22 September 2010
Jim Willie CB,  “the Golden Jackass”






Special Report #1

"The 21st Century will be the American Century." ~ Barack Obama (this week at Town Hall Meeting, failing to notice movement by the United States into Third World)

"The 2010 Decade will be dominated by China in a great awakening." ~ Jim Rogers (successful independent investor and sage global trend observer)

CHINESE WEALTH, TRADE WAR & FIAT VIRUS

Take a brief tour through China, and cover a reasonably diverse set of representative stories. This report is a brief look, an update on the ongoing mystery that is China. It reflects great challenges from eroding Chinese wealth tied to the US$ wagon, without going into detail on the banking issues. It describes some recent inroads made by China into South America, building partnerships. It gives some recent glimpses to the trade war ramping up relentlessly with the USGovt, guaranteed to inflict great damage. It covers the rapidly deteriorating relations with Japan, concealing the rivalry and urgent need to keep the Yen currency down. The USGovt aggravates much of the friction with empty headed laws. It brings to light some infections from the fiat currency virus, like millions of empty homes, apartments, and buildings. The emphasis in keeping job growth brisk has yielded enough empty homes to house entire small nations. China has begun to flex its muscles, but some important weak spots show visibly. These are growing pains, if not childbirth pains.

◄$$$ EMPTY PROPERTY IN CHINA COULD CONTAIN AN ENTIRE SMALL NATION OR TWO OR THREE, OR HALF OF AMERICA. THE PLAN TO EMPLOY PEOPLE HAS GONE HAYWIRE. OVER 60 MILLION HOME UNITS REMAIN EMPTY. ENTIRE DEVELOPMENTS AND BUILDINGS ARE VACANT. PRICE CRASHES ARE IN PROGRESS. $$$

The quip byline is that enough vacant properties lie empty in China to house over half of America, or a couple small nations. Sad but true. The Beijing and Shanghai authorities have investigated the high vacancy rate for Chinese prope rty. Finance Asia reports that 64 million apartments and houses have remained empty during the past six months. Make the assumption that each unit serves as home to a typical Chinese family of three. Then the vacant properties could accommodate 200 million people, which accounts for 15% of the 1.3 billion national population. But instead, they remain empty, a grotesque imbalance. For cultural reasons, few prefer to rent. Most prefer to own. Their stock market has given investors huge headaches from topsy turvy times, often under pressure. The interest paid on bank deposits comes nowhere near coverage to offset price inflation. So the tendency is to purchase a new property, sometimes as a place to store their wealth. In all too many cases, finding a renter is not an objective. Extapolate the conditions and behavior by a few hundred million, and the result is enough vacant properties to house over half of America. See the Business Insider (CLICK HERE). This neighborhood shown in the picture is empty.

◄$$$ WATER SHORTAGES HAVE REACHED CRISIS LEVEL IN CHINA. THE NATION HAS NEVER BEEN BLESSED WITH AMPLE WATER RESOURCES. THE DAWN OF INDUSTRY HAS MADE THE PROBLEM WORSE. $$$

In northern China, vast farm fields have developed cracks up to 10 meters (33 feet) deep. They resemble desert lands of Africa. Many farmers in Chifeng city have had to delay harvests in order to avoid injury. According to the Chifeng's water bureau, 62% of the city's 51 reservoirs have run totally dry. More than 250 thousand people are short on drinking water. In the southwest Guizhou province, a drought affected more than 600k people and nearly 250k head of livestock in August. Parched soil in rice fields aer covered with cracks in entire regions. The officially estimated water shortage in Beijing will soon reach 200 million to 300 million cubic meters, even as the city waits for a new diversion of water supply from southern China. The donation comes from areas that will suffer shortage as a result, but Beijing has power and pull. Hundreds of other Chinese cities face varying levels of water shortages and water quality in deterioration, even as industries continue to pollute water. See the CNN article (CLICK HERE). Industrial development places great strains on a nation's water systems. Fresh sources are needed, and filthy contaminants from effluent must be processed. China has neither the advantage of natural supply nor mature processing methods in place. Toxic water levels, major health problems, and public demonstrations have resulted. The leading nations in the world for fresh water supply are Canada and Russia. Wars have been fought over water. Wars were routine in the Old West during frontier times over water.

