Posts Tagged ‘Trade’


World economy: The China cycle

By Geoff Dyer – FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

China-brazil trade
Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations’ commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.

China exports
Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.


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Drought, Fire and Grain in Russia

August 10, 2010 | 0856 GMT

By Lauren Goodrich

Three interlocking crises are striking Russia simultaneously: the highest recorded temperatures Russia has seen in 130 years of recordkeeping; the most widespread drought in more than three decades; and massive wildfires that have stretched across seven regions, including Moscow.
The crises threaten the wheat harvest in Russia, which is one of the world’s largest wheat exporters. Russia is no stranger to having drought affect its wheat crop, a commodity of critical importance to Moscow’s domestic tranquility and foreign policy. Despite the severity of the heat, drought and wildfires, Moscow’s wheat output will cover Russia’s domestic needs. Russia will also use the situation to merge its neighbors into a grain cartel.

A History of Drought and Wildfire

Flooding peat bogs appears to be bringing the fires under control. Smoke from the fires has kept Moscow nearly shut down for a week. The larger concern is the effect of the fires — and the continued heat and drought, which has created a state of emergency across 27 regions — on Russia’s ordinarily massive grain harvest and exports.
Russia is one of the largest grain producers and exporters in the world, normally producing around 100 million tons of wheat a year, or 10 percent of total global output. It exports 20 percent of this total to markets in Europe, the Middle East and North Africa.
Cyclical droughts (and wildfires) mean Russian grain production levels fluctuate between 75 and 100 million tons from year to year. The extent of the drought and wildfires this year has prompted Russian officials to revise the country’s 2010 estimated grain production to 65 million tons, though Russia holds 24 million tons of wheat in storage — meaning it has enough to comfortably cover domestic demand (which is 75 million tons) even if the drought gets worse.
The larger challenge Moscow has faced in years of drought and wildfire has been transporting grain across Russia’s immense territory. Russia’s grain belt lies in the southern European part of the country from the Black Sea across the Northern Caucasus to Western Kazakhstan, capped on the north by the Moscow region. This is Russia’s most fertile region, which is supported by the Volga River.





Drought, Fire and Grain in Russia
(click here to enlarge image)

Though drought and wildfires have struck Russia over the past three years, they have not affected its main grain-producing region. Instead, they struck regions in the Ural area that provide grain for Siberia. Those fires tested Russia’s transit infrastructure, one of its fundamental challenges. Russia has no real transportation network uniting its European heartland and its Far East save one railroad, the Trans-Siberian. While its grain belt does have some of the best transportation infrastructure in the country, it is designed for sending grain to the Black Sea or Europe — not to Siberia. The Kremlin began planning for disruptions of grain shipments to Siberia during the droughts and fires of 2007-2009. During that period, Moscow established massive grain storage units in the Urals and in producing regions of Kazakhstan along the Russian border.
This year’s drought and fires do not primarily affect Russia’s transportation network, but rather the grain-producing regions in the European part of Russia that make up the bulk of Russia’s grain exports. These regions lie on the westward distribution network, with the port of Novorossiysk on the Black Sea handling more than 50 percent of Russian exports.
Russia has focused largely on being a major grain exporter, raking in more than $4 billion a year for the past three years off the trade. This year, the Kremlin announced Aug. 5 that it would temporarily ban grain exports from Aug. 15 to Dec 31. Two reasons prompted the move. The first is the desire to prevent domestic grain prices from skyrocketing due to feared shortages. Russia’s grain market is remarkably volatile. Grain prices inside Russia already have risen nearly 10 percent. (Globally, wheat futures on the Chicago Board of Trade have risen nearly 20 percent in the past month, the largest jump since the early 1970s.)
The second reason is that the Kremlin wants to ensure that its supplies and production will hold up should the winter wheat harvest decline as well. Winter wheat, planted beginning at the end of August, typically fully replenishes Russian grain supplies. Further unseasonable heat, drought or fires could damage the winter wheat harvest, meaning the Kremlin will want to curtail exports to ensure its storage silos remain full.
Russia’s conservatism when it comes to ensuring supplies and price stability arises from the reality that adequate grain supplies long have been equated with social stability in Russia. Unlike other commodities, food shortages trigger social and political instability with shocking rapidity in all countries. As do some other countries, Russia relies on grain more than any other foodstuff; other food categories like meat, dairy and vegetables are too perishable for most of Russia to rely on.
Russia’s concentration on food volatility has a long history. Lenin called grain Russia’s “currency of currencies,” and seizing grain stockpiles was one of the Red Army’s first moves during the Russian Revolution. In this tradition, the Kremlin will husband its grain before exporting it for monetary gain. And this falls in line with Russia’s overall economic strategy of using its resources as a tool in domestic and foreign policy.

