materials. It has found a new source of aid and investment. China is now
Africa's biggest source of aid...
CHINA'S UNQUENCHABLE THIRST
by Brian Durrant
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 proviso: 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
Bill Bonner, at the wrong end of Blackfriars Bridge:
Was ever there a better time to work on Wall Street, or in the City of
London?
Probably not. Goldman Sachs employees made an average of $622,000 last year.
A group of 11 top executives carved up $150 million. All together, the firm
paid out $16.5 billion in salaries and bonuses.
Of course, you have heard all of this before...
The do-gooders are howling about it. The press is all over the story. Even
Congressional blowhards are beginning to blow on the issue. They see a
headline or two coming out of it...maybe a lift in their ratings.
The voters don't know what to make of it. On the one hand, they like to
press their noses to the glass and look in on the rich and famous. They like
to see rich people; it gives them hope for the future. And they know that in
America it doesn't take any special brains to become rich; they've seen
Paris Hilton and Ted Kennedy on TV. They imagine it must be some kind of
luck behind it. So they buy lottery tickets and stocks and still think it
might happen to them.
On the other hand, they sense that something is not quite right. How come
these fellows make so much money, they wonder? Where does it come from?
And then they turn to their own situation...and they feel a little left
behind.
"Retirees Up Against Debt," says the headline on today's USA Today
newspaper.
While the rich get richer, the poor seem to get poorer.
"From 1992 to 2004, the percentage of US households 55 and older with
overall debt grew faster than the rate of the overall population," says USA
Today. "Those 75 and older packed it on most quickly: The average load for
those households with debt shot up 160% to an average of
$20,234 during this time, according to research by the Employee Benefit
Research Institute, a non-partisan group that studies economic security.
"Among households 65 and older, the average amount of credit card debt more
than doubled from 1992 to 2004, to $4,907, according to Demos, a New York
think tank.
Seniors' debt levels are catching up to those of younger people.
"Seniors in and approaching retirement — such as the oldest baby boomers —
are carrying 'debt loads that their parents would not have considered,' says
Sally Hurme of AARP, the advocacy group for people 50 and older. 'This does
not bode well for financial health.'
A record number of old people are going bust, continues the report, with
people 65-and up the fastest growing group in the bankruptcy courts.
Their eyesight may not be what it was, but they can still read the paper.
And what they see is a strange
sight: all over the world, people are getting rich.
Yesterday, stock markets in Asia and Australia hit record highs. Even Tokyo
is at a 9 month high. And, of course, the Dow Jones average is near a record
high too.
Money...money...money...
Record prices for works of art. Record prices for houses, cars, antiques...
Sam Zell is no fool. He sees it too. US property prices are at a 95- year
high, in real terms. He aims to take advantage of it. He's put his entire
real estate empire up for sale. Opening bids are around $38 billion.
Liquidity...liquidity...liquidity...
When the price of one Jackson Pollock painting goes up, other people look at
their walls. If they too have a Jackson Pollock, they are wealthier. They
now have an asset that could be easily exchanged for dollars...that could be
then exchanged for stocks, or bonds, or houses...or whatever.
So too do the holders of Asian stocks look in the mirror this morning and
see richer faces. They can sell today and buy other financial assets. They,
too, have more money.
And think of the man who bought a house in Mayfair in the 1970s, or a beach
house on the coast of Florida, or practically any other property in the
world, outside of Paraguay; the guy is an investment genius. He can
sell...and swim in the big, warm pool of this new liquidity.
Ai yi yi, dear reader...it is almost overwhelming!
So much liquidity...so much money...so many fools and so little time to
laugh at them all.
But wait. What if liquidity were 'mean reverting' like everything else? What
if this gush of money, this tide of cash and credit, this well of new
wealth, suddenly dried up?
Is it possible?
Yes, dear reader, it is not only possible...it is inevitable.
How do we know?
How do we know that things always go back to 'normal?'
Well, if it weren't so, there would be no 'normal' and no abnormal. And if
there were no abnormal, everyday would be a new day, with no past and no
future, and nothing every out of whack, never anything out of order, nothing
ordinary and nothing extraordinary, and no reason to laugh or cry.
No, dear reader, there will always be a mean. And things, lacking anything
better to do, will always revert to it.
More news...from the Sunshine State:
---------------------
Justice Litle, in California:
- As far as the public is concerned, coal is the Rodney Dangerfield of
fossil fuels: It gets no respect. Coal is dirty, lumpy and unremarkable. It
is a game show booby prize, a punishment for bad children at Christmas. In
terms of our daily lives, coal is almost wholly out of sight and out of
mind.