◄$$$ EXPANSION INTO SOUTH AMERICA CONTINUES IN GREAT STRIDES. THE CORE OF LATIN-SINO TRADE WILL BE BRAZIL. A GIANT PORT FACILITY IS UNDER CONSTRUCTION. THE USGOVT INVESTS IN DEAD BANKS, WAR & NARCOTICS, BUT CHINA IN TRADE & FACILITIES. $$$

Brazil's huge new port highlights the Chinese determined initiative into South America. The infrastructure investments guarantee to them access to soy, crude oil, and other vital resources. The Sao Joao da Barra port will be the largest in Brazil with capacity to handle the largest ships in the world. Its giant concrete pier juts nearly two miles out into the South Atlantic and boasts an unusual nickname, the Highway to China. Even Mandarin language facilities have been set up locally. The entire Superporto do Acu is a $2.4 billion port and industrial complex on the Rio de Janeiro coastline. It might qualify as the largest industrial port complex of its type in the world. It surely is the most visible symbol of China's rapidly accelerating drive into Brazil and South America. Initiatives such as this will lock in access to important natural resources and its bolster commercial support base in the developing world. Chinese companies such as Wuhan Iron & Steel have committed to assist in building a $5 billion steel mill at the port complex. The Brazilian logistics company LLX is in line to receive $billions in Chinese investment. Millions of tonnes of iron ore, grain, soy, and millions of barrels of oil are expected to pass through the superporto each year on their way to Asia. While the supply will do much to quench their hunger for natural resources, the flip side is that the supply will not reach the United States. Consider it another link in the chain that strangles the US, whose government is far more interested in bank welfare, war seizures, and the narcotics business.

China is soon to become Brazil's top foreign investor. Its companies benefit from the Chinese plowing of $20 billion in the first six months of 2010, compared with $83 million in 2009, a 240-fold rise. A recent study by DeLoitte predicted that Chinese investments in Brazil could hit an average of about $40 billion per year between now and 2014, with Chinese funds targeting sectors in telecommunications, infrastructure, farming, oil, biofuels, natural gas, mining, and steel manufacturing. Other South American nations are in Chinese focus also. Ecuador has signed $5 billion of bilateral deals with China in year 2010, including $1.7 billion toward construction of a hydro-electric dam and $1 billion investments for oil exploration and infrastructure projects. That compared with Chinese investment of only $56 million in 2009. Chinese companies directed $1.4 billion into Peruvian mining operations in year 2010. Even rogue nations are lined up. In April Hugo Chavez announced that the Chinese Govt has established a $20 billion credit line toward the so-called Bolivarian revolution. They already have large stakes in the oil industry. It will be interesting to see how China reacts to basic fraud, theft, and crony payola that are routine by the Chavez Gang.

Michael Klare, author of books on Chinese pursuit of global resources, believes China has deployed an aggressive strategy that goes far beyond business transactions. They are building partnerships. He said "[China is] the shopaholic of planet Earth... The Chinese authorities understand that to sustain the country's continued growth, they will have to ensure that its industries are provided with adequate supplies of energy, minerals, and other basic raw materials. They seek to fashion a multi-polar world in which no single power (read the United States) plays an overwhelmingly dominant role. To this end, they seek to bolster ties with rising regional powers like Brazil and South Africa... There are many in Washington who worry about China's growing presence in Africa and Latin America. They claim that this poses a threat to America's long-term strategic interests." For clarity, Klare openly noted that the USGovt fixation with Afghanistan and the war on terror meant there had been virtually no reaction to inroads made in Brazil. Minor dissent is indeed heard in Brazil, from critics like the prominent economist Antonio Delfim Netto. He complained of Chinese neo-colonialism, pursing a strategy to purchase Brazil after having bought Africa. See the UK Guardian article (CLICK HERE).

◄$$$ LIGHT BULB PRODUCTION HAS GONE TO CHINA, AS A RESULT OF A USGOVT ENERGY CONSERVATION BILL, UNINTENDED CONSEQUENCES BY DIMWITTED POLITICIANS. WATCH FOR NUMEROUS TRADE WAR ADVANTAGES IN THE CHINESE CAMP, AS A RESULT OF SLIPSHOD MYOPIC USGOVT LEADERSHIP AND OPTIMAL CORPORATION DECISIONS. $$$

The Most Favored Nation status given to China in 1999 was a watershed event. The light bulb story makes for another late chapter in the saga. The last major General Electric factory making ordinary incandescent light bulbs in the United States is closing in September. The product is the flagship discovery traced to its roots, whose inventor was Thomas Alva Edison in the 1870s. One of the greatest inventions in world history, by one of the world's greatest inventors, will soon be manufactured by GE plants in China and other plants overseas. Many such US plants became instantly vulnerable as a result of a 2007 energy conservation bill passed by the USCongress. It set standards that essentially banned ordinary incandescent bulbs by 2014. The law will require millions of American households to switch to more efficient bulbs. The resulting savings in energy and greenhouse gas emissions are expected to be immense. But the move also had unintended consequences. The leading product to replace the older light bulbs are called compact fluorescents, or CFLs, made almost entirely overseas, mostly in China. Finding themselves at the unemployment line will be 200 workers from a GE plant in Winchester Virginia. Jobless Americans can use Chinese made bulbs.

