China's Unquenchable Thirst

The Daily Reckoning PRESENTS: Africa has found more than a buyer for its raw materials. It has found a new source of aid and investment. China is now Africa’s biggest source of aid. Read on…

CHINA’S UNQUENCHABLE THIRST

In the Spring of 2004 there was a spate of thefts of manhole covers in Gloucester and Aberdeen, the craze spread to East London, Montreal, Chicago and Kuala Lumpur. As darkness fell, they would be levered up, sold to local merchants who cut them up and loaded them onto containers. The motives for the thefts were financial.

China’s runaway economic growth had forced up the price of steel and scrap metal prices followed suit. The 130 manhole covers stolen in Aberdeen were worth £13,000 and the metal would be shipped to China and used to make washing machines and the like. At the time this incident brought home to me the growing influence of China on our way of life.

Then this autumn I read a news item about an outbreak of rioting in the Zambian capital Lusaka in which supporters of the defeated opposition alleged vote rigging. Nothing new here, you might say. But what really caught my eye was that the opposition’s anger had been targeted at Zambia’s rapidly growing Chinese community. Beijing had been investing heavily in the country and Chinese firms, some of which came under attack, have been accused of driving Zambians out of business. Just as the manhole cover thefts were a symptom of China’s voracious appetite for raw materials, was this evidence of 21st colonialism another manifestation of the same thing?

The Chinese have had a stab at securing influence in Africa in the past. In the 1950s Zhou Enlai backed left wing governments, giving aid and funding lavish infrastructure projects. But the strategy was not very successful. Maoist China was not wealthy enough to establish China as a leading force, while the export of revolutionary ideas did not go down well with African leaders. Now, rather than using ideology, China is using trade…with impressive results.

While African trade with the EU and the US has been declining, its trade with China has been booming, because unlike the west, China imposes no duties on commodity imports. Europe’s share of total trade with sub-Saharan Africa has fallen from 44% to 32% over the past 10 years, meanwhile China’s has increased from around 2% to 10%. Over the same period trade between China and Africa soared from $3bn in 1995 to $32bn last year. China is now Africa’s third most important trading partner after the US and France.

China’s push for breakneck economic growth has resulted in an unquenchable thirst for raw materials, including copper, cotton, platinum, lumber, iron ore and most important of all, oil. This year Angola overtook Saudi Arabia as China’s largest supplier of crude oil. China realises the strategic importance of oil supplies to its development plans. In January this year the China National Offshore Oil Company paid $2.27bn for a 45% stake in a Nigerian oilfield, trumping a $2bn bid from an Indian rival. China has shown a similar interest in other oil producers like Sudan, Equatorial Guinea, Gabon and Congo-Brazzaville, which already sells a third of its output to Chinese refiners.

Moreover, Africa has found more than a buyer for its raw materials. It has found a new source of aid and investment. China is now Africa’s biggest source of aid. This year alone it has pledged more than $8bn in loans to sub-Saharan Africa. By comparison in 2004, the US gave loans of $3.5bn, France $3bn, while this year the World Bank is lending $2.7bn. This investment is often an entry ticket. For example, in Nigeria, Chinese promises to invest $4bn in refineries and power plants were conditional on securing oil rights. In Angola a $4bn low-interest credit line to fund infrastructure rebuilding after decades of war is repaid in oil.

African nations have found that dealing with China offers fewer complications than with the IMF, where loans are sometimes conditional on good governance and human rights records. China has also flooded Africa with workers in straw hats from the Chinese Middle Kingdom.

There are an estimated 44,000 Chinese workers in Namibia. The Chinese are building a railway line in Angola from the capital Luanda to the eastern province of Malange. There are also numerous Chinese traders that sell cheap electronics, plastic goods and textiles manufactured in China, undercutting local traders and manufacturers.

However, given China’s unsatisfactory human rights record it is not surprising that it backs the vilest regimes in Africa. When Western nations imposed sanctions on Robert Mugabe’s Zimbabwe, China stepped in with aid, arms and electronic communications technology for the corrupt tyrant. From then on Mugabe launched operation Murambatsvina, in which 700,000 had their homes or businesses destroyed. China neutered all attempts at discussion, let alone condemnation, at the UN Security Council.

China’s record in Sudan is just as bad. When in 2004 the Sudanese government was said to be fuelling the genocide in Darfur, China resisted UN military intervention and instead invested $150m in the country that year, three times as much as any other donor. In turn China has become Sudan’s largest export market.

