Nov
30
2011
If you missed the announcement on Thursday, November 24, China’s Domestic Foreign Exchange Market began trading the Chinese Yuan (Renminbi) against both the Australian and Canadian Dollars. This in circumstances where both Australia and Canada are said to be among China’s main trading partners, likely currently an overstatement in terms of Canada currently – but that may change over time if China’s annual GDP growth and appetite for resources continues at or close to levels experienced since 1999.
See ‘China allows yuan trading with loonie’ written by Lu Jianxin and Jacqueline Wong that was published in the Financial Post on November 24 – reading time 3 minutes. You might also want to read an article that appeared in the Huffington Post on November 13 titled ‘Keystone XL Pipeline: Canada Eyes Asia After U.S. Delays Project’ – reading time 2 minutes. My view on the commentary in the latter article: Subject to extraction costs and methodologies, there is an abundance of oil in Canada’s Oil Sands. Subject to issues around Canada:U.S. relations, I see no reason why, over time, oil from Canada’s Oil Sands will not be shipped to both the Chinese and U.S. markets. ‘Over time’ might mean over the next few decades, not years, in this context.
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Nov
22
2011
A recent article published on Commodity Online says ‘China’s automobile sector to grow 15% annually till 2016’ – reading time 2 minutes. The compound growth rate reported in the body of the article is 15.9%, from revenue of U.S.$386 billion in 2011 to revenue of U.S.$806 billion by 2016. I recalculated the numbers to satisfy myself that a 15.9% compound growth rate over a five year period indeed results in a slightly more than doubling of revenue from the current reported annual revenue amount – it does.
The article reports this 15.9% is down from the reported average auto manufacturing revenue growth of 23.9% experienced over the past five years. That said, 15.9% on a larger ‘base number’ is far more when expressed in absolute dollars than is 23.9% on a much smaller ‘base number’. To put that in perspective, I calculated what China’s base auto manufacturing revenue must have been in 2006 for a 23.9% compound growth rate to be realized through 2011. The answer: U.S.$132 billion. This means that over the past 5 years China’s auto manufacturing revenue has increased by a ‘simple average’ of about U.S.$51 billion, but is expected to increase over the next five years by a simple average of about U.S.$84 billion – or an increase of about 65% per year based on simple average comparisons. I have made these calculations and included them in this commentary to once again demonstrate that the ‘devil is in the detail’, and that reliance on percentage comparisons (which is how most economists report and seem to think) often is misleading in the context of ‘absolute numbers’.
The foregoing is combined with a statement in the article (which I have read similar versions of elsewhere) that “China surpassed the United States as the largest automobile market in the world in 2009”. To me this suggests that ‘all things equal’, and depending on the validity of the underlying world and Chinese specific macro and micro economic assumptions used by IBISWorld (the group reported by the article to have generated these statistics and forecasts), China’s appetite for the automobile (and presumably other on and off-road vehicles) will be positive for steel, zinc, and other auto-required resources demand through at least 2016.
All that said, I nonetheless suggest you read the previous paragraph very carefully. Unless forecasters clearly state the underlying macro and micro economic forecasts on which any specific forecast (autos or whatever) are based, or commentaries that re-report those forecasts don’t state the forecaster’s underlying macro and micro economic forecasts, forecasts as reported are really for the reader a form of ‘unsubstantiated report’ that while interesting, ought to be researched further if they are important to one’s investment strategy and analysis. Something to think about as you read media reports and commentaries.
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Nov
22
2011
And something more pertaining to China.
I think a recent article by Christopher Cundy in the OilPrice Blog titled ‘China`s Economy Threatened by Water Shortages’ – reading time 3 minutes – makes a short, interesting, and informative read. In summary, the article says that 9 of China’s 31 Provinces “suffer from extreme water scarcity” and 11 are very water inefficient. Taken together, that is about 2/3rds of China’s Provinces. The article also says that 14 of China’s Provincial economies “could be at risk from water stress” in circumstances where they are heavily reliant on manufacturing.
It strikes me that this is something that not all investors and traders are likely to know about. Yet it is something that, given the current importance of China’s economy to the world economy generally, and to (as I see things) the base metals and oil industries in particular, investors and traders ought to be alerted to and kept informed about.
