General Contractors represents 7 million workers. AGC represents construction companies whose workforce numbers about 7 million; it does not represent those workers.

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'Buy American' Limits Threaten Trade War With Canada

Congress and the states are bent on keeping jobs in the U.S., but their actions may have unintended consequences.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

June 16, 2009

RELATED FORECASTS

• Stimulus Trade Provision Still Troublesome
• Not Much 'Oomph' in Buy American

HELPFUL LINKS

• U.S. Dept. of Commerce, Trade Compliance Center
• World Trade Org., government procurement
• Canadian American Business Council
• Federation of Canadian Municipalities

EDITOR'S PICKS

• Higher Rates Won't Sink Home Sales
• What to Do in the Face of a Pandemic

Fears of a U.S.-Canadian trade war may be grossly understated. The stimulus plan's "Buy American" provision is already pushing the two nations in that direction. But far from trying to solve the problem, Congress seems determined to make it worse. House members have attached similar language to bills authorizing funds for school construction, repair of public buildings, purchases of health care technology and hybrid cars and, less surprisingly, procurement of a new plane for use as Air Force One.

The Obama administration is feverishly seeking a solution before tensions rise any higher. U.S. and Canadian businesses, along with the Canadian government, are lobbying Congress heavily to back off, pointing out the number of jobs that depend on cross-border trade. But it's far from clear such efforts will have any effect.

The Buy American language in the stimulus was meant to exempt trade with countries that had ratified the World Trade Organization's Government Procurement Agreement or NAFTA. NAFTA members are the U.S., Canada and Mexico. But those treaties fully bind the U.S. and Canada only at the federal level. No Canadian provinces participate.
While 40 states observe the pacts, most have exceptions for sensitive goods. Few U.S. cities are covered by the deals.

Such distinctions made little difference before the stimulus bill became law. But now, fearing a loss of aid money, many U.S. state and local governments are going further than they need to and are rejecting contract bids from firms that use Canadian components.

Canada's local governments are already threatening retaliation. On June 5, the Federation of Canadian Municipalities passed a resolution requiring that members limit government procurement from abroad to countries that themselves do not bar Canadian companies from such competition. This would give European, Japanese, Chinese and Korean firms a leg up over U.S. competitors. The federation gave the U.S. 120 days to fix the problem before the decision takes effect.

There's a risk of long-term damage to North American supply chains. Much of U.S.-Canadian trade involves goods crossing the border multiple times before the products in which they're used are finally completed. Indeed, supply chain integration has long been one of the main benefits of NAFTA, given its role in increasing trade and lowering production costs. Makers of water and wastewater equipment, the manufacturers hit hardest by the stimulus bill's Buy American rules, accounted for $10 billion in cross-border trade last year. Other industries with North American supply chains will get dragged down, too, if they're unable to buy from Canada and Mexico.

Consider the case of IPEX, a Canadian-based manufacturer of thermoplastic pipe systems for the construction sector, to see how the problem is playing out on both sides of the U.S.-Canadian border. Before it can participate in a U.S. construction project, IPEX is now asked to sign a certificate affirming that all its products are made in the U.S. Since IPEX's supply chain is integrated across the border, its product load is invariably a mix of Canadian and U.S. parts. The result is that it is either unable to bid on the project or the parts are turned away if they have already been shipped to a construction site.

"Before Feb. 17, we had access to the U.S. market," says Veso Sobot, an IPEX engineer, referring to the date the stimulus bill became law.

"Since Feb. 17, we have not." That's bad news for companies such as Westlake Chemicals. Westlake, based in Houston, manufactures the raw materials IPEX uses to make its pipes. IPEX's troubles in the U.S. market will force it to cut back production.

"America ships way more product into Canada than Canada ships into America," says Sobot. "If we injure either one of us, we're injuring ourselves collectively, and we won't be able to compete effectively on the world stage."

For weekly updates on topics to improve your business decisionmaking, click here.

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China risks trade suicide

Beijing is playing with fire by issuing a `Buy China' edict for its stimulus package.