The story reveals the incredible stupidity and disconnect of the USGovt. The USCongress is inhabited by lawyers, elite scions, and freaks who often know nothing about engineering, chemistry, manufacturing, or business development. They passed a law to satisfy a political agenda without even bothering to consider the impact on the USEconomy. Myopia is thicker than a Mr Magoo cartoon, as the legislators grandstand to proclaim that the new clean energy policies will create jobs. It will, in China. One is reminded of the California high speed railway project that resulted several months ago in significant jobs for Chinese workers that satisfied the specific contract provisions. The epitaph is simply written. An industry that has flourished in the United States for over a century, founded by an American genius, has now been entirely outsourced overseas, one more nail in the coffin for the US manufacturing base. Neither US economists nor politicians have a freaking clue about business development, job growth, or anything selfsame. They deserve every harsh criticism doled out by the Jackass in recent years, who is actually too kind. Their corruption is exceeded by their stupidity. See the Zero Hede article (CLICK HERE) and the Washington Post article (CLICK HERE). Although not a Chinese fiat virus story, it is a flip side US fiat virus story.

◄$$$ TRADE WAR FRICTION HEATS UP. WHILE FAR FROM A CLIMAX, PLENTY OF HEAT IN DISPUTES OVER LACK OF CURRENCY EXCHANGE RATE ADJUSTMENT AND VAST ACCUMULATION OF RESERVES. THE USGOVT IS LEADERLESS, HELPLESS, AND A VICTIM OF ITS OWN HORRENDOUS POLICIES OVER A FULL DECADE. $$$

The US Treasury Secy Tim Geithner has issued his harshest attack to date on the Chinese currency policy, the latest skirmish between the superpowers. The intensity has risen in US attacks, but the theme is the same, amidst no change. Geithner appears as a minor caricature figure who does not fill his own chair and whose voice squeaks like a boy. The USGovt displays its weakness and fumbling actions. The USCongress conducts regular meetings to discuss Beijing's usage of exchange rate fixing (as in narrow bands) for trade advantage. The pace of Chinese Yuan climb is painfully slow, which permits continued strides for China's export sector. It encourages outsourcing of production and jobs from the United States, but often with full indirect encouragement by the mindless members of the USCongress and active investment by US corporations in recent years. Recent friction has come over steel producers and credit card companies. More grievances are piling up in tires, aluminum, paper, and steel. The consensus has firmed that the US and China are adversaries, not enemies, but if the Obama Admin continues to pushes the trade agenda, the relationship will turn more hostile and antagonistic. Open hostility and blatant conflict with nasty damage is certain, like next year.

◄$$$ CHINESE RELATIONS WITH JAPAN HAVE TURNED EXTREMELY SOUR. THE SURFACE STORY IS TERRITORIAL DISPUTE. THE UNDER-CURRENT HAS TO DO WITH ASIAN DOMINANCE AND BEIJING BANKERS LIFTING THE YEN CURRENCY DURING RESERVES DIVERSIFICATION. THE AREA OF THE INCIDENT IS HOTLY DISPUTED, A STRING OF INTERMEDIATE ISLANDS. $$$

Tensions betwen China and Japan have escalated suddenly and sharply. In fact, the Chinese Govt has broken off high level diplomatic contacts. Incidents have occurred where the Japanese flag has been burned in public places without restraint. Last Sunday, China broke off high level government contacts with Japan, as the Associated Press described, "over the extended detention of a [Chinese] fishing boat captain arrested near disputed islands. The rare move pushed already tense relations to a new low, and showed China's willingness to play hardball with its Asian rival on issues of territorial integrity... Beijing has suspended ministerial and provincial level contacts, halted talks on aviation issues, and postponed a meeting to discuss coal." The Chinese fishing vessel collided with two Japanese Coast Guard boats in the East China Sea, a territory claimed by both countries. The boat's captain was arrested on suspicion of deliberately ramming the official vessels. The captain has been detained, charges pending, as the situation has been inflamed.

This all occurred ironically at the anniversary of the 1931 Japanese invasion of China. The reaction by Beijing has been swift and forceful, indicative of its newfound muscle and perceived prestige. Chinese Premier Wen Jiabao has threatened further action against Japan unless the Chinese sea captain is released. The boat was seized in waters long disputed in territorial resource battles. Wen charged Japan for full responsibility in the entire incident, demanding his immediate and unconditional release of the captain, in order to bring bilateral relations between China and Japan back on track. The Chinese leader canceled a planned meeting with Japanese leaders at a United Nations summit in New York. The meeting between Wen and his Japanese counterpart Naoto Kan on the sidelines of the summit was deemed inappropriate. See the Zero Hedge article (CLICK HERE) and the BBC Asia-Pacific article (CLICK HERE).