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Nov
21
2011
There has been, and continues to be, increased speculation and suggestion that China’s economy is going to ‘come a cropper’ going forward, and as a result will experience either a ‘soft’ or a ‘hard’ landing. For me this is a highly complex and important topic that I readily admit to not fully understanding. That said, when I come across what I think are useful and reasonably balanced articles I pass them along and comment on them in these e-mails – and will continue to do that.
An article Sunday by Yuhan Zhang in the Vox Blog – a self-proclaimed ‘Research-based policy analysis and commentary from leading economists’ blog – falls into this category. I have been able to find little background on Yuhan Zhang, other that he is said to have an affiliation with the ‘Carnegie Endowment for International Peace’.
In any event, this article crams a lot of well presented information into comparatively few words, and I strongly recommend you take the time to read it. I say this given what I see as the importance of China’s continued infrastructure and general economic growth to (1) base metal and other commodity prices in particular, and (2) act as a bridge to economic recovery in the developed countries. Titled ‘China’s economic growth ‘miracle’ and its outlook by 2020’ – reading time 4 minutes – in summary this article says that (my order of importance):
- China’s average GDP growth rate going forward is expected to be in the order of 7.8% per annum. My comment: 7/8% is not as high as 9.5%, China’s approximate average annual growth rate in recent years. That said, 9.5% is a long way from 0% – and has to be seen as astonishing annual GDP growth by any developed country standard;
- it is continued high national savings that fully finances Chinese investment and sustains it, and high profit profits of state-owned enterprises re-invested into capital-intensive projects should “keep the ball rolling for quite a long time”. My comment: this is a clear differentiator between what is going on in China and China’s potential economic growth as contrasted with America, European countries, and other developed countries. The developed countries have borrowed extensively against their respective futures, to date China has not. Two analogies come to mind:
- the first is to a group of people sitting around a Monopoly Game Board where one smart, young, focused and sober player has comparatively few properties but most of the paper Monopoly money, while all the other players are likewise smart, but are much older, tired, confused, not particularly well focused, have had somewhat too much to drink, and have only properties that pay comparative low rents and have little paper Monopoly money left. The outcome of that Monopoly Game is virtually certain. What happens in real life in a fiat currency environment may not be quite so certain, but a similar outcome is hard to bet against if you have an opportunity to make but one bet. One other important difference between ‘Monopoly Game fiat currency’ and ‘real world fiat currency’ is that at least ‘Monopoly Game fiat currency’ is finite in amount. I say that with a wry smile, and
- the second is, of course, to the old saying ‘he who owns the gold makes the rules’. It seems to me the question in the context of China and the developed countries then has to be: does ‘he who owns the fiat currency (read Monopoly Money) likewise make the rules’. Time will tell on that one;
- contrary to what is generally thought, and not withstanding that China’s export boom after 2003 has been “spectacular”, China’s economic growth since 1978 has been driven by internal investment, not by exports. My query: is it coincidence that China’s growth is said to have begun in a serious way after 1978, in circumstances where it was immediately after 1978 that the developed countries faced their highest ‘modern-day’ inflation rates when interest rates in America, Canada, and elsewhere exceeded 20%?;
- fixed capital formation (read infrastructure) has risen in China from 30% of GDP in 1980 to 47.5% of GDP in 2010, and continues to grow. My comment: it is not clear to me from the article whether ‘continues to grow’ means only in absolute Renminbi terms, or means as a % of GDP. Obviously if China’s GDP continues to grow, and the % of GDP spent on Infrastructure remains the same, more Renminbi will be spent on infrastructure each year. However, if GDP grows and the % of GDP spent on infrastructure continues to grow, even more Renminbi will be spent on infrastructure. This strikes me as an important distinction, as Chinese infrastructure spending is a direct influence on commodity prices, including in particular oil and base metal prices;
- the flow of labour from agriculture to industry and resultant rapid urbanization and huge external demand for China’s low-priced manufactured products principally after 2003 has created China’s ‘economic miracle’. My comments:
