Tuesday, June 28, 2011

China Lays the Most Recent Golden Egg

Growing up in the sixties and seventies, one could not venture out to the toy store or local clothing shop, without hearing slightly derogatory remarks about 'made in Singapore' or 'made in Japan'.

Now, 40 years later, it is a different story.

The economies of Singapore and Japan grew on the back of the growing credit creation after President Nixon went off the gold standard in 1971. Historically, Singapore and Japan were probably in the right place at the right time.

But economies grow up. Spending time in Singapore, one can observe how a low paid workforce can develop into a well-educated and financed middle-class. Singapore had great ambitions and a tight Confucian society. It has reaped the rewards of growth and stability.

But Singapore and Japan are as vulnerable as any country right now. Singapore is a major finanacial and service industry hub for south east Asia. Japan manufactures sophisticated goods, mainly electronics, for the world market. The veneer of success is merely a crash in confidence away from being exposed.

So too with China. China is the latest Asian Tiger to manufacture the world's junk consumer goods (along with Vietnam). China is mooted to be the largest economy in 20 years time.

But hold on a minute. There's something not quite sounding right.

Here's a contrary view. You may not here this view in the mainstream press. There has been much investment in China by western manufacturers and much vested interest in keeping the game going there.

But China has issues. It has pegged the Yuan to the US dollar for some years now. This causes it to import the inflation caused by the printing of the US dollar, courtesy of the Federal Reserve Bank. China complains, but it can't have the peg cake (to keep export prices low) and eat it too.

Eventually, inflation will eat away at China's huge savings nest-egg created by sales to the West.

And China is pumping money into Europe as well. Becoming the lender equivalent of the Cavalry. It has offered to stump up with the cash for Greece and any other of the PIIGS that want it. Why? Because if Europe goes, China suffers in a number of ways. It loses export markets for one and it surely does not want a contagion default causing it's savings to vanish.

But consider this issue as China's largest problem. Real Estate. Property prices in China and Hong Kong are highly inflated. Arguably more so than in the UK or USA before 2007. Their property market may be in for a huge correction; soon. Real Estate has been a major part of GDP and China's success locally. But some cities have now seen prices go from 21% rises to 5% falls in three years. If prices drop more, then the demand for raw materials, which keeps many countries afloat right now, could cause issues. Especially in Africa.

The West is running out of money. High debt levels mean that that spending on junk consumer goods is waning. The large pot of cash China has in US Bonds and other assets, may need to be used in order to keep the new middle-class at work (by boosting local consumption). A command economy like China, can't afford to have restless locals.

China is at the cross-roads. Not enough time to become militarily equivalent to the US and not enough time before the money runs out as its economy becomes starved of sales income.

Already the shift has begun to new tigers, like Bangladesh, where cheap labour is abundant.

Gold in New Zealand dollars: $1856.13 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $41.66 per oz
Previous all time high: $48.58
per oz

Articles of interest:

A Lesson from the Gold Standard

See article here


The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001

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