Business – Economics – News

The BBC is correct in their analysis that allowing these renminbi-denominated spot gold contracts is a major step in “internationalizing” the Chinese currency.  This will start making it a larger player on the global currency scene like the Dollar, Euro, Pound and Franc.  As China becomes more developed and their per capita income rises, the demand for there currency will increase and more people will be (hopefully) selling many goods to the Chinese domestic economy.

Over the next 50-100 years, the probability that Yuan will be the most important currency is over 50% in my opinion.  Hong Kong is a important financial market so this is a big step.  They have already been doing currency swaps in the Pan-asian region that does not involve the U.S. dollar.  The United States needs to get it house in order before the world finally loses confidence in the strength of their currency.

BBC News (Staff Reporter): The Chinese Gold & Silver Exchange Society (CGSE) said it will offer offshore renminbi-denominated spot gold contracts to investors.  The move comes amid a push by Chinese authorities for a more international role for its currency.  Hong Kong is the world’s third-largest gold trading centre.

“By attracting both local and international investors, the Renminbi Kilobar Gold is a significant step towards internationalizing the renminbi,” said Haywood Cheung, president of CGSE.   The growth of the Chinese economy coupled with a push by the authorities for a more global role for their currency has seen an increased demand for yuan-denominated investment products.  At the same time Hong Kong has been trying to promote the city as the offshore trading hub for the yuan.  The demand has grown further by the increasing amount of offshore deposits of the Chinese currency in the city which rose 6.4% in August to 609bn yuan ($95bn; £60bn).

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This is interesting timing on my last article about China producing over 90% of the world’s rare earth minerals and because of a territory dispute, the stoppage of exports of these minerals and metals to Japan.  Now it has been turned up a notch with China stopping the exports of rare earth metals to the United States as well.

From reports given, this turn in Chinese policy is due to the current trade disputes that revolve around claims of an artificially low Yuan (Chinese Currency) that makes their export very competitive compared to native U.S. manufacturers that have a much higher operational costs due to material pricing, wage requirements and taxes.   The second claim is of the Chinese “dumping” certain products on the U.S. market such as steel and tires.

These are quite strong-arm tactics by the Chinese and they are exerting some real pressure on the federal government and Defense Department because these elements are crucial to a number of our military technologies.  In this link you will see a 38-page GAO report (Click Here) that addresses these issues.  There conclusion is that the U.S. is 7-15 years out from getting full scale mining and processing of these elements if we started tomorrow.

A nasty trade dispute appears to have prompted Chinese customs officials to block shipments of rare earth minerals to the U.S.

The move underscores a deepening U.S. vulnerability because of its dependence upon China for tech-crucial rare earth minerals (also known as rare earth elements). Small but significant amounts of the minerals go into creating everything from PCs and cellphones to wind turbines and hybrid cars, as well as U.S. military technologies such as missile guidance systems.

This latest news came from three rare earth industry officials cited by the New York Times. The officials spoke on the condition of anonymity for fear of backlash from China.

China currently controls about 97 percent of rare earth production, and has the only facilities capable of processing rare earth minerals after they have been mined. Rare earth minerals are not exactly rare, but the mining and refining processes can be costly and time-consuming.

Official Chinese plans have called for China to reduce rare earth mineral exports to meet its own rising industrial demands. That already indicated to many industry experts that countries such as the U.S. would have to find alternate supplies soon.

Analysis: If this does not get resolved peaceful, this has all the makings of a real war through direct confrontation or proxy.  When you start hampering a military in there ability to use the available tools, strategist will start feeling backed into a corner and once that happens, many options come back on the table which include force.  A scary prospect when your dealing with nuclear superpowers.

This is a growing issue that keeps on coming up and no one seems to have a solution.   China in the 800 pound gorilla when it comes to rare earth metals.  If you don’t know what they are, here is a link to a definition (click here).  They basically are rare occurring elements that have become very essential in electronics, especially in generators, solar cells, cell phones, hybrid cars and satellites.

If the world is truly going to transition from an oil based economy to a renewable energy economy, we are going to need to produce many renewable energy pieces of equipment to produce the gigawatts if power we use in the U.S. alone.   To do this we need these elements to make them.  China currently produces 90% of the entire world’s output and they are aggressively going out and locking down access to supplies outside of China.  This is going to become of great strategic importance as oil becomes more difficult to find large new discoveries.