But China’s aid and support for African nations at the UN comes with one important provis the ditching of their recognition of Taiwan. To date 48 African countries paid due obeisance to Beijing, which brings us back to the Zambian presidential elections. Given the suggestion that Michael Sata, the main opposition candidate, would have recognised Taiwan, the Chinese ambassador said he would consider cutting diplomatic relations if he won. This is tantamount to a public intervention by China into the internal affairs of a sovereign African country.

There will be plenty of hand wringing in the West about its impotence in these issues, but the actions of its leaders are partly to blame. The war in Iraq has preoccupied the West. Whether the mission was to secure oil supplies for the West, give ordinary Iraqis security or spread freedom and democracy in the region, it has failed dismally on all counts. And there is a wider diplomatic and strategic cost to the West. While Bush and Blair got the West bogged down in Iraq, China has stolen a march on the Western interests in Africa.

With the result that China has an increasingly tight grip on oil supplies and political influence in the region. The West will be regretting playing its first “regime change” card so ineptly.

Regards,

Brian Durrant
for The Daily Reckoning
January 25, 2007

Editor’s Note: A Cambridge economics graduate with nearly 25 years experience in the City, Brian Durrant is investment director of The Fleet Street Letter (founded 1938). He has worked in stockbroking, the foreign exchange markets, and also headed the research department at one of London’s leading futures and options brokers.

Yesterday, the Dow rose to a new record high.

Oil moved back up too – to $55.

And gold rose again – to $648.

But let us try to ignore the noise of the news and the roar of the markets. Let’s look at the essential math:

Between 1995 and 2005, the supply of dollars -M3 – grew at about 10% per year. The feds aren’t talking any more, but we have no reason to think it has slowed down.

This does not include the extra liquidity through asset price appreciation, securitization, derivativization, and so forth – all of which seem to have grown at an even faster pace.

During this same period, the U.S. GDP grew about 3% per year. And the quantity of above-ground gold rose at about 2% per year.

Since gold represents a ‘money of last resort,’ it would be reasonable to expect it to rise in dollar terms. How much? When? Those are the big questions.

The yellow metal gained $150 between 2002 and 2005 – from $300 to $450 per ounce. Then speculators began coming into the market and prices became less stable. In May of last year, the price shot up to $730…then stumbled…picked itself up again…and now seems to be on the climb again. Even while other commodities have fallen – notably oil – gold continues to make progress. What this signals to us is that gold buyers are no longer treating the metal as any other commodity, but are buying it for its unique character as money; it’s the stuff to which people typically turn when they get worried about other stuff.

Why they might be worried about other stuff has been the subject of many of these Daily Reckonings. There is more stuff than ever before out in the financial world. $140 trillion worth, according to a recent estimate. Against that, there is only slightly more gold than there was 10 years ago.

Again the essential math:

There’s only $1.8 trillion in gold above ground. Over the last 10 years, at today’s prices, we estimate that about $300 billion of new gold was added to the world supply.

Meanwhile, the price of all other assets rose by an estimated $70 trillion (this is just a guess; generally the price of assets doubled during the past 10 years).

In other words, 10 years ago, there was one ounce of gold – at $300, more or less – for $31,000 worth of other stuff. Today, there is one ounce of gold for every $50,000 worth of other stuff. As much as $140,000 worth of stuff has been added for every ounce of gold…grosso modo…that came out of the ground in the last 10 years.

(Better check our math, dear reader).

And again, the essential conclusion: Gold is likely to go up.

More news:

————–

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“All the talk last year was that China was going to slow down… There were even those that said China’s economy would come crashing down. Well… For-get-a-bout-it! China’s economy grew at a 10.4% clip in the fourth quarter.”

For the rest of this story, and for market insights, see today’s issue of The Daily Pfennig

————–

And more thoughts:

*** Whoops…in yesterday’s issue, we made a slight boo-boo. We mentioned our annual conference in Vancouver, and gave Barb Perriello’s number to sign up – but failed to include the date of the conference. (Sorry, Barb!) So, let’s try this again…the conference will take place on July 24-27, 2007 and we’ll focus on the Rim of Fire: Crisis and Opportunity in the New Asian Century. To register, and lock-in an early, early, early bird discount of nearly 60%… please call Barb Perriello at 800-926-6575

*** Yesterday, we pointed out that seniors that are in and approaching retirement’s debt levels are building up some pretty heavy debt loads – that this age group is the fastest growing group in the bankruptcy courts.

People in this age bracket may benefit from something that has been touted as the possible salvation from housing market hell – the reverse mortgage.