Exports and Foreign Policy

Russia is a massive producer and exporter of myriad commodities besides grain. It is the largest natural gas producer in the world and one of the largest oil and timber producers. The Russian government and domestic economy are based on the production and export of all these commodities, making Kremlin control — either direct or indirect — of all of these sectors essential to national security.
Domestically, Russians enjoy access to the necessities of life. Kremlin ownership over the majority of the country’s economy and resources gives the government leverage in controlling the country on every level — socially, politically, economically and financially. Thus, a grain crisis is more than just about feeding the people; it strikes at part of Russia’s overall domestic economic security.
Russia’s use of its resources as a tool is also a major part of Kremlin foreign policy. Its massive natural resource wealth and subsequent relative self-sufficiency allows it to project power effectively into the countries around it. Energy has been the main tool in this tactic. Moscow very publicly has used energy supplies as a political weapon, either by raising prices or by cutting supplies. It is also willing to use non-energy trade policy to effect foreign policy ends, and grain exports fall very easily into Moscow’s box of economic tools.
Russia is using the current grain crisis as a foreign policy tool even beyond its own exports, prices and supplies. It has asked both Kazakhstan and Belarus to also temporarily suspend their grain exports. Belarus is a minor grain exporter, with nearly all of its exports going to Russia. But Kazakhstan is one of the top five wheat exporters in the world, traditionally producing 21 million tons of wheat and exporting more than 50 percent of that. The same drought that has struck Russia also has hit Kazakhstan; production there is expected to be slashed by a third, or 7 million tons.
Kazakhstan traditionally exports to southern Siberia, Turkey, Iran and its fellow Central Asian states: Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan. For the first time, Kazakhstan had planned to send grain exports to Asia. It had contracted to send approximately 3 million tons of grain east, with 2 million of those supplies heading to South Korea and the remainder to be split between China and Japan. The drought has forced Kazakhstan to reassess whether it can fulfill those contracts along with contracts for its immediate region.
Russia’s request that Belarus and Kazakhstan cease grain shipments does not seem primarily connected to Russia’s concern over supplies, but instead looks to be more political. The three countries formed a customs union in January, something that has caused much political and economic turmoil. Kazakhstan sought to lock in its president’s desire to remain beholden to Russia even after he steps down, while Belarus reluctantly joined as Russia already controlled more than half of the Belarusian economy.
For Moscow, however, the union was a key piece of its geopolitical resurgence. The Russian-Kazakh-Belarusian customs union was not set up like a Western free trade zone, where the goal is to encourage two-way trade by reducing trade barriers, but as a Russian plan to expand Moscow’s economic hold over Belarus and Kazakhstan. Thus far, the customs union has undermined Belarus and Kazakhstan’s industrial capacity, welding the two states further into the Russian economy.
Since the customs union has been in effect, Russia has quickly turned the club into a political tool, demanding that its fellow members sign onto politically motivated economic targeting of other states. In late July, Russia asked both Kazakhstan and Belarus to join a ban on wine and mineral water from Moldova and Georgia after continued spats with each of the pro-Western countries. Russia has added another level of demands in light of the grain shortages. As of this writing, neither Astana nor Minsk has accepted or declined the demands from Moscow, with grain exporting season just a month away.
Given current Russian production and storage supplies, Russia doesn’t actually need Belarus or Kazakhstan to curb their exports. Instead, it is seeking to use the drought and fires to create a regional grain cartel with its new customs union partners.
And this leads to the question of the other former Soviet grain heavyweight, Ukraine. Ukraine, which does not belong to the customs union, is the world’s third-largest wheat exporter. In 2009, Ukraine exported 21 million tons of its 46 million-ton production. Also hit by the drought, Ukraine revised its projected production and exports for 2010 down 20 percent, with exports down to 16 million tons. Some fear Ukraine will have to slash its export forecasts even further. Moscow will most likely want to control what its large grain-exporting neighbor does, should it be concerned with supplies or prices. Despite Russia’s recent actions with regard to Belarus and Kazakhstan, however, Ukraine has not publicly announced any bans on grain exports.
If Russia is going to exert its political power over the region via grain, it must have Ukraine on board. If Russia can control all of these states’ wheat exports, then Moscow will control 15 percent of global production and 16 percent of global exports. Kiev has recently turned its political orientation to lock step with Moscow, as seen in matters of politics, military and regional spats. But this most recent crisis hits at a major national economic piece for Ukraine. Whether Kiev bends its own national will to continue its further entwinement with Moscow remains to be seen.