I am not sure if the U.S. Government has made a strategic decision to start making in-roads on securing our access as well.   I am quite sure they are aware of this.  We can see what happened in Japan after the fishing boat accident and how quickly after China stopped exports of those metals to Japan they had to start an all out program to increasing their recycling of products that contain these elements to meet the increasing demand.   We could be in the same situation if we have a falling out with China over issues like political rights or currency disagreements.  If we can not solve them diplomatically, then war is the usually remedy and that is not a good thought when your dealing with a nuclear-armed state and rising superpower.

China is the world’s biggest producer of rare earth metals, vital for the auto and electronics industries.

But concerns over global supplies have increased in recent months, after tensions rose between China and top consumer Japan, over imports.

“There are more than 200 rare earth projects outside of China,” David O’Brock, chief executive at the privately-owned AS Silmet told Reuters. “There are a lot of very optimistic projects out there — which may never be realized.

“If the Chinese leave the quotas at what they are today, I would guarantee that prices will at least double for next year.”

China accounts for more than 90 percent of the world’s total production of rare earth, mining around 120,000 tonnes in 2008.

Analysis: We will see increased use of proxies to gain access to these elements to try and not sir up a frenzy to get access to rare earth metals.  We could see covert actions if needed to get access as oil prices rise and fuels get more precious for transportation.

More rhetoric about the Yuan and trade imbalances.  I do not agree that currency valuations are not a major part of the problem.  If country A has an undervalued by 40% and country B has basically free trade, country A will have an advantage when trading with B.  Because A’s (Yuan) currency will be cheap, it will encourage business in B to do production in A because B’s (Dollars) will exchange for much more of A’s (Yuan) so they will go farther in A’s economy to purchase materials and labor.

Bottom line is that the United States population is addicted to cheap goods from foreign countries and China is the 800 pound gorilla in that area so they are a large target for this kind of rhetoric.  Until we realize that we will not be able to keep the standard of living we are used to in America without jobs that support an income of what we would define as a middle class standard.  We either need to support native production that would support jobs that are usually of a higher income level, OR we need to have extensive retraining programs so that when these production jobs go overseas , the displaced workers will be able to get the skills they need to find a job in another part of the economy.

China’s commerce minister warned the United States on Sunday against imposing trade sanctions over Beijing’s currency controls, and said his country was likely to report a trade deficit in March.

Washington and other trading partners are pressing China to ease controls that have kept its yuan currency steady against the dollar for 18 months to help its companies compete amid weak global demand. Some U.S. lawmakers have demanded to have China declared a currency manipulator in a U.S. Treasury Department report due out next month, which could precede possible trade sanctions.

Asked what measures China would adopt if the Treasury Department declared it a currency manipulator, Chinese Commerce Minister Chen Deming said China would not sit idly by and reiterated Premier Wen Jiabao’s statement a week ago denying that the yuan was undervalued.

“If (the Treasury Department’s) reply is accompanied by trade sanctions and trade measures, we will not ignore it,” Chen said. “If it is followed by any international legal lawsuit against China, we will take them on.”

Business groups say China’s currency controls keep the yuan undervalued by up to 40 percent, giving its exporters an unfair price advantage and swelling its multibillion-dollar trade surplus.

Analysis: We need to focus on a new doctrine of “Fair Trade” and get away from totally free trade in the U.S. or get used to falling wages and less middle classed jobs for some time until these low wages countries build up their standard of living to reduce the incentive for jobs to move from high to low wages areas.  Higher education is the key.

In Hong Kong today, China issued its first bond denominated in yuan for foreign investors.  With China’s prospects growing as the world’s dominant manufacturing base and the long-term policy to increase domestic consumption, it looks like investors will be lining up for more Chinese debt in the years to come.  The issue itself consisting of 2,3 and 5 year bonds brought in close to a billion dollars ($880 million).

Bank of Communications senior fixed-income dealer Midas Chu was quoted in a Dow Jones Newswires report as saying the “very satisfactory” results demonstrate yuan bonds’ popularity in Hong Kong.

“This would encourage [mainland] China to issue more on a regular basis in the future,” Chu was quoted as saying.

Analysis: With pressure being brought to bear for China to let their currency appreciate, these bonds could become much more valuable if the Chinese yuan rises in value.