By Ambrose Evans-Pritchard
Published: 6:08PM BST 17 Jun 2009

As the world’s top exporter with a $400bn current account suplus and an economy that lives off the America and European market, it will pay the highest price if it triggers a global retreat into protectionist blocs.

The Chinese elite no doubt feel provoked by what they call the “poison” of the US `Buy American’ clause, but the Obama White House managed to tone down the worst excesses of Capitol Hill and in any case the Chinese version is more restrictive.

It bans the purchase of foreign equipment for investment projects unless a special exemption is obtained. The measures apply to European goods, even though EU states have not imposed any such “Buy Europe” clause of their own. EU producers of wind turbines have already been excluded from a $5bn wind project, whether or not they have factories in China.

Beijing risks making the same catastrophic error as the US Congress when it passed the US Smoot-Hawley Tariff Act in 1930. America was then the rising surplus power, like China today. It was the chief beneficiary of an open global system.

By imposing tariffs, Washington triggered massive retaliation. While nobody escaped the Great Depression that ensued, the effects were unequal. The US suffered a far steeper decline in output than the rest of the world. Britain muddled through relatively well in a trade bloc behind Imperial Preference.

China’s action is extremely disturbing. It confirms what we have long feared, that the Chinese government is sufficiently worried about rising unemployment to adopt suicidal measures. Nor does this episode instill confidence in the `China recovery story’.

While exports fell 26pc in April, imports were down by almost as much. There is no real rebalancing under way from external to internal demand. China is still running a massive surplus. It is flooding the world with excess goods, and exporting deflation. This is untenable. At some point, the West will react.

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Things are starting to decouple...

It's Official: Beijing's 'Buy Chinese' Policy

Posted by: Dexter Roberts on June 17

More evidence has emerged that China intends to favor its own companies as it spends money to boost its economy, including through its $586 billion stimulus package. As I blogged last Friday, there is growing concern amongst foreign companies that Beijing has been quietly instructing local governments and ministries to ‘buy Chinese’ as they implement new infrastructure projects. This issue was raised during the June 8 BusinessWeek Global Green Business Forum in Tianjin.

Now as reported in today’s Financial Times, front page for maximum impact, nine of China’s ministries and government agencies have issued a directive that states much more clearly the imperative of buying Chinese goods whenever possible. “Except for engineering, goods, and services that cannot be obtained under reasonable business conditions within China, domestic products should be purchased for the government investment program,” the notice states.

The directive, which was issued May 26 and posted later on June 4 on the website of the powerful National Development and Reform Commission, is a joint statement by the NDRC itself and the legislative office of the State Council, as well as industry and information, housing, railways, water resources, supervision, transport, and commerce ministries. The edict even goes further and claims that to date there has been discrimination against local brands in purchasing by local governments, a practice that will no longer be allowed. Foreign companies, for their part, claim that much the opposite is true. The “untenable distinction between ‘domestic’ and ‘foreign’ in government procurement practices negatively impacts the sustained growth and development of the domestic economy,” the American Chamber of Commerce complained April 27.

For regular observers of China, the latest directive could provide a bit of mental whiplash. That’s because Beijing officials have recently been on the anti-protectionism warpath, speaking out loudly and often about what they see (and probably rightly so) as examples of protectionist tendencies abroad.

China’s commerce minister Chen Deming (his ministry is one of those that are now pledging to buy Chinese products whenever possible) even penned an editorial on the topic that ran in the Wall Street Journal:
“History tells us that the more serious a crisis becomes, the more committed we must be to openness and cooperation. Regrettably, however, trade measures by the U.S. against China are on the rise.

Recently, American industries have petitioned the U.S. government for antidumping investigations, and for investigations under the World Trade Organization’s ‘special safeguard provision,’ which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations,” Chen wrote in the piece that ran on April 27. Fair enough—many trade analysts do see these measures as examples of protectionism by the U.S.

But then the whiplash: the minister continues by suggesting that both countries should see business opportunities in their respective stimulus packages: “Both governments have rolled out economic stimulus packages on a massive scale, which in turn are expected to become new growth areas for our trade and investment cooperation. For example, China’s demand for infrastructure, machinery and equipment, and environmental protection is huge.