Read more: Drought, Fire and Grain in Russia | STRATFOR

Drought, Fire and Grain in Russia is republished with permission of STRATFOR.

Drought, Fire and Grain in Russia | STRATFOR

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>Oh, poor “Demonized Algos” !!!

Demonised ‘algos’ push the surge in FX trading

By Jennifer Hughes, Senior Markets Correspondent
Published: September 1 2010 00:04 | Last updated: September 1 2010 00:04

Since the infamous stock market “flash crash” of May 6, high-frequency, or algorithmic, trading has been unwillingly dragged into the political and regulatory limelight.
forex-trading-graphicSo far, however, attention has focused on the role of these high-speed traders in the equity market. Outside the glare of that publicity, it is less well known that on May 7, FX trading volumes reached records, straining the plumbing of these markets.
Some participants argue these strains were partially caused by algorithmic, or algo, traders.
Exactly how much of this can be attributed to algo trading is unclear. However, there is no question that high-frequency traders are a fast-increasing force in FX markets, which is sparking a fierce debate as to their value to the market.
On Tuesday, the Bank for International Settlements reported that average daily turnover in the FX market has jumped 20 per cent in the past three years to $4,000bn a day. Its survey was taken in April, so missed the May spike, which related to the eurozone sovereign debt crisis.
The BIS-reported gains were led by a near 50 per cent leap in spot trading – deals for immediate delivery – to $1,500bn a day. This jump was powered by increased activity from “other financial institutions”, a group that includes hedge funds, pension funds, some banks, mutual funds, insurance companies and central banks. This will also include algos.
While all categories of “other” could have increased their trading, it is likely a significant proportion was driven by algo traders, who favour the deep, liquid spot markets and particularly currency pairs such as eurodollar and dollar-yen, which between them account for 42 per cent of all currency trading.
The question for the FX market is whether high-frequency dealers improve the market by adding liquidity, or whether they are instead merely price takers who contribute little.
“Algos have been demonised, but they’re an important part of the growth story,” says David Rutter chief executive of Icap Electronic Broking, which runs EBS, the main FX interbank trading platform. “What we’ve found is that they add pressure at each price point so that instead of getting big price gaps on shocking news, trade is more orderly.
“With FX, there are a lot of other flows such as global trade, so there is good underlying liquidity that the algos can enhance.”
Algos initially appeared in FX markets almost a decade ago, attracted by the deep liquidity and increasing use of electronic trading. They were generally welcomed, particularly by banks looking to build their prime brokerage businesses. However many banks soon grew disenchanted when they found the fast-moving shops were profiting from banks’ own slow systems by exploiting brief, tiny price differences between rival platforms.
Some banks went as far as ejecting offenders from their platforms but banks’ views have since become more nuanced. They have generally reached an accommodation, helped by technological improvements which make it easier to monitor client dealings and offer client-specific prices.
“The facts are that algos have made the markets more efficient and have helped ensure there’s one virtual price,” says Jeff Feig, global head of G10 FX at Citigroup. “They do cause banks to be smarter and we’ve had to work harder to be more efficient, but that’s ultimately to the advantage of the end user.
“I think that to some extent, algos have pushed banks and the result has been enhanced transparency and increased liquidity.”
Algos mean many different things in the FX market. While high-frequency traders are the best known – typified by one senior banker as “five smart guys in a room in New Jersey,” – banks are increasingly adept at developing their own algorithms to make their internal FX deals more efficient. These “internalisation” trades too will have provided a boost to the BIS numbers.
Most players say algos are now a fact of life in currency markets.
Unlike the equity market, which is split into hundreds of stocks, they believe the FX world’s focus on a relatively small number of currency pairs means it would be far harder for a single group of participants to move the market significantly, intentionally or otherwise, as some watchers fear happened during the “flash crash”.
“Also trading can happen anywhere there’s an electronic execution system and a volatile market,” says Alan Bozian a former FX banker and now chief executive of CLS Bank, the FX settlement system. “The question is, which markets adapt well and I don’t think it’s necessarily the stock market.”
FX markets have proved generally good at adapting. Systems such as CLS, introduced years before the financial crisis, have helped minimise settlement risk and since May, participants have been working again to improve their processing systems to cope with increased volume.
Significantly, for a market that is very much built around a hub of big banks, the BIS report showed that, for the first time, interaction of the main banks with “other” financial institutions overtook trading between themselves.
This could be a pointer to the market of the future, where banks are likely to remain the hub, but as much for their trade processing abilities as for their liquidity.
This would allow the winners to build profitable volume without taking on huge trading risks – suiting the current regulatory mood.
“The banks want to continue being the price providers, but they’re getting much more interested in the infrastructure and improving that,” says Mr Bozian. This evolution is likely to apply to high-frequency trading too.
Mr Rutter believes algos are only in their “late teens” in terms of development. “The early algo trading was about super-fast dealing and chasing inefficiencies. That’s largely gone,” he says.
“Now its about math and science being thrown at the market – there’s a rich pool of data and I think we’ll see algos evolve so its not just about milliseconds, but about longer-term predictive math.”

