TRANSCRIPT: Fundamental Misalignment: Sinomania!
Volume I Episode 20, June 15, 2007
Fundamental Misalignment: The US Congress declares
currency war on China;
Chinese markets rebound;
And for you fearless daredevils – more Chinese
IPOs!
FUNDAMENTAL MISALIGNMENT
A major volley in the China blame game was lobbed
this week in the U.S. Senate with the introduction
of the so-called “Fair Currency Act of 2007.”
The legislation is a bipartisan effort of Senators
ranging from Max Baucus of Montana to Lindsey
Graham of South Carolina and is the latest attempt
to legislate an appreciation of China’s currency,
now desired at 40%.
The bill is cleverly crafted to disguise trade
protectionism as exchange rate impact on select
American imports by determining whether China’s
currency is in “fundamental misalignment.” Such
a determination would then lead to a WTO decision
on slapping import tariffs on the Chinese goods
in question.
On the surface this process is anti-free trade
and in its definition fantastically subjective.
For example, fundamental misalignment is described
as -- and I quote -- “a material sustained disparity
between the observed levels of an effective exchange
rate for a currency and the corresponding levels
of an effective exchange rate for that currency
that would be consistent with fundamental macroeconomic
conditions based on a generally accepted economic
rationale.”
This implies that Congress will be well versed
in the fundamental macroeconomic conditions of
a country that most of its members still refer
to as “communist.” Further, who or more likely
what pressure groups will determine the “generally
accepted economic rationale” used as justification?
Under the so-called Bretton Woods II system that
ensures global financial stability today, whatever
money the USA pays for Chinese imports is given
back the same day as a loan. China is one of the
chief financers of America’s trade and government
deficits. That means China has a financial claim
on the USA. Already the Chinese are accumulating
fewer dollars in foreign exchange reserve as a
result of removing – under heavy political pressure
– the renminbi’s fixed peg to the dollar.
What if China significantly reduced its dollar
assets in retaliation to subjective tariffs on
its exports? The result is the end game scenario
long warned of by many central banks and policy
wonks. Many analysts believe that if east Asian
central banks stop financing the USA, there will
be a sharp drop in the US dollar and bond markets,
an increase in interest rates to 1970s levels
or higher, and a fall in the prices of risky assets,
particularly equities. So a very serious risk
factor to take into consideration.
Call it Bretton Woods II or whatever you like,
the current arrangement is carefully managed by
American, European, and Asian central banks and
global investors to direct shifts of capital across
the globe. These shifts typically last for at
least a generation as one set of nation states
replaces another. In modern times, for example,
we saw the USA replace the British Empire just
as the dollar replaced the pound sterling as the
world’s reserve currency.
America is intimately connected to this process
because as the most open economy in the world
and it has been willing – so far – to restructure
its labor market. Speaking plainly, the USA has
been willing to lose factory jobs to China as
it did to Japan previously because – so the theory
goes – the American economy is replacing manufacturing
with high-end services.
The Chinese continue to finance the United States
even though they may ultimately lose money in
a currency appreciation because it is in China’s
long-term interest to promote an export economy
that slowly but steadily absorbs its massive unemployed
rural population and creates an urbanized and
industrialized society.
In my view, Congress’s move signals abandonment
by America of its willingness to accommodate the
rise of China as it accommodated the rise of Europe
and Japan before it.
Seen in this light, what Congress calls a fundamental
misalignment is actually America’s growing integration
with China.
MARKETS & IPOs
Chinese markets rebounded this week with the
Shanghai Composite index passing the 4,000 mark
on June 12 and nearly all indicators are getting
close to their end May peaks.
Rumours are circulating that the China Securities
Regulatory Commission will suspend approvals for
overseas listings. I have obtained no confirmation.
Word is that IPOs valued at over 1 billion US
dollars would go through but reports say only
on the Hong Kong exchange or the US and Singapore.
Meanwhile the New York Stock Exchange, the London
Stock Exchange, and NASDAQ all report record numbers
of Chinese firms listing. London anticipates 100
Chinese companies may list by the end of the year.
And so far this year Tokyo, Korea, and Germany
have each had a Chinese IPO.
In a related move Hong Kong red chips – the big
mainland controlled H share firms – will be allowed
to list on domestic markets. Lining up for possible
issues are China Mobile, Lenovo, and CNOOC.
Chongqing Lifan Holdings – a major motorcycle
exporter – will bypass Hong Kong for a Shanghai
IPO to sell 25% to expand its auto production.
Lifan began making the 520, a compact hatchback,
only a year ago and has already sold 50,000.
Setting the stage for future consolidation in
the auto sector, First Automobile Works, is still
waiting for approval of its domestic IPO and Guangzhou
Auto Industry Group which I reported on earlier
is also hoping to list.
A new one in the hot semiconductor industry –
Spreadtrum Communications Inc a maker of wireless
chipsets out of Shanghai will list on NASDAQ under
symbol SPRD to sell American Depository Shares
valued between $11 and $13 US dollars per share.
And as I reported previously, China Construction
Bank is moving forward with its plan to list on
the Shanghai exchange. The bank is listed as a
H share on Hong Kong and the Shanghai sale must
be approved by shareholders this summer and approved
by Chinese regulators. The sale could raise over
$5 billion US dollars.