It is hoped that both countries would turn these opportunities into tangible outcomes.” To state the obvious: successfully turning these opportunities into tangible outcomes sure isn’t going to be easy when Beijing’s top ministries are ordering localities to ‘buy Chinese.’

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U.S.-China trade tensions starting to boil

Obama administration files its first unfair trade case against Beijing


updated 5:02 p.m. CT, Tues., June 23, 2009



WASHINGTON - Long-simmering economic tensions between the U.S. and China boiled over Tuesday as the Obama administration filed its first unfair-trade case against Beijing, accusing it of restricting exports of materials needed to produce steel, aluminum and other products.

The administration vowed to protect the rights of American companies, and it got backing from the European Union, which filed its own case on the issue.

Some trade experts suggested China might settle the dispute rather than endure a prolonged hearing process before the Geneva-based World Trade Organization, the arbiter of global trade rules.

Analysts expect the fight over China's export restrictions will be just one of many trade cases the administration files against China. Obama made campaign pledges to take a tougher approach with U.S. trading partners in the face of soaring job losses and the longest U.S. recession since World War II.

The materials at issue include coke, bauxite, magnesium and silicon metal, the U.S. complaint says.

The U.S. and EU complaints say China's export restrictions give its companies an unfair edge over their foreign rivals by giving them access to cheaper materials, despite WTO rules against export curbs.

U.S. Trade Representative Ron Kirk said the Obama administration decided to pursue a WTO case after two years of talks between the Chinese and the Bush administration had failed to reach a resolution. He said China's actions were endangering American jobs.

"The United States believes that China is unfairly restricting exports of raw materials," Kirk said. "These actions are hurting American steel, aluminum and chemical manufacturers, among other industries, that desperately need these material to make their products."

The U.S. and EU filed separate complaints with the WTO, a step that triggers a 60-day consultation period. If the dispute is not resolved, they can formally request a WTO hearing panel. At that point, the cases likely would be merged.

If the U.S. and EU prevail at a WTO hearing — a process that can take up to a year — and China still refuses to lift the export restrictions, the two would be given a go-ahead to impose economic sanctions on China. Those sanctions would be equal to the harm inflicted on their companies by Beijing's actions.

A strong case
"The United States has a strong case," said Dan Griswold, a trade economist at the Cato Institute, a Washington think tank. "And it certainly adds weight to the U.S. case that the two largest trading entities in the WTO have joined together. That should get China's attention."

Officials from the U.S. and EU sought to protect their domestic companies' collective ability to compete on a global scale.

"The Chinese restrictions on raw materials distort competition and increase global prices, making things even more difficult for our companies in this economic downturn," EU Trade Commissioner Catherine Ashton said in a statement.

Ashton and Kirk expressed hope the issue could be resolved during the consultation period. But if that doesn't happen, Kirk said the U.S. will go forward with a WTO case.

"Dialogue is our preferred course of action, but despite raising this issue with China repeatedly, China has not changed its policies," Kirk said.
Wei Xin, a spokeswoman for the Chinese embassy in Washington, had no immediate comment on the U.S. action.

The American Iron and Steel Institute — whose members include Nucor Corp. and United States Steel Corp. — the United Steel Workers and other industry groups released a joint statement praising the administration's decision to pursue a WTO case against China.

"When China joined the WTO in 2001, it committed to removing these restrictions," the groups said. They called the barriers on the export of raw materials and minerals "just another way in which China favors its domestic manufacturing industries at the expense of the rest of the world."

The U.S. complaint contends that China maintains measures that restrain the export of raw materials for products — such as coke, a key ingredient in steel production — for which it's the world's largest producer, or near the top.

A U.S. fact sheet said "a prime example of the highly distortive effects of China's export restraints" was its decision to limit exports of coke from 336 million metric tons in 2008 down to current annual exports of only 12 million metric tons. Before the export controls were imposed, China accounted for about 60 percent of global coke production.

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Threat of Trade War With China Sparks Worries in a Debtor U.S.

By Steven Mufson and Peter Whoriskey
Washington Post Staff Writers
Tuesday, September 15, 2009



The prospect of a trade war with China fueled fears of wider fallout Monday, rattling bond markets and prompting many economists to criticize President Obama's decision to slap import tariffs on Chinese-made tires.

