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News, China, Currency And A New President?

By John Dietz - Email Editor

Date : 17-April-2007

Dear Subscriber:

If you are a “one in a million”, then you have 1,300 people just like you in China.
--Thomas Friedman

Last week I made the supposition that China was more capitalistic than any other place on earth.

Today, China is reaching out all over the globe buying what it needs and selling what it has. Economic partners can make for strange bed fellows. Venezuela’s President Hugo Chavez is working on a deal with China National Petroleum to take a 40 percent stake in Venezuelan crude projects. Chavez predicts Venezuela will soon be exporting a million barrels of oil a day to China. A recent quote from Chavez:"The United States as a power is on the way down; China is on the way up.”

On another front, forgoing a tumultuous past, China and Russia have put behind them decades of rivalry, as both oppose U.S. global dominance. At this juncture, China needs Russian oil and natural gas to support its number one spot as the world’s fastest growing economy.

In a recent visit to Russia, Chinese President Hu signed eight agreements after a Kremlin meeting, including an accord between the two countries' railway networks to enable increased oil exports to China via rail. The head of OAO Russian Railways, Vladimir Yakunin, said that China could increase Russian crude imports by rail this year by 50 percent to about 15 million tons (300,000 barrels a day).

Trade between China and Russia reached 33 billion in 2006. Russia is now a major arms supplier to China, and the two nations, which argue for a ``multi-polar world'' in which the U.S. would not have such unrivaled power, held joint military exercises last year for the first time ever.

On March 7th, 2007 the U.S. Treasury Secretary Henry Paulson arrived in Beijing to lobby high-level Chinese officials for action to end China’s controversial currency controls and rein in its bulging trade surplus. Paulson’s message comes with a caveat that if the Chinese would not consider this option, there would be significant trade sanctions.

Fast forward to April and U.S. Commerce Secretary Carlos M. Gutierrez's announcement that the U.S. is imposing certain duties on Chinese goods. The initial tariff calls for a 10.9 percent and 20.4 percent duty on Chinese makers of high–gloss paper. The calculation was done by adding alleged illegal Chinese government subsidies. This portends of a future with other trade restrictions and a possible trade war with China.

Pondering Points

Inward looking U.S. media may be to blame for trying to squeeze every last advertising dollar. Hollywood has all but supplanted hard core journalism. News was, in another lifetime, a loss leader, where events and stories were told with a Sergeant Joe Friday bend. Today, look behind the owners of the news stations and you're liable to find, well you guessed it, entertainment media companies!

As the world turns, the media has turned from Anna Nicole to Imus, and U.S. politicians are scrambling to raise money for their respective parties, all the while Vladimir Putin and his counterpart President Hu Jintao have been developing chummy relations and making their own decisions and observations about many world events.

While the U.S. is busy building walls--physical and non-physical--China has been busy with the art of relationship building and commerce. The Chinese built their walls dynasties ago and now use them for tourist attractions. Hmm. ...

Asset Protection and the U.S. Dollar

It is difficult to predict the future of currencies with any certainty. From trade deficits, budget deficits, European and Asian central bank positions, to public sentiment, in the short term, anything can happen. The only thing economists seem to agree on is that the value of the U.S. dollar will continue to go down. This scenario has played itself out with other currencies in many other parts of the world. The greenback is not immune, in fact, we may be set up for a perfect storm, and it may occur sooner than you think. Currently the Asian central banks hold an estimated $2 trillion in U.S. dollars. This represents an estimated 75 percent of their foreign reserves. China, while only part of the perfect storm for the dollar, will lower its dollar holdings, as to when and to what degree is any body's guess. It’s obvious the delicate balance between the U.S. and China has been broken.

Politics

With election time in the U.S. coming just around the corner, I offer my criteria for the next U.S. president. At minimum, my perfect president must have at least a degree in history, and a realization that foreign affairs are anything but foreign affairs.

Until next time,

John

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