- what has happened has happened, and I see a virtual zero probability that meaningful manufacturing can or will be repatriated to the developed countries going forward irrespective of tariff or other trade barriers that may be imposed – perhaps with the exception of what I call ‘specialized manufactured products. I understand a small example of such developed country specialized manufacturing is instances where expensive solid wood case good furniture (beds for example) are being made from ‘solid wood’ because the low-priced Chinese manufactured units are perceived not to have the same quality and durability,
- manufacturing wage rates are the key to economic recovery. I have often said in these e-mails, and again say, that as I see things manufacturing jobs add durable value to an economy, whereas broadly speaking service jobs do not. I have long believed this, and suggest if you haven’t read it, take the time to read The World Is Flat by Thomas Friedman. It seems to me that ‘manufacturing wage rates’ are a very key marker with respect to the likely long-term success or failure of any particular country economy in a globalized world. The exception going forward may prove to be the ‘natural resource rich’ countries. If I am right in this, for globalization to work there has to be a workable balance between manufacturing wage rates in low-wage rate countries, and consumer spending ability in high-wage rate countries. I would see this as more practical in a world that was politically unified than I see it in our world which is not, and is not going to be. The problem is easy to define – just look at the 17 country Eurozone today with a common currency but different country objectives and interests where agreement among countries is difficult at best;
- “over-reliance on investment and exports makes China’s economy very unbalanced, vulnerable, and unsustainable”. My comment: while that statement resonates well at first blush, I am not sure I buy into it completely. First, infrastructure investment is necessary for growth to occur, so I am not sure focus on ‘investment’ as not being sustainable makes sense. That said, reliance on exports does strike me as leaving China vulnerable if its external customer base (America, Europe, etc.) proves unable or unwilling to consume Chinese manufactured goods. I think ‘unable’ and not ‘unwilling’ may prove to be the operative word, and so I think there is risk to China on that front. However, it seems to me China has three huge advantages going forward that Yahan Zhang’s article does not discuss:
- China’s political system is not a democratic one. That seems to me likely to enable China to move forward economically without the burden of political polarization that democracies – particularly those with minority governments – continually face. Look no further than Washington today for an example of political inefficiency and continuous ‘shooting oneself in the foot’,
- China’s population is, or so I think, not one that each day wakes up with a ‘sense of entitlement’. I do not think that can be said in many, if not all, of the developed countries. I see this ‘sense of entitlement as, in particular, a serious ‘mill-stone’ hanging around the necks of young people in the developed countries, and
- the Chinese political leaders have a wonderful opportunity, which I expect them to take advantage of, to analyze ‘what went wrong economically in America, Europe and elsewhere. I expect China to learn from ‘the mistakes of others’, as they go about positioning and building the Chinese economy for the benefit of China and its people;
- Chinese investment in infrastructure leads to more and more internal Chinese debt assumed by ‘local quasi-government agencies’ (whatever that means). At the same time, local governments repay debt through household wealth transfers. Hence it is unlikely these local agencies will go bankrupt. Household wealth transfers, among other things, may result in difficulties in China transitioning to a consumer based economy. My comment: while this is possible, it strikes me as far to early to reach such a conclusion based on current world economic uncertainties, and given the background comments in Yahan Zhang’s article;
- China has identified seven emerging strategic industries and “has the fiscal resources to massively invest in them” (paraphrased). From another source (see an October 2010 HSBC Global Research Paper titled ‘China Strategy’ – reading time 10 minutes) these are (1) energy-saving and environmental protection, (2) next generation information technology, (3) bio-technology, (4) high-end manufacturing, (5) new energy, (6) new materials, and (7) clean-energy vehicles. My comment: this list doesn’t strike me as being very different than the U.S. new business development agenda. The critically important difference as I see it? – the U.S. has spent liberally to support its past, China is in the position to spend liberally to support its future;
- China’s manufacturing exports may face challenges after 2014, and imports then or at some other future date are “likely to rise faster than exports”. My comment: that is exactly what one would expect in an economy that successful transitions from an export economy to an internally supported consumer economy.
All in all, I think an interesting article, and one I recommend you read.
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