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Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.
“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”
China’s central bank hasn’t increased rates since November 2007. In the U.S., the Federal Reserve this month left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it’s been since December 2008, while the European Central Bank has kept its key interest rate at a record low of 1 percent.
Policy makers in Malaysia, South Korea, Taiwan and Thailand have increased the cost of borrowing at least once this year, while India has boosted rates four times in five months.
The global economy is at the risk of prolonging a recession after reports over the past two days showed U.S. home sales plunged by a record and Japan’s export growth slowed for a fifth month in July, he said.
“We never got out of the first recession,” Rogers said. “If the U.S. and Europe continue to slow down, that’s going to affect everyone. The Chinese economy is 1/10 of the U.S. and Europe and India is a quarter of China, they can’t bail us out.”
Rogers, who predicted the start of the global commodities rally in 1999, said he was short emerging markets and stocks and long on commodities.
“Commodities will go above their old high sometime in the next decade even if they only grow 5 to 6 percent annually,” said Rogers, who is a consultant for the Dalian Commodity Exchange.
Rogers said he would resume buying China’s stocks if they were to tumble as they did during the aftermath of the global financial crisis in 2008, when they plunged 65 percent. “I haven’t bought since the fall of 2008,” he said. “It it were to happen again, I hope that I’m smart enough to buy again.”
Allen Wan. With assistance from Chua Kong Ho. Editors: Richard Frost, Linus Chua
To contact the Bloomberg News staff on this story: Allen Wan in Shanghai at awan3@bloomberg.net

Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance – Bloomberg

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Colombia, Venezuela Agree to Restore Diplomatic Relations After Dispute

