Comment: China and Argentina in $10bn deal

China and Argentina have made a tentative agreement to swap $10bn (£7bn) worth of their currencies.

The move, which allows both countries to bypass the US dollar, makes it easier for Argentine businesses to buy Chinese imports directly in yuan.

It also gives Argentina hard cash at a time when its finances have been hurt by the global financial crisis.

The deal comes after China suggested that the world should create a new reserve currency to replace the dollar.

The swap is being seen as a sign of China’s ambitions in South America.

China primarily imports agricultural products from Argentina, while the South American nation buys Chinese electronic goods.

In the past, China has signed similar deals with South Korea, Malaysia, Belarus and Indonesia.

http://news.bbc.co.uk/2/hi/business/7973541.stm

I think you will find that a lot of countries will start conducting business in another currency other than the U.S. dollar.  In addition to Argentina, China is reportedly in talks with a number of other nations to arrange similar swap arrangements.

While the amounts may be small, it reflects China’s desire to establish a greater importance on the yuan as a reserve currency.  I’ll be watching for similar deals, as this sort of things tends to have a cascading effect.  Is a bigger deal with another country in the workings?

Comment: Drop U.S. dollar as reserve – China

China proposed yesterday a sweeping overhaul of the global monetary system, outlining how the U. S. dollar could eventually be replaced as the world’s main reserve currency by the IMF’s Special Drawing Right.

The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, said Zhou Xiaochuan, governor of the People’s Bank of China.

“The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system,” he said.

http://www.financialpost.com/scripts/story.html?id=1420262

Bad news for the U.S. dollar!!!  If this is any reflection of how foreign governments think, then you can be sure that these countries may be less inclined to buy U.S. debt in the future.

The switch to an SDR based on a basket of currencies seems like an idea worth exploring.  This would decrease the effect a single currency has on the global economy and help rein in the extravagant spending that the U.S. has been doing based on borrowed money.

To date, the policies Obama have introduced involved “unclogging” the financial system by using public money to fix the situation.  There has been no hard rebuke for the industry.

Excessive and reckless issuing of credit killed the financial markets.  Now it seems like Obama is trying to jump start the whole system again but this time with credit backed by the government.  What we want to see is legislature that will change the way the current financial system is run.

China wants IMF voting power for cash

“Developed countries should come to talk to developing countries with humility,” Jin Liqun, supervisory board chairman of China Investment Corp, told reporters on the sidelines of a financial conference in Shanghai.

“The question is whether developed countries are ready to accept China as a major player. If you want China to take out money when the crisis happens, but give China little power when voting, nobody is going to play with you.”

http://www.guardian.co.uk/business/feedarticle/8034390

It is a very true statement.  No country is willing to deplete the wealth of their citizens in order to boost the pockets of other people without anything to gain.  Sure there are charitable and relief donations but very little to alleviate what amounts to the padding of another’s pocket books.

The U.S. is still a prosperous country.  If they want aid from countries like China, the reality is that they have to give up some of their influence.

OPEC cuts production; European leaders ask China for more help

Not really a surprise for anyone, but OPEC is really looking after its own interest by cutting production by 1.5 million barrels to boost oil prices.  (see http://www.bloomberg.com/apps/news?pid=20601087&sid=azg0in03PRLk&refer=home)

Most of the Western world could use a helping hand, but don’t expect it to come from oil producing countries.  The troublesome part about all this is that oil plays a large role in our economies, and a higher oil price may boost inflation at a time when interest rates are being cut.  In fact, Singapore reported that September inflation rose to 6.7%!

Many European leaders are asking China to take a larger role in relieving the financial crisis.  But China is being shrewd in its dealings.  It will want concessions before it commits to a large role.  In business, there is no such thing as a free meal – well, rarely at least – and China is hoping to ensure that it comes out of this crisis well-compensated for whatever help it provides.

For more info on this topic:

http://www.reuters.com/article/forexNews/idUSTRE49M41B20081023?pageNumber=1&virtualBrandChannel=0

http://english.people.com.cn/90001/90780/91421/6521101.html

IMF delays report on China

http://www.gulfnews.com/business/Economy/10249178.html

“We have delayed [the report] just because it was obvious that there was no need to risk further problems in the current situation,” IMF Managing Director Dominique Strauss-Kahn said in an interview on Tuesday.

“China’s imbalance is a long-term problem and can wait one month more; it will not change the face of the world if we wait one more month,” he added.

 

I always love to hear what the folks at the IMF have to say.  Imagine if China were to allow the renminbi to rise 50% tomorrow… what would happen to the price of clothing, household items, electronics, etc???

Inflation across the world would go through the roof.  Internally, China’s manufacturing sector would be devastated overnight.

In the past two years, the renminbi has appreciated from RMB 7.9173 per USD to RMB 6.9229 per USD or just over 12.5%.  In these same two years, western countries have been battling inflation and China’s manufacturing growth has slowed.

Now I’m not arguing that the renminbi should not be allowed to rise, but that the effects of this appreciation are significant and thus warrant the current cautious approach.

Luckily the Chinese government knows when to tell the IMF to mind their own business.

Milk Scandal: Corporate Corruption or Something Else?

This post is a commentary on the milk scandal in China, where melamine (an industrial chemical) was discovered in many dairy products both for internal consumption and export.

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The past 10 years have seen us witness some pretty large scandals  – among them, the likes of Enron and WorldCom – but when there are real and dangerous threats to our food supply, somehow it hits closer to home.

Globalization has meant that products from one side of the world are shipped to the other, so when a crisis of this nature unfolds it is best that everyone take caution.

But what is the cause of this latest food scandal?  Are people right to attribute it to corporate greed and corruption?

I would argue that it is not.  Corruption would seem to indicate that an issue can be resolved with better oversight and enforcement.  What people need to understand is that China is very different from Europe or North America, and the problems it faces requires a different sort of approach.

China has a history of poverty and conflict which has resulted in a culture of mistrust and an emphasis on survival at all costs.  Cooperation and a sense of community are sorely lacking especially with the migration of people from the country-side into urban areas and manufacturing hubs.

What has arisen is a case of people acting in their own self-interest, with little thought on how this might affect their fellow man.  To solve this, China must address its social issues and start re-establishing a sense of camaraderie.