Alex’s Notes: Do you still think we do not have a dollar inflation problem?

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A sinking feeling for the dollar in China
By Don Lee, Los Angeles Times Staff Writer
February 19, 2008

SHANGHAI — On a frigid winter afternoon, an old dumpling of a man with buzz-cut hair was holed up in his usual spot, the corner of a busy bank lobby here. He reached into his beige fisherman’s vest, pulled out a wad of bills and turned to the people hovering over him waiting to trade currency.

There was the young woman with 40,000 Japanese yen to exchange. Another had a stack of euros. Then an elderly couple, each clutching a handbag, sidled up to the man and asked if he would change their U.S. dollars into Chinese yuan.

“No, I don’t want dollars,” he snapped, shooing them away with a wave of his pudgy hands.

Nobody here wants the lowly American dollar anymore. Not businessmen, not bankers, not even the “yellow bulls” like this man, who has been a black-market trader for years and whose presence in the lobby of a large state-owned bank is tolerated, oddly, by its managers.

As the government has allowed the value of the Chinese yuan to rise faster against the greenback in recent months than it had before, there’s been a mad dash by many more people to sell their holdings. Money-changers are so flooded with dollars that they refuse to take any more. It’s too risky, they say, because the American currency’s value is slipping every day.

In 2007, the yuan appreciated almost 7% against the dollar, and most observers expect the pace to quicken this year. Since Jan. 1, it’s risen a further 2%.

The dollar might have fallen even faster had the Chinese government let the yuan float freely instead of controlling the daily exchange rate within a narrow 0.5% band. A dollar currently trades for about 7.16 yuan, down from a high of 8.28 in the last decade.

In recent years, the dollar’s slide has been much sharper against other major currencies, including the euro and the British pound, reflecting what many experts believe is the result of the U.S.’ borrowing binge over many years. That has left the nation deep in hock to foreigners, of which China is among the biggest creditors.

“It’s meaningless to buy U.S. dollars,” said another Chinese black-market trader whose turf is in front of the Citibank branch in Shanghai’s riverfront area known as the Bund. The currency has lost its luster, he said.

“Even the government doesn’t want it.”

It’s true: China’s central government doesn’t want too many dollars for the same reason — they are a shrinking asset. Thanks to its huge trade surplus, Beijing is sitting on the world’s largest stockpile of foreign reserves — about $1.5 trillion, much of it in U.S. dollars.

One way that the government is dealing with the dwindling dollar is by spending some of it in the U.S. through its sovereign wealth fund and other state-owned enterprises. With $200 billion in assets, China’s government investment fund bought a $5-billion stake in the Wall Street firm Morgan Stanley in December.

“No one would like assets that are depreciating. And government cannot ban people from selling dollars,” said Lu Sui, an associate professor at Peking University’s School of Economics. “That’s why experts and officials are figuring out ways like encouraging people to invest overseas, acquiring companies and resources overseas, and approving [so-called] QDII investments,” which give Chinese investors a way to put their money into overseas financial vehicles, thus encouraging them to keep their U.S. dollars.

Even as it is acting to encourage citizens to buy things with dollars, or keep them, China’s government is allowing faster appreciation of the yuan, also called the renminbi. This may seem counterintuitive, but by raising the yuan’s value, and thus making Chinese goods sold abroad more expensive, Beijing hopes to slow exports a bit. That could reduce its massive trade surplus and inflows of dollars — and the accompanying political pressure from trading partners and domestic inflation that has surged to worrisome levels.

Li Yiwen, 48, was in a hurry one day recently to exchange $10,000 that her relatives in the U.S. were wiring to her. Waiting at a Bank of China branch in central Shanghai, she was anxious to see if the money had arrived.

“Today is my second time coming here,” said the laid-off electronics factory worker on a Thursday afternoon. Li said she didn’t want to wait even a day before exchanging the currency.

Just a few years ago, Li, like many Chinese, treated dollars like the most precious of commodities.

“I thought I should exchange to get dollars whenever I had the chance,” she said. “The dollar seemed to be very valuable and hard to get. . . . People even admired us because we could easily exchange for U.S. dollars.”

As back then, many ordinary Chinese today would rather trade dollars on the black market than at banks, where lines are always long. Yellow bulls can often beat a state bank’s official exchange rate by a hair. What’s more, China’s government last year set a $50,000 limit on how much one person could exchange annually at banks.

“Many feel that $50,000 is not enough, and so they use their close relative’s ID to exchange more dollars,” said Lu Yongzhen, an officer responsible for foreign exchange at a Bank of China branch in Shanghai’s old French concession district.

