China Shows the World How to Stimulate
Australia bails out economy - Bad.

US bails out economy - Bad.

Europe bails out economy - Bad.

China bails out economy - Good.

Well, not quite. For a start, the AU$849 billion ’stimulus package’ proposed by the Chinese sounds like a lot of money. And it is. It is more than the US government is spending on its TARP initiative to bail out the credit market.

But at least the Chinese money might be spent on something useful. The US government is spending nearly the same amount just to buy dodgy debt.

The one thing we don’t know about this package is how much of the USD$586 billion is additional money to what had already been promised.

For instance, back in July US investment firm Merrill Lynch estimated Chinese infrastructure spending to be USD725 billion per year over the next three years. Sure, things have changed a bit since July, but there is no evidence yet that this is entirely new money.

Even so, it is still significant. So if we suppose the USD586 billion is added funds then it will likely take Chinese infrastructure spending to north of USD$1 trillion per year.

The upside is twofold. First it is being spent on things that country needs. Second, if it wants to, China can pay for it in cash, unlike in the US, Europe and now Australia where ’stimulus’ packages will have to come from debt.

And then we have the Australian government version of a stimulus. Give the money to a basket case industry and hope for the best.

The one positive about the hand-out to the three Australian based car manufacturers is that it involves them spending $3 to get $1 of government funding. To be honest, we’re not sure that is likely so the taxpayer’s $6 billion should be safe.

The automotive industry in Australia employs about 60,000 people directly and up to another 200,000 in related industries. It is a big employer. But does it warrant special treatment by the government on this basis alone? We don’t think so.

Our guess is that government’s view vehicle manufacturing the same way as they view national airlines: a ‘badge of honour.’

It’s not just the U.S. anymore. The entire global economy is slowing down. Several countries in Europe and Asia are already either in recession or teetering on the brink of a contraction in output. But there’s one country that’s managed to remain relatively unscathed: China.

Yes, the world’s main driver of commodity consumption this decade continues to grow. That tells me that the recent decline in commodities is way overdone.

Since hitting a peak on July 3, the benchmark Reuters/CRB Index has plunged 25%. All commodities representing this index have declined sharply, including crude oil (32%), gold (22%), copper (22%) and the grains (28%).

China is still one of the more formidable factors supporting raw materials. As commodities have crashed recently, the Chinese are once again hoarding industrial metals like copper, tin, and steel scrap.

The U.S. credit problems won’t stop the Chinese from grabbing commodities - especially when the U.S. dollar inflation-adjusted interest rates are in negative territory. The U.S. Fed Funds currently stands at 2% versus 5.6% inflation through July.

China can’t afford a recession. A major contraction in output would devastate the economy and result in tens of millions of people becoming unemployed. To combat a recession, the Chinese have started to expand credit again after tightening the money-supply since 2006 in small increments. The People’s Bank of China also has the capacity to spend heavily and finance continued expansion.

If you think the Federal Reserve has muscle, think again. China is home to more than US$1.7 trillion in foreign-exchange reserves. They can literally bailout the entire American banking system with one check. They’ll do everything they can to keep this expansion going strong.

Meanwhile, commodities are now heavily oversold. In the span of just 60 days, the world has become obsessed with deflation. Just a few short months ago, inflation fears ruled the markets. That’s a major flip-flop. Commodities are not good deflation-based hedges. Like most assets, commodities decline amid deflation.

In my eyes, the U.S. government has played a big role “talking down” commodities by attacking oil trading speculation. The government blames hedge funds and other speculators for US$147 oil in July. Nonsense.

Was the government helping these same speculators when oil was trading at US$15 back in 1998? Of course not. In an election year, it’s really no surprise the Feds are targeting oil prices. They wanted lower oil prices and they got it.

The macroeconomic picture is also a factor hitting commodities.

The global economy is slowing this fall. Europe is several months behind the United States in this credit squeeze and Japan is basically in recession again. But the emerging markets should get a dose of good news as oil and food prices have plunged by about 25% since July.

These countries, including China, will continue to expand even at the expense of weaker exports. China, India and many other emerging markets are piling billions into domestic infrastructure projects. I’m expecting these and other domestic projects to keep these markets humming until the West can stabilize credit markets.

Commodities are in a brutal correction. We saw similar dramatic pullbacks in 1974-1976 before the sector resumed its historical bull market run to its peak in 1980. It isn’t over yet.

BEIJING (AFP) - - China’s inflation rate was 7.7 percent in May, easing from April’s 8.5 percent, the government said Thursday, as analysts cautioned that some prices had been kept artificially in check.

Food prices have eased but, at the same time, price controls meant pent-up inflation had accumulated in the world’s fastest-growing major economy, according to economists.

“While agriculture seems now to be responding… there are other price pressures out there that are being severely repressed,” Standard Chartered economist Stephen Green said in a statement.

Inflation has become a global concern, with the US Federal Reserve now putting it on the top of its agenda in view of soaring energy and food prices.

The prices of food, a main driver of inflation in China since last year, continued to be an important factor last month, although they were rising at a less steep rate, according to the statistics bureau.