Traders fretted that the 35 percent tariffs might prompt China to send a sign of disapproval by paring purchases of U.S. government bonds. And a chorus of economists and climate activists fretted that the president's action might undercut U.S.-China climate talks and poison relations just two weeks before the summit of the Group of 20 major economies to be held in Pittsburgh.

Moreover, economists argued that it would all be for nothing; they said tariffs on Chinese tires would probably boost U.S. imports from countries like Poland and Mexico and do little to help the American steelworkers whose union brought the trade action in the first place.

Obama said Monday on CNBC that the tariffs, which were announced late Friday night, were necessary to maintain the "credibility" of trade agreements. "I'm not surprised that China is upset about it, but keep in mind, we have a huge economic relationship with China," he said.

China's commerce minister, Chen Deming, called Obama's action an "abuse" of trade provisions and said it "sends the wrong signal to the world." China said it would look into punitive measures against U.S. exports of auto and poultry parts.

"I think it's a terrible message in the run-up to the G-20, and we are all very concerned about the escalation of protectionist measures," said Uri Dadush, senior associate at the Carnegie Endowment for International Peace and long-time international trade director at the World Bank.

"If there were any prospect of the United States taking the moral high ground in Pittsburgh at the G-20, there isn't any longer, and that's unfortunate," said Daniel Rosen, partner at the advisory firm Rhodium Group and a former senior adviser for Asia at the National Economic Council. "Instead . . . people are going to be talking about the U.S. and China squabbling over tires and chickens."

One person who said such fears are overblown: Leo W. Gerard, the former nickel mineworker and leader of the United Steelworkers who instigated the current flap by filing the trade complaint that pushed Obama to impose a tariff on Chinese tires imports. Brushing aside concerns over a trade war or China's purchases of mountains of U.S. debt, he said that China exports far more than it imports and so has much more to lose.

"Eh," Gerard said when asked about fears of Chinese retaliation. "Are they going to kick the three chickens out they let in? . . . We've got into a situation now where everyone's afraid to tick off our banker," he said. "If our government had the guts to retaliate, [China] is going to be on the losing end."

The Obama administration also said it was not worried. "We do not expect that it will have an impact on the broader relationship," said a senior administration official who spoke on the condition of anonymity because he was not authorized to speak publicly. He said that there had been a "robust effort" by the administration to negotiate with China for a settlement on tires before imposing import tariffs. He asserted that U.S. imports of Chinese tires, which more than tripled since 2004, clearly met the test for tariffs aimed at reducing "surges" in imports.

But when asked about whether the United States would simply import from other nations, he conceded that "it is hard to predict the impact with specificity."

'Not to Be Provocative'
"A healthy economy in the 21st century also depends on our ability to buy and sell goods in markets across the globe. And make no mistake, this administration is committed to pursuing expanded trade and new trade agreements," Obama said in a speech Monday in New York's financial district.

"But no trading system will work if we fail to enforce our trade agreements," he added. "So when -- as happened this weekend -- we invoke provisions of existing agreements, we do so not to be provocative or to promote self-defeating protectionism. We do so because enforcing trade agreements is part and parcel of maintaining an open and free trading system."

There are reasons why the dust-up over tires might settle down. China exports three times as much to the United States as it imports from the United States. It also has relatively few secure places to park its huge foreign-exchange reserves other than U.S. Treasury bonds and government-backed U.S. mortgage securities.

Thea Lee, an economist and policy director for the AFL-CIO, said the concern over an incipient trade war was overblown and called China's reaction "blustering."

"The Chinese government is trying to raise the rhetoric and scare off the U.S. We should not be scared off," she said. "We are within our rights. . . . It's not the beginning of a trade war."

From 2004 to last year, the number of Chinese tires imported in the United States more than tripled and their share of the U.S. market rose from 5 percent to 17 percent. Over the same period, the share of the U.S. market served by U.S. factories declined by a corresponding amount. More than 5,000 U.S. jobs were lost.