These days, she said, twice as many people are coming into her branch to sell their dollars as did last year.

The heavy inflow of dollars is a strain on bank branches, too, as they have to exchange or sell them promptly to prevent excess supplies.

Many Chinese businesses face a similar bind.

He Bin, manager of Zhejiang Hexin Toy Co., an export company based in Zhejiang province, collects about $1 million in U.S. dollars every month from his overseas customers. As recently as 2006 — when the yuan appreciated just 3.25% over the entire year against the dollar — he didn’t worry about quickly converting that money to yuan. His finance department usually went to the foreign currency section once a month. He figured any extra dollars in hand could be used to buy imported materials.

“But nowadays, if we get the money in the morning, we go to the bank and convert it in the afternoon,” he said, adding that he faced an even bigger headache when it came to negotiating orders.

“Just a couple days ago, one Japanese client ordered 280,000 wooden toys from us, over $500,000 in U.S. dollars or about 4 million renminbi. . . . But the products aren’t due until June and July this year. And they want us to sign the contract in U.S. dollars,” he said. “It’s very likely that we won’t be able to make any money.”

“I wish I could only be paid in renminbi and get rid of my U.S. dollars as soon as possible.”

http://www.latimes.com/business/la-fi-cheapdollar19feb19,1,4692293.story

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Alex’s Notes: In 2008, I expect we will see China come to dominate the Gold Investment market for a handful of reasons.

• The Chinese stock markets are at a high, and smart Chinese investors will be diversifying before continued corrections
•  Chinese culture has a history of great respect and desire for gold
• The new Chinese middle class has ever increasing disposable income, and the Chinese are by nature savers
• Recent legislation allowing Chinese civilians to once again own gold
• China’s Central Bank actually encourages its citizens to save in gold

The spot gold price at the London Gold Exchange reached $950/oz on Thursday; and it is very likely to hit the psychologically important $1000/oz barrier in the near future. The Chinese marketplace has attracted a lot of attraction as China’s increasing gold demand is said to be an important factor in the recent rise in the price of the commodity.

The World Gold Council (WGC) together with the Shanghai Gold Exchange released a joint announcement on February 21^st declaring that Chinese gold demand surged by 26% over the previous year to reach 326.1 tons in 2007. China has now overtaken the US and Turkey to become the world’s second largest gold consumer with only India consuming more gold annually.

The strong demand has come from both jewelry buyers and investors. The announcement also revealed that demand for gold jewelry climbed to 302.2 tons, the first time it has exceeded 300 tons in the past ten years. Gold transactions in 2007 at the Shanghai Gold Exchange rose by 57.53 tons to reach a record high of 1,828 tons, a 46% increase over the previous year.

2007 saw the Chinese gold market run smoothly allowing for the significant increase in the number of transactions. The average trade amount reached 316.49 Yuan, soaring by 62.51%, the average weight of daily trade was 7554.26 kilograms while the biggest day of trading peaked up to an impressive 24767 kilograms.

Chinese gold consumers may now choose from an increasingly long list of products, ranging from gold coins and gold bullions, to 24k or 18k jewelry. The prosperity of the gold industry indicates the perceived investment, artistic and emotional value with which a growing number of Chinese consumers are now associating gold. Larger incomes, brought about by China’s rapid development have also made a significant contribution to the rise in consumer demand.

Chinese buyers seem unfazed by surging world prices as they continue to invest in gold which they see as a safe haven from the depreciating RMB and the turbulent stock market. These factors have created a new boom for gold investment inside the country with the total amount of gold retail sales reaching 23.9 tons, a 60% rise over 2006.

“2007 is a good year for gold. China’s continuously growing economy provides us with a perfect opportunity to explore the market potential.” Said Zheng Lianghao, General Manager of WGC Far East

Shanghai Gold Exchange’s Chairman, Shen Xiangrong believes that that on the whole, domestic gold prices fluctuated simultaneously with international prices in 2007. The domestic gold price rose 22.16% from 158.99 at the beginning of the year to 194.22/g at the end of the year. 2007 also saw the Industrial and Commercial Bank of China, the Industrial Bank, the Shenzhen Development Bank, the Hua Xia Bank and the Kunming City Commercial Bank successively kick-off their gold agency services for individuals so that both the number of individual accounts and the amount of gold traded rose significantly. In 2007, the amount of gold traded by individuals skyrocketed to 17.33 tons, a 185.03% increase over 2006. This has happened as more and more commercial institutions are also investing in the gold market; commercial banks and investment companies in particular are becoming major forces in the domestic gold market.