Food prices were up 19.9 percent in May from a year earlier, while the price of pork, the staple meat for hundreds of millions of Chinese, had soared 48 percent, it said.

But pork had risen a staggering 68.3 percent in April, suggesting there was now a more plentiful supply in response to government incentives.

At the same time, energy prices were being kept under control by the government, meaning local oil companies had not been permitted to pass rapidly rising global crude prices on to the consumers.

“We all know about fuel and electricity controls, but we hear reports of firms in the food and construction industries also being told not to raise prices,” said Green.

“There is a lot more bottled up inflation in this economy than meets the eye.”

In the first five months of the year, the consumer price index was up 8.1 percent from the same period in 2007, the National Bureau of Statistics said.

China has set an inflation target of 4.8 percent in 2008, an objective many observers believe will be almost impossible to achieve, given factors the government has little control over such as the price of imported goods.

The consumer price data was released a day after the government said producer prices had risen 8.2 percent in May, the fastest rate in nearly four years.

China should fight inflation by raising the interest rate at a “proper time”, the Bank of China, one of the nation’s main commercial lenders, said this week.

HONG KONG, June 11 - Hong Kong shares are expected to open lower on Wednesday, extending the previous day’s sharp losses, as investors remain cautious about the state of the world’s largest economy following the Fed’s hawkish signal on interest rates.

Shares in chip-makers and software technology companies fell on Wall Street after Federal Reserve chairman Ben Bernanke said on Monday he would strongly resist rising inflation expectations, which was interpreted by the market as a signal for higher rates.

The Fed has been slashing rates through since September 2007 in a bid to boost consumer spending and avert recession.

“The selling pressure will continue as investors still lack confidence in the U.S. economy,” said Conita Hung, head of equity markets with Delta Asia Securities.

“Also, the mainland markets are unlikely to recover till they see some stimulus measures from the government.”

Mainland bourses fell the most in a year on Tuesday after Beijing took measures to curb liquidity and arrest inflation.

In April, the then down-in-the-dumps market was rescued by the government’s decision to cut stamp duty on share transactions. The Shanghai Composite Index recovered over 9 percent the following day. Investors are now back to holding their breath for more market-boosting measures from Beijing.

The Hang Seng Index closed 4.21 percent lower on Tuesday at 23,375.52, its lowest level in 10 weeks. Most blue chips dropped further in the extended 10-minute closing auction as investors scurried to cover short positions.

The main index is expected to move between 22,500 and 23,200 today.

STOCKS TO WATCH

* CNOOC , which was trading higher for most of Tuesday, is likely to fall further after crude oil prices fell for a second day running on expectations of a rate hike in the U.S.

* Cosco Pacific said the huge disparity between the reported values of its bid to run and upgrade Greece’s Piraeus Port stemmed from a difference in accounting methods and the inclusion of certain fees [ID:nHKG343844]. Cosco, which was suspended from trading on Tuesday, pending an announcement about its Piraeus bid, will resume trading today.

The stock took a beating last week when the company announced it was submitting a bid valued at about 500 million euros, far below the 4.3 billion euros reported earlier.

* CITIC International Financial Holdings Ltd said on Wednesday its major shareholder CITIC Group planned to privatise the company by offering one China CITIC Bank Corp Ltd H share and HK$1.46 cash for each CIFH share.

Based on the closing price of HK$5.44 per CNCB share on June 2, the offer represented a 21 percent premium over the closing price of HK$5.70 per CIFH share.

Spanish bank BBVA had said earlier in June that it had agreed to raise its stakes in Chinese bank CITIC and its Hong Kong-listed international arm CIFH for about 800 million euros .

* Hutchison Telecommunications which said on Tuesday it will launch the new 3G Apple iPhone in Hong Kong on July 11 is expected to extend gains after defying the broad market and cloing higher yesterday.

* Shares in local property developers are expected to drop further after Tuesday’s sharp losses as a likely interest rate hike in the U.S. would also push local rates higher as the local currency is pegged to the greenback.

Property stocks which had rallied sharply in the last four months of 2007, since the Fed began to slash rates, have given up some of their gains so far this year.

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INSTRUMENT LAST PCT CHG NET CHG S&P 500 <.SPX> 1358.44 -0.24% -3.320 USD/JPY <JPY=> 107.33 -0.06% -0.060 10-YR US TSY YLD <US10YT=RR> 4.0968 — 0.000 SPOT GOLD <XAU=> 868.05 0.20% 1.700 US CRUDE <CLc1> 131.57 0.20% 0.240 DOW JONES <.DJI> 12289.76 0.08% 9.44 ASIA ADRS <.BKAS> 156.81 -1.96% -3.14 ————————————————————-> U.S. STOCKS-Market ends mostly lower on rate-hike concern [.N] > Oil falls $3 on demand worries, dollar rebound [O/R] > FOREX-Dollar rallies as Bernanke focuses on inflation [USD/] > TREASURIES-Prices fall as investors anticipate rate hike [US/] > Gold ends 3 pct lower on down oil, rate hike bet [GOL/] > SE Asian Stocks-Fall on inflation worry