Opponents of the tariff say the U.S. industry's shrinkage is unrelated to the surge in Chinese imports. U.S. manufacturers, they say, have strategically moved into pricier, more profitable tires, shifting production of cheaper tires overseas. Yao Jian, a Chinese Commerce Ministry spokesman, said, "Four U.S. companies have tire production operations in China and account for two-thirds of exports to the U.S. The tariffs will have a direct impact on them."

Under the so-called "421 clause" that China agreed to as part of its bid to gain admission to the World Trade Organization, the United States does not need to prove unfair trade practices.

Bad Timing?
But other observers said the timing was particularly bad, regardless of the case's merits. "They may have the basis for doing this, but the point in my mind is not the legality but the overall political impact and the message this gives the world," said Dadush of the World Bank. "Over the last several months, Chinese imports are exploding and thank God for that because that's holding up all of Asia and having a good impact on the rest of the world." By contrast, he said, U.S. imports are declining.

Moreover, globally, new requests for protection from imports in the first half of 2009 are up 18.5 percent over the first half of 2008, according to the World Bank-sponsored Global Antidumping Database, organized by Chad P. Bown, a Brandeis University economics professor. That increase follows a 44 percent increase in new investigations in 2008.

On Tuesday, Obama is scheduled to address the AFL-CIO's annual convention. Some analysts said that the tire tariffs were a political favor to trade unions, whose support Obama needs for health-care reform and who backed Obama in the 2008 election. Gerard dismissed the idea that the tire tariffs were political payback. The people who say that "are smoking something," he said.

Some observers said Obama might follow the Bush administration, which initially seemed to adopt a tough stance on trade. In March 2002, President Bush imposed tariffs on foreign steel, but later he backed off and rejected proposals to impose trade sanctions for other products.

"He pulled the plug on us because he didn't think we were grateful enough," Gerard said. "He didn't have the guts to enforce the law. He basically invited the Chinese to keep doing the same thing."

Whoriskey reported from Pittsburgh.

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US slaps duties on Beijing steel pipe imports

By Sarah O’Connor in Washington
Published: November 6 2009 00:17 | Last updated: November 6 2009 00:17

The US hit China with another big trade action on Thursday as it slapped *preliminary anti-dumping duties on $2.6bn worth of Chinese pipe imports.
The commerce department’s decision to impose duties of up to 99 per cent on imports of some steel pipes is the latest in a string of trade spats between over tyres, cars and chickens. It comes less than a fortnight before President Barack Obama’s first visit to China.

The ruling will affect more imports by value than Mr Obama’s recent move to impose duties on Chinese tyres, which sparked an international row in which Beijing accused the US of “rampant protectionism”.

The decision was a victory for steel companies, including US Steel Corporation, that petitioned for the duties in April. The United Steelworkers union said the decision was “an overdue message for thousands of American laid-off workers that trade laws are being enforced”. It says nearly half the domestic industry’s workers have been laid off.

“China’s government and exporters are being told we are fed up with their cheating on our fair-trade laws, and penalties for these transgressions are long overdue,” said Leo Gerard, USW president.

Anti-dumping duties are used when companies sell their products unfairly cheaply into foreign markets. Imports of the Chinese pipes, which are used in oil-drilling, surged 203 per cent between 2006 and 2008, according to the commerce department.

The duties range from 36.53 per cent for a select group of Chinese companies to 99.14 per cent for the rest. One manufacturer, Jiangsu Changbao Steel Tube Co, was exempted from the ruling.

It follows commerce deppartment’s decision in September to impose so-called “countervailing duties” on the pipes, which are aimed at offsetting government subsidies.

Although it is only a preliminary ruling, US customs will now start collecting a cash or bond deposits on imports based on the rates set yesterday. A final decision will not be made until March.

In another sign of its muscular approach on trade with China, the US this week asked for a World Trade Organisation disputes panel to investigate Chinese restrictions on exports of specialised raw materials used in industry. It was joined by the European Union and Mexico in claiming that China’s restraints on some raw materials were driving up the cost of end products.

China recently struck back at the US, announcing it would investigate whether Washington was unfairly subsidising its car-makers.