- Yet the entire Industrial Revolution was founded on coal. (The steam
engine gets all the press...but think of the steam engine as the Lone Ranger
and coal as Tonto. Without his trusty companion, the Lone Ranger would never
have gotten any glory.)
- Oil may hog the limelight these days, but coal has not gone dormant. If
anything, today's world relies on coal more than ever before. According to
recent figures from the World Coal Institute, 24.4% of primary energy
consumption worldwide comes from coal.
- Coal's share of worldwide electricity generation is 40.1%. In the United
States, more than half the country's electricity comes from coal; in China
and Australia, the totals approach 80%; in Poland and South Africa, the
totals are above 90%.
- For perspective on how much physical coal the world eats up, consider
this: According to the science Web site, howstuffworks.com, the electricity
required to power a single 100-watt light bulb, if left on 24 hours a day,
would consume 714 pounds of coal over the course of a year. Most of us do
not leave our lights on round the clock, but we tend to have many going
simultaneously. (Never mind all the other doodads and gizmos around the
house.)
- As it turns out, the world's heavy coal users — folks like you and me —
don't even know they have a habit.
That ignorance is a luxury, provided by the blessings of modern technology.
For the majority of its history, coal has been a particularly nasty source
of urban pollution.
- Blackened lungs and reddened eyes go all the way back to the High Middle
Ages. In the year 1285, King Edward I — commonly known as Edward the
Longshanks — had two great battles on his hands. In Scotland, there was
William Wallace; at home in London, there was coal.
- The King tried, and failed, to curtail London's use of coal on public
health grounds. Harsh bans and brutal penalties were put in place, but acrid
smoke continued to foul the air. With the city growing rapidly and the
forests in retreat, London's pressing need for fuel and heat trumped all
else.
- Some 500 years after Longshanks, the potent combination of coal and steam
had transformed England and kicked off the Industrial Revolution. By the
1850s, Britain was officially urbanized, with 51% of the population living
in cities. And what living hells those early industrial cities were,
Manchester chief among
them: sky black with smoke, ground black with soot, the very air choked with
dust.
- Scores of Manchester children were struck with rickets, a vitamin
deficiency malady that softens the bones due to lack of exposure to
sunlight. Fifty-seven percent died before the age of five. Those children
who survived typically toiled the rest of their lives away in the factories
and the mines.
- All that misery is gone now (in the West, at any rate). Modern coal-fired
power plants are paragons of efficiency and discretion. Leviathan jets of
flame 10 stories high consume as much as 500 tons of coal per hour, hidden
in the confines of gigantic boilers that convert heat into steam and steam
into electricity. It all happens behind closed doors, on guarded grounds
outside city limits. We no longer see, smell or taste the coal. We only flip
on the light switch.
- Yet, for all the cleaning up the coal industry has done, we are still
paying a heavy toll for coal use.
Western coal plants no longer belch black smoke; their emissions have been
vigorously scrubbed and filtered, in accordance with the law. But these
scrubbed emissions still make a disturbing contribution to the likes of acid
rain and other "slow-fuse" environmental concerns like rising carbon dioxide
emissions.
- And in less fastidious jurisdictions – like the entire country of China –
"unscrubbed" emissions from coal- fired plants have produced some of the
most toxic cities in the world. Many Chinese cities resemble the Manchester,
England of old.
- The New York Times reports that China uses more coal than the United
States, Japan and the European Union combined. China's plants are older,
less efficient and produce more toxic emissions than their regulated Western
counterparts. China's massive pollution clouds have been known to travel the
breadth of oceans, clogging up filters as far away as Lake Tahoe. With India
following in China's sooty footsteps, a global pollution epidemic may be in
the works.
- So should we feel gratitude or disgust toward Old King Coal? It's hard not
to feel a mixture of both. On the whole, coal has been very good to us. As a
driver of the Industrial Revolution, however hellish initial conditions
were, coal brought about the rise of manufacturing and the high standards of
living the West now enjoys.
- As an ongoing source of cheap power, coal now gives China and India a
chance at continued rapid growth. But none of this is without cost. China
possesses seven of the world's ten most polluted cities, thanks largely to
the country's heavy reliance on coal-fired electricity.
- Even so, the world will not be going off coal anytime soon. Energy
economics tilt heavily in coal's favour, especially in the developing world.
New coal plants, still being built at a rapid clip, have operating life
spans of half a century or more. It wouldn't make sense to mothball them
prematurely. Countless existing plants have decades left to go.