(Corrects date of Bolivar’s death in sixth paragraph.)
Venezuela and Colombia agreed to restore diplomatic relations and vowed to step up security along their border to prevent Marxist guerrillas and drug traffickers from mounting attacks or using dense jungle for hideouts.
The two countries will form joint committees to work on any lingering issues, Colombian President Juan Manuel Santos said yesterday after meeting with his Venezuelan counterpart, Hugo Chavez. The nations had been locked in a dispute over Colombian accusations that Venezuela was harboring rebels.
“We are starting this relationship from zero in a frank and sincere way,” Santos, who was inaugurated as president Aug. 7, told reporters in a joint news conference with Chavez in the town of Santa Marta. “The two countries will re-establish diplomatic relations and create a roadmap so that all aspects of relations can progress, advance and deepen.”
The agreement paves the way for a restoration in trade between the countries, which plummeted during the past two years amid accusations that Chavez was aiding the Revolutionary Armed Forces of Colombia in its campaign to disrupt the government. Chavez put troops on high alert along the 1,375-mile (2,200- kilometer) border July 30 after Santos’ predecessor, Alvaro Uribe, said as many as 1,500 rebels are launching cross-border attacks from Venezuela.
Chavez, speaking after Santos, said he doesn’t allow illegal groups to operate in Venezuela. He said he examined documents that Colombia said proved the existence of rebel camps in Venezuela and found that there were no outposts.
‘Always Doubts’
“There are always doubts, but President Santos has promised to believe me when I say that Venezuela’s government does not support Colombian guerrillas,” Chavez told reporters after the meeting at the estate where his 19th-century independence hero Simon Bolivar died in 1830. “If I supported the guerrillas the results would be quite notable — they would have weapons and money.”
Colombian Foreign Minister Maria Angela Holguin will travel to Caracas within two weeks to jumpstart relations, Chavez said.
Venezuela gave assurances that it will pay debts to exporters dating from July 2009 when Chavez first froze commerce, Santos said. Venezuela owes some $800 million to Colombian exporters, according to the Venezuela-Colombia Chamber for Economic Integration, a Caracas-based business group.
Trade between the nations tumbled to $651 million in the first five months of this year from $2.26 billion in the same period of 2008, the last year of normal relations, according to Colombia’s statistics agency. Colombia’s central bank, while acknowledging that the ongoing row cut into trade, says the impact is being offset by the global economic recovery.
‘Kick in the Pants’
“Santos knows he needs better diplomacy with Venezuela, he knows he can’t enter office kicking Chavez in the shins, he has to open talks and look super reasonable,” said Myles Frechette, U.S. ambassador to Colombia from 1994 to 1997. “He won’t be confrontational but he will give Chavez a good kick in the pants if need be.”
Venezuela’s economy will shrink 2.6 percent this year, according to the International Monetary Fund.
“It would be convenient to reopen the border, but it’s not a matter of life or death for Colombia’s exporters,” said Rafael Mejia, president of the Colombian Agriculture Society. “The real issue is that Venezuela doesn’t pay.”
The yield on Colombia’s benchmark 11 percent bonds due 2020 has dropped to 7.2 from 7.96 since Santos’ election June 20. The peso has gained 4.7 percent over the same period, the most among major Latin American currencies tracked by Bloomberg.
Even if Chavez opens the border to trade, many exporters are wary of rushing back, said Jorge Bedoya, head of the National Federation of Colombian Poultry Farmers.
Trade Tensions
“It’s important that Chavez takes it seriously and abides by the rules,” said Bedoya, whose members lost as much as $60 million in trade to Venezuela before finding new markets locally and in Asia.
The collapse in commercial ties likely contributed to rising prices in Venezuela because of the costs of importing food and other items from longer distances, said Luis Alberto Rusian, president of the Venezuelan-Colombian Chamber for Economic Integration, or CAVECOL.
“Colombia’s natural market has always been Venezuela just as the natural market for Venezuela is Colombia,” Rusian said. “We also need to rebuild confidence between businesses and this is going to take some time.”
To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net

Colombia, Venezuela Agree to Restore Diplomatic Relations After Dispute – Bloomberg


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U.S. Lawmakers Gear Up to Seek New Yuan Policy

WASHINGTON—The U.S. trade deficit with China in June hit its highest level in nearly two years and could spur congressional pressure on Beijing to revamp its currency policy.

America’s trade deficit with China jumped 17% in June over the previous month to $26.2 billion, the biggest gap since October 2008. Earlier this week, China said its overall trade surplus hit $28.7 billion in July, an 18-month high.

Associated Press

A production line in Guangdong province, in southern China, in May.

The Commerce Department figures could set the stage for a fight in Congress this fall over China’s currency policy. Some lawmakers, arguing that China has set the yuan artificially low to make its exports more price competitive on global markets, are keen to pass laws that would penalize countries that are found to be manipulating their currencies.

China, under pressure from the U.S. and other countries, announced a shift to a more-flexible exchange rate in June. But the yuan has appreciated less than 1% since then, and some economists say that it remains undervalued against the dollar by at least 25%.

While efforts to pass such legislation have made little headway, lawmakers and industry groups agree that the issue could gain traction in September, given that voters, who head to the polls in November, are angry about the country’s continued weak economy and high unemployment rate.

A number of bills have garnered bipartisan support, including measures promoted by Tim Ryan (D., Ohio) and Patrick Murphy (D., Pa.) in the House, and by Charles Schumer (D., N.Y.) in the Senate.

These efforts would, among other things, make it easier for companies to seek import duties on goods from countries designated as having undervalued currencies. The Ryan-Murphy bill has more than 127 co-sponsors, including 37 Republicans.

Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi (D., Calif.), said the House Ways and Means Committee would hold a hearing on the currency issue in September after Congress returns from summer recess.

“But no final decisions have been made on moving legislation forward,” he said.