The Senkaku Diaoyu Islands where the incident occurred lie north of Taiwan and south of the Japan's Okinawa prefecture of Japan. The island chain extends all the way to Taiwan. The area contains rich fishing grounds and probable oil & gas deposits. The location highlights the scarce resource battle in the region. Under the surface are two major areas of friction. Japan has been for four decades the undisputed powerhouse in Asia. Its manufacturing base, excellence in factory production processes, consistent innovation, and annual sizeable trade surpluses brought it prestige. Like the Americans, the Japanese gave China a great deal of technology free, in the hope of building partnerships. The exchange was done through subsidiary corporations in a transition toward Chinese ownership, the same reckless model employed as with the US corporations.

A great rivalry has developed, as China has doubled Japan in its total reserves wealth, and surpassed Japan in USTreasury Bonds owned. Tokyo has the cooperative ear of the US bankers, but Beijing sits opposite a chess board from the same US bankers. The Tokyo clan actually act more like US lackeys. The Beijing clan is fiercely independent, to the contrary. The other immediate issue extends from the diversification underway by China away from USTreasurys, and toward to a greater extent the Japanese Govt Bonds. Their move has strengthened the Japanese Yen currency, a VERY unwanted development. Beijing allocations have actually helped to weaken the Japanese export trade which is vulnerable, to the anger of Tokyo political and banking leaders. China does not back off. They have a deep war chest with which to weaken Japan and retain dominance, a strange angle indeed!! Their primary motive is preservation of assets, but the Yen currency is a casualty in the line of fire.

◄$$$ SOROS CLAIMS CHINA RUNS THE WORLD, WITH GROWING POWER AND INFLUENCE. IT IS THE INDUSTRIAL SUPPLY ENGINE. A GREAT POWER SHIFT IS IN PROGRESS, AIDED BY REFUSAL TO MAKE THE CHINESE YUAN CURRENCY FULLY CONVERTIBLE. THE YUAN'S CONTROLLED EXCHANGE RATE ENABLES CONTINUED LABOR ARBITRAGE, BUT WITH HUGE FIAT VIRUS PROBLEMS LOCATED IN RESERVES (SAVINGS). ANY TRADE SANCTIONS WOULD RENDER GREATER HARM TO A VULNERABLE USECONOMY. HENCE THE STRAINS AND CAPITAL DRAIN CONTINUES. $$$

George Soros might be a duplicitous type, but he is brilliant. My only question is of his deeper loyalty, hidden grand positions, and public sincerity. He offers a great summary of the Chinese chpater being written. Here are his views. China has become the industrial engine that runs the world, relegating the United States to second fiddle in both economic power and global influence. Soros said, "The shift is phenomenal. I have never seen anything like it. There is no parallel because the rise of power typically takes decades." The US financial crisis accelerated the power transfer by shutting down the US consumer, whose voracious consumption demand powered numerous upstart economies. After a full decade, China finds itself in the driver's seat of a global locomotive running on a supply side engine. The transfer of wealth is the direct result of the US willingness to consume more than it produces and Chinese willingness to produce more than it consumes, Soros explained succinctly. China received tremendous Western aid in the form of investment capital and technology transfer to accumualte the wealth generated by its cheap labor. The end result is Western poverty and Chinese wealth, much to the surprise of ignoramuses occupying economist chairs and banker thrones.

A key element of the process has been the benefit to the state by keeping its currency undervalued through a peg to the USDollar, Soros believes. Very true, but even with a much higher Yuan currency exchange rate, the vast difference in wages would still power a significant wealth transfer, just not as quickly. Soros believes if China were to allow its currency to be traded in global markets, it would replace the USDollar as the premier global currency easily. However, China does not want such reform since the change would destroy the machine, in his words. As a result, a more gradual change is more likely to result from increased domestic consumption inside China, from changed culture, the maturity of a new generation, as growing national wealth translates into increasing wage expectations, he expects. He calls the US helpless to do anything meaningless to force a quicker liberalization of China's currency policy. Trade sanctions as part of a wider trade war would be destructive to both sides. Furthermore, Chinese officials realize that the USEconomy is in a weaker position, and cannot afford a trade war. The massive holdings of USTreasury Bond debt provides great leverage for China. See The Street article (CLICK HERE).