- Last, but certainly not least, countries like China and India also have to
deal with an emerging middle class and the rise of consumption-based
lifestyles. They may need all the energy sources they can get their hands on
– both dirty and clean – to keep up with demand in future years.
- Meanwhile, coal-to-liquids technologies, as well as various "clean coal"
technologies, will continue to promote demand for coal throughout the
Developed World.
Given all these demand factors, $40-a-ton coal seems way too cheap.
- It is interesting to note that the price of coal, relative to the price of
crude oil, has slumped to its lowest level in a decade. This relationship
does not necessarily imply that coal prices are approaching an important
bottom, but it does suggest the possibility.
- Long-term investors take note.
---------------------
And more thoughts from Bill:
*** More thoughts...?
Well, we read the paper and notice that Iraq seems to have gotten much more
brutal and dangerous since it has enjoyed the benefits of democracy. One
hundred people died in Iraq on a single day last week. Thirty thousand died
last year, said the press reports. The numbers of dead and maimed keep
rising. So do the costs.
Nicholas Kristof notices that our president is in roughly the same position
as Alcibiades in ancient Athens. The man had led the country to war in
Sicily...after others had warned him that it was a dangerous waste of time
and money. Nicias said of the campaign that it was "a war that does not
concern us,"
according to Thucydides' account. But Alcibiades had insisted, claiming that
the Athenians would be welcomed as liberators...and that the 'rabble' would
be easily defeated.
As it turned out, the campaign went badly. And so the pro-war groups had to
go back to the Athenian people, asking for more money and more troops. What
they needed, they said, was a 'surge' that would finally overcome
resistance. At that stage, they couldn't honorably face the prospect of
defeat and withdrawal. So, against much internal opposition, the new troops
were raised - 5,000 of them - and sent, on 70 ships, to support the war
effort in Sicily.
The result - a catastrophic defeat. Not only was the Sicilian adventure a
total failure, it so weakened the Athenian state that its enemies ganged up
on it and the country was soon conquered by the Spartans. Thousands of
Athenians were killed. Thousands more were sold into slavery. And Athens was
now a vassal state, paying tribute to Sparta and its allies.
Back to the future...
Our own Alcibiades is scheduled to address the nation today. "If only the
people read the classics..." as Ezra Pound once remarked.
*** What will happen to pull the plug on this huge bath of liquidity? We can
think of several things...
Corporate profits will revert to their historical mean.
Investors will realize that stock prices are too high...that they have been
too optimistic. Stocks will fall; maybe they will crash.
Bond prices will collapse. Spreads between high quality bonds – Treasuries –
and junk bonds have never been thinner. When investors get worried, spreads
will narrow. Bond prices will fall. Billions in liquidity will be lost
overnight.
The property market is vulnerable too. Housing in America for example, is
soft. It will take years to squeeze the juice out, but the future has plenty
of years. It is not unlikely that at some point householders – who are
already feeling the squeeze – will begin a panic of saving. Consumption will
tumble.
The economy will grow cold.
Are there no geopolitical risks? What sort of a headline would it take to
cause speculators' blood to run cold?
We don't know, but we imagine there are many possibilities.
China's economy and its stock markets are plainly bubbles. Are there no pins
in China? Plenty of them, is our guess. There is always a leading market in
any bubble. Generally, the leading market is the one that gets the pin
first. And when it blows...the whole thing blows.
Private equity, structured finance, hedge funds, derivatives; there are a
lot of players and a lot of games going on in the financial world. Not all
the players are geniuses. Not all the games are straight.
And not all the casinos are run by Presbyterian ministers. There are bound
to be some stories, bound to be some scandals and bound to be some
spectacular losses. Will any be big enough to blow a hole in the great
bubble? Maybe...
Finally, all the Anglo-Saxon economies are deeply in debt. We wonder where,
how, when will they have to change course. You cannot really get rich by
going into debt. So when people appear to get rich, and appear to be going
deeply into debt, we sense that there must be a skunk in the woodpile
somewhere. Something just doesn't smell right. No one wants to dig around
and find out what it is, but somehow, someday, it is bound to turn up. Then,
people will hold their noses...and rush for cover.
What can you do to protect yourself, dear reader? A single, simple thought;
over the last 12 years, the supply of dollars has increased at roughly 10%
per year.
The world's economy has grown at roughly 3% per year.
And the world's supply of gold has increased at only 2% per year.
We buy gold...and wait to see what happens.
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