Sen. Sherrod Brown (D., Ohio), a co-sponsor of the Schumer bill and a member of President Barack Obama’s Export Council, wrote Mr. Obama on Aug. 4, urging the administration to take tougher measures to address “unfairly subsidized exports” by countries such as China. Ten other senators signed the letter, including Republicans Jim Bunning of Kentucky and Olympia Snowe of Maine.

The Treasury Department on Wednesday declined to comment on the U.S.-China trade gap or China’s currency policy.

Business groups are expected to intensify their lobbying on the issue, although they differ over whether punitive legislation aimed at China’s currency policy is the best solution for narrowing the U.S.-China trade gap.

Augustine Tantillo, executive director of the American Manufacturing Trade Action Coalition, a Washington trade group representing U.S. manufacturers, says the group backs the Ryan-Murphy bill and is lobbying lawmakers, targeting those from Midwestern and Southeastern states with large manufacturing sectors and high unemployment.

“These trade surpluses aren’t a result of happenstance,” he said. “We’re hoping concerns about job creation and the fall election environment will finally give us an opportunity to bring the legislation to a vote.”

Erin Ennis, vice president for the U.S.-China Business Council, which represents U.S. companies doing business in China, said the window for China to “show it was serious” about addressing U.S. concerns about the yuan would close in September, when Congress returns to session.

But while Ms. Ennis expected the Chinese currency policy to be a major issue in the fall, “this isn’t our member companies’ top priority,” she said.

Rather, she said that Congress and the administration should focus on reducing barriers to China’s market and on the country’s new “indigenous innovation” policy, which many Western companies say unfairly favors Chinese companies by promoting domestic innovation.
Write to Kathy Chen at kathy.chen@wsj.com

U.S.-China Trade Gap Stirs Lawmakers – WSJ.com

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Colombia charging ahead!!!

Colombian Exports Could Reach $40 Billion In 2010 
First Published Monday, 12 July 2010 11:29 pm – © 2010 Dow Jones 
(Updates with comments from Trade Minister; adds details and background) 
By Darcy Crowe 
Of DOW JONES NEWSWIRES 

BOGOTA -(Dow Jones)- Colombian exports are on pace to reach a record-breaking $40 billion this year as companies offset a decline in exports to neighboring Venezuela by finding new 
markets in Central America and the Caribbean, Trade Minister Guillermo Plata said Monday. 

The government expects exports to climb 22% in 2010 and break the $37.2 billion mark from 2008, despite a diplomatic dispute with Venezuela that has led to a 70% plunge in sales to that country, Plata said. 

“Colombia is diversifying its exports, and in the last three months, firms have started to offset the losses to Venezuela,” he said. Venezuela has traditionally been Colombia’s second-largest  trading partner, surpassed only by the U.S. 

Venezuelan President Hugo Chavez essentially shut the border to Colombian products last year in a heated diplomatic spat with Bogota. President-elect Juan Manuel Santos has said that fixing diplomatic and trade relations with Venezuela will be one of his priorities. Chavez is slated to attend Santos’ inauguration on Aug. 7. 

Plata said that even if the new administration is able to reopen the Venezuelan border to Colombian goods, the main goal should be diversifying exports. “Putting all our eggs in one basket is very risky,” he said. 

Exports to Venezuela could also suffer even if relations are restored due an economic recession and strict currency controls. 

As a result of the problems with Venezuela, China is now Colombia’s second-largest trading partner. Plata, however, highlighted that the products Colombia used to sell to Venezuela, such 
as manufactured and agricultural goods, are being redirected to markets in Central America and the Caribbean. 

This year’s export boom, however, has been driven by sales of commodities like oil, coal, coffee and ferronickel. Manufactured and agricultural goods, among others, are down 4.5%, a 
figure that Plata says is the result of the problems with Venezuela, which was a key market for these types of items. 

“It’s actually a very good number if you consider that sales to Venezuela are down 70% and shows that other markets are compensating for the decline,” he said. 

Foreign direct investment, meanwhile, could reach $10 billion this year, as money continues to pour into Colombia’s booming oil and mining industries, Plata said. Foreign direct 
investment in the country so far this year was $4.4 billion, 8.5% higher than in the same period in 2009. 

-By Darcy Crowe, Dow Jones Newswires; (57) 1 703 8953; darcy.crowe@dowjones.com 
Copyright © Automated Trader Ltd 2010 





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