Basically, the reverse mortgage is exactly what it sounds like – a regular mortgage in, er, reverse. It’s a type of loan, used as a way of converting home into one or more cash payments while retaining ownership of the property and avoiding monthly payments. In a reverse mortgage, the home owner pays nothing each month and all interest on the debt is added to the lien on the property. If the owner receives monthly payments, then the debt on the house increases each month.

From Wikipedia: “If a house gains significantly in value after a reverse mortgage is taken on it, it is possible to get a second and even third reverse mortgage to borrow against the increased equity that the owner now has in the more valuable house. But, in the United States a reverse mortgage must be the first and only mortgage on the property (if there is an existing mortgage, it will be paid off with some of the proceeds from the reverse mortage). In the United States, if the property increases in value (and as the mortgagee ages and qualifies for more money), the reverse mortgage may be refinanced to borrow more against the increased equity.”

So, it sounds like a pretty safe bet…we’re just waiting for the lenders to work the same “creative financing” magic on the reverse mortgage as they did on the regular mortgage – and we’re still stepping over the carnage from the subprime lending market.

In fact, we’ve been keeping track of subprime lenders that have gone under since the beginning of 2007. We’re up to 13 – in less than a month. We’ll keep you posted. We expect that number to go a lot higher as the year progresses.

*** A few weekends ago, we went to a wedding. It led to the following reflection:

People don’t take marriage seriously enough. Of course, it is not a matter that lends itself easily to the brain. Falling in love is not something you can think through or add up. It just happens. People fall in and out of love all the time. Sometimes they get married and sometimes they don’t.

The marriage we attended featured a bride and groom who seem to have thought the whole thing through better than most. Both were in their late ’30s, we believe. The groom, a candidate for Parliament, was an exceptionally eloquent and accomplished speaker; his after dinner speech was the best we’ve ever heard.

It made us regret our own wedding ceremony. Not that we ever regretted getting married. We just wish we had been a bit more alert on the occasion. How many times does a man get married, after all?

At the time, we were too young and too distracted to appreciate the gravity of our act. Had we been questioned by a wise justice of the peace, he probably would have stopped the marriage right there; we didn’t know what we were getting into.

But instinct is often a better judge of the facts than reason. We had been drawn into it by forces within ourselves we didn’t understand…but forces that seemed to know where they were going. And in retrospect, they had a much better idea of what was going on than we did.

*** We picked up a copy of the Daily Mail in the train station this morning, hoping to catch up on the news. We were delighted to find that there was no serious news in it.

Instead, on page three, we find the story of a woman who went ahead with her wedding, even though her groom had backed out. “The jilted bride who refused to miss out on her big day,” begins the headline.

It still takes two to tango, but poor Ms. Knight, doesn’t give up the dance floor easily. The groom split before the ceremony, but she simply had the party anyway…with 100 guests turning up from all over England.

*** Then, on page seven is the story of an 87-year-old World War II veteran who was asked for an ID when buying a bottle of sherry at a local liquor store. He thought the check-out girl was joking. But this girl could work for Homeland Security. She wasn’t giving him any alcohol unless he could prove he was over 21.

“We simply wish to make sure that we satisfy our moral and legal obligations with regard to the sale of alcohol,” said a spokesman for the store.

And over on page 13 is an interesting story: “Expressing horror at Saddam’s death was ‘culturally insensitive’, says diversity chief.”

The first curiosity is the discovery that the BBC has someone called an ‘editorial executive of diversity,’ who makes about $180,000 per year. With her trained eye for diversity, Mary FitzPatrick, “suggested to reporters [that they] should have shown more cultural sensitivity to the hanging.”

The real problem, as near as we can tell, is that the BBC doesn’t show more sensitivity to humbug. Apparently, the reporters were rather put off by the fact that the ‘Iraqi tyrant was taunted by his executioners before his death.’ Maybe they thought the insults interfered with the solemnity they thought should accompany a hanging; we don’t know. But Ms. FitzPatrick seems to think that if the Iraqis want to mock their former jefe before lynching him, the BBC has no business having opinions on it.

Last weekend, the biggest holiday attraction in wealthy Greenwich, Conn., kicked off: The spectacular light show at the waterfront home of Paul Tudor Jones.

The Wall Street Journal tell us:

“Every year, Mr. Jones, the well-known manager of a $15 billion hedge fund, decorates the house and surrounding trees with tens of thousands of lights. The mansion resembles Tara from ‘Gone with the Wind.'”