The tit-for-tat takes place against a backdrop of high-level talks between the two countries. They struck a positive tone last week at a trade summit in the Chinese city of Hangzhou, where they resolved some outstanding US complaints over imports of pork and windpower equipment.

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Trade dispute heats up while Obama visit nears

By Wang Yanlin and Jin Jing | 2009-11-7 |

CHINA blasted the United States yesterday for launching preliminary dumping duties on Chinese-made steel pipes and announced an investigation into imports of American-made autos as a trade conflict escalated a little more than a week before US President Barack Obama visits Beijing.

Yao Jian, spokesman for China's Ministry of Commerce, said higher pipe tariffs would have a serious impact on the Chinese steel industry and that "China strongly opposes such acts of protectionism."

Yao urged the US to follow promises made at last month's session of the China-US Joint Commission on Commerce and Trade to fight protectionism. He also said China will "take measures" to defend the interests of domestic enterprises.

"By not recognizing China as a market economy, the US is acting in a discriminatory manner," he said.

Market-economy status would give China more leverage in trade disputes.

"The Obama administration is adding pressure to cause China to compromise more on trade issues such as the foreign exchange rate and tax rebates during Obama's visit," said Sun Lijian, an economics professor at Fudan University.

In its preliminary decision, the US Commerce Department proposed duties ranging up to 99 percent on Chinese-made steel pipes used in oil and gas drilling. The duties still must be approved by the International Trade Commission.

Those charges would be on top of separate duties averaging 21 percent that were imposed in September to counter Chinese government subsidies, the US department said.

The products involved, valued at about US$3.2 billion, account for 46 percent of last year's Chinese steel exports to the US. More than 90 Chinese steel producers, including some state-owned companies like Tianjin Pipe (Group) Corp and Baosteel Group Co, would be affected.

The move was part of a growing list of actions against Chinese exports after the US imposed punitive tariffs on Chinese tires in September. China answered that with a World Trade Organization complaint.

On Wednesday, the US set preliminary duties ranging from 2 percent to 438 percent on Chinese steel wire.

On the auto issue, China's Ministry of Commerce said it will conduct anti-dumping and anti-subsidy investigations into imports of US-made sedans and sport-utility vehicles with engine capacities above 2 liters.

The probe, which could lead to additional duties on vehicles made by General Motors Corp, Ford Motor Corp and Chrysler LLC, was made in response to complaints from domestic car makers, the ministry said.

"China is making a gesture to show its hard stance on trade issues," said Tan Jijia of Pacific Securities Co. "Imported vehicles from the United States are not substantial, but the intensified conflict could hit market confidence in the recovering US auto industry."

Vehicles from the US account for around 14 percent of China's total auto imports, making America the third biggest country for vehicle shipments to China after Germany and Japan.

Most of the imported products are mid-to-high class sedans and luxury cars including General Motor's Cadillacs and Buicks, and Jeep and Dodge vehicles from Chrysler.

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China has now become the biggest risk to the world economy

Far from taking over as the engine of growth from an exhausted West, China is making matters worse. Its "beggar-thy-neighbour" policies continue to play havoc with global trade and risk tipping the world into a second leg of the Great Recession.

By Ambrose Evans-Pritchard
Published: 6:21PM GMT 15 Nov 2009

"The inherent problems of the international economic system have not been fully addressed," said China's president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. "I'm more worried about deflation," he said.

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – "stealing American jobs", says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad "U6" gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.

President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears. "We have reached one of those rare inflection points in history where we have the opportunity to take a different path," he said. Failure to take that path will "put enormous strains" on America's ties to China. Is that a threat?

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Mr Hu sounded conciliatory last week. China is taking "vigorous" steps to cut reliance on exports, still 39pc of GDP. "We want to increase people's ability to spend," he said.

Beijing is indeed boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time. All we have seen so far are "baby steps", says Morgan Stanley's Stephen Roach.

The reality is that much of Beijing's $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Pivot Asset Management said lending has touched 140pc of GDP, "well beyond" levels that have led to crises in the past. With the revolution's 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful. Pivot said
a hard-landing in China could prove as traumatic for world markets as the US sub-prime crash.

The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China's investment bubble; and Europe's banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.