As China’s gold market and gold consumption has increased, its official gold reserve has also drawn attention. Figures show that the gold reserve of the central bank remains steady at about 19.29 million oz. Soaring gold prices seem to have had no effect on the bank’s investment strategy.

With the founding of the China Investment Corporation (CIC) in October of 2007, rumors among industry insiders suggested that the CIC should invest in gold. Yet nothing of the sort has happened, and the CIC does not seem to have put gold on its investment list.

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http://www.chinastakes.com/story.aspx?id=218

Alex’s Notes: Many analysts are saying that commodities are ‘topping’ but I dont think so. If you take into consideration that commodities demand has been driven by the USA for over 50 years, then consider the differences in population, the ratio of commodity demand as Chinese consumers with disposable income coming online is quite huge.

Think of it like this:

USA - 175 million Consumers
China -1.2 billion Consumers

By that simple ratio alone we could see demand 6.85 times as high as what happened with the US economic rise.

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By STEVENSON JACOBS – 17 hours ago

NEW YORK (AP) — Soybean futures continued their upward climb Friday, hitting a new record as investors bet that dwindling stockpiles coupled with growing demand in China will keep prices high. Wheat also rose.

Other commodities traded mostly higher, with heating oil futures rising amid a snowstorm in the Northeast and silver reaching its highest level since 1980.

Soybean prices have surged more than 15 percent this year, driven higher by poor harvests around the globe and growing Chinese demand for the beans used to feed people and livestock. Last week, China announced that bad winter storms had severely damaged 40 percent of the country’s rapeseed crop, increasing expectations that the country will boost buying of soybeans to make up the shortfall.

“You’ve seen a lot of headlines about China’s needs lately and that’s having an impact. They’ve got a growing demand for edible oils with their growing population and the Olympics coming up,” said Elaine Kub, grains analyst with DTN.

Soybeans for May delivery jumped 13.5 cents to settle at $14.3825 a bushel on the Chicago Board of Trade, after earlier rising to an all-time high of $14.40 a bushel.

Soybean prices shot up nearly 80 percent last year and are poised for another stellar performance in 2008. U.S. exporters have already sold more than three-quarters of the soybeans the Agriculture Department predicts for the whole marketing year, which ends in June. Although current supplies appear ample, analysts say the market is headed into a downward trend and that farmers need to plant more soybeans than last year — when an ethanol boom led farmers to favor planting corn acres over soybeans.

“There’s no reason to believe prices will fall significantly unless Brazil and Argentina come up with significantly more (soybean) production than expected,” Kub said.

Other agriculture futures traded mixed. Wheat for May delivery gained 19 cents to settle at $10.645 a bushel on the CBOT, while March corn fell 2.25 cents to settle at $5.2225 a bushel.

In energy markets, heating oil futures advanced Friday, driven up by the snowstorm blanketing the Northeast. Heating oil for March delivery jumped 2.49 cents to settle at $2.763 a gallon, after earlier rising to a contract-high of $2.7860 a gallon.

Other energy futures traded mixed. Light, sweet crude for April delivery rose 58 cents to settle at $98.81 a barrel on the Nymex on concerns about potential supply disruptions and cold weather. Meanwhile, March gasoline futures rose 1.17 cents to settle at $2.5337 a gallon.

In precious metals, gold for April delivery fell $1.40 to settle at $947.80 an ounce on the Nymex.

Other metals traded mixed. March silver surged to a 28-year high of $18.195 an ounce before easing back to settle at $18.035, still up 8.5 cents. March copper fell 2.10 cents to settle at $3.7895 a pound.

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Alex’s Notes: This is an ongoing in issue in every major country around the world right now. The only way to stop inflation is to stop printing money.

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Yesterday the China Daily published an interesting editorial on inflation that may indicate what the concerns are among at least part of the leadership. Here it is in total: Early reports of shocking price hikes in areas hardest-hit by the bitter snowstorms might have made it relatively easy for the public to swallow a 7.1-percent consumer inflation in January. Given the severity of the supply shock caused by the worst snowy weather in at least half a century, a short-term acceleration of inflation at this level, though the highest in a decade, is still an acceptable result of the Chinese government’s efforts to curb overall price rises.

Had the authorities not tried hard to increase food supplies and introduced stopgap price controls on a number of daily necessities before the snowstorms, the consumer prices may have gone through the roof. On back of a 6.5-percent headline inflation in December, it took a lot of endeavors to limit growth of the consumer price index to 7.1 percent in January when both snowstorms and the coming Chinese New Year were significantly pushing food prices up.

However, while they can breathe a sigh of relief for managing to cope with short-term inflation factors, policymakers should not stop fixing their eyes on long-term inflation. Aggressive price measures that the authorities have adopted will continue to take effect and thus slow price hikes in the near future. But the country’s inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.

The acceleration in inflation has so far been predominantly driven by food. But that does not mean the current round of inflation will be short lived if the supply of food can be raised. While food prices surged by 18.2 percent year-on-year, non-food price inflation remained low at 1.5 percent in January. The slow rise in non-food prices is rather a source of increasing inflationary pressure than a reassuring check on further inflation.

The surge in producer prices which jumped 6.1 percent in January, the fastest growth in more than three years, indicates that rising energy and food costs are considerably pushing up manufacturing costs. Besides, the enforcement of higher environmental and labor standards will add to companies’ costs. Hence, non-food price inflation is already in the pipeline. The complexity of China’s growth prospects this year makes it very difficult for policymakers to fight an all-out war against inflation. A tightening monetary policy is essential to preventing serious inflation. But it may also risk slowing the growth of the Chinese economy by too much as a US slowdown or recession weighs increasingly heavily on the country’s export sector.

The policymakers should certainly be forward-looking and prepare for the possible downturn. Yet, an inflation rate above 7 percent currently warrants more concerns over entrenched inflationary pressures than worries about a temporary farewell to double-digit economic growth.

I think there are at least two very interesting points about this article (besides the fulsome but perfunctory praise about how well the authorities have handled the inflation problem so far). First, the author seems less than confident that inflation is merely a short-term food problem. Clearly he is worried that the inflation genie has already been let out of the bottle and that inflation is spreading to other parts of the economy.

Second, he acknowledges the complexity of the economic issues surrounding financial policy-making, but he says emphatically that “the country’s inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.” As I understand it, “structural imbalance” almost always means the currency regime and the associated monetary consequences. I am not sure what “properly and promptly” mean, but interest rates have been rising, reserve requirements have been rising, and the currency is appreciating more quickly. Either he means something else must be done, and soon, or he is arguing that the recent hints of a policy reversal (actually a lot more than just hints) are ill-considered and Chinese policy-makers must go back to the grim spirit of the October Economic Conference.

Either way I read this as suggesting that the internal policy debate is fierce and far from resolved.

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http://seekingalpha.com/article/65459-china-s-inflation-debate-fierce-and-unresolved?source=d_email

China Gold Demand Now Second Largest in the World
Monday, February 18, 2008

In 2007 China surpassed the USA to become the second biggest retail gold market in the world after India. Total consumer demand in China’s mainland, Hong Kong and Taiwan reached 363.3 tons, an increase of 23.5 percent from 2006, the World Gold Council indicated in a research report.

To put that figure into perspective 363.3 tons, is equal to 10,596,250 troy ounces of gold, at today’s gold price of approximately $900 US that is $9,536,625,000 US Dollars worth of gold.

Mainland China gold demand, including gold jewelry and retail gold investment, reached 326 tons, an increase of 26 percent from 2006. This is the first time it has surpassed the 300 ton level. The gold jewelry demand in mainland China reached 302 tons in 2007, a year on year growth of 23.5 percent. Gold Jewelry and other ornaments have always been a form of savings in China since time immemorial.

India which has the world’s largest gold demand had a gold demand of 773.6 tons in 2007, while the US now in third place had a gold demand of 278.1 tons.

“Encouraging civilian reserves of gold has strategic significance and economic value,” said a director of the Peoples Bank of China’s (China’s Central Bank) official news vehicle back in 1998 when gold was around $300US. Can you imagine the US Federal Reserve Bank giving such a recommendation and what it would do to the gold price?

The article went on to say “If there are problems with the U.S. dollar, there will be an international catastrophe.” “Reducing reliance on the dollar, and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk,” it said. “As a result, an increase in our country’s gold reserves is necessary.”

It looks like the Chinese people have been taking notice of the advice from their central bank to buy gold. China’s mainland gold demand rose 18% percent from 2006 level to 94.3 tons during the 4th quarter. This was when the gold price rocketed from the breakout area of of around $730US to around $900US.

Consider this, the U.S. possesses 262 million ounces of gold for its nearly equal population. Were China to achieve the same financial gold backing, it would require 1.2 billion ounces of gold. The same amount of ounces of gold owned by all the world’s central banks and more than ten years of global gold mining production. However, China is now the worlds largest gold producer, surpassing South Africa in 2007.

China’s Gold demand is likely to continue to increase and put significant upward pressure on gold prices for many years to come, particularly if the US Dollar continues to decline in purchasing power as many analysts are predicting it will do.

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http://goldprice.org/gold-news/2008/02/china-gold-demand-now-second-largest-in.html