Bloomberg: Dollar Declines as Bank of Korea Plans to Diversify Reserves

Dollar Declines as Bank of Korea Plans to Diversify Reserves

Feb. 22 (Bloomberg) -- The dollar fell the most in more than two years against the yen and dropped versus the euro, Korean won and at least 30 other currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth-biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg.

``The market will now be looking to other central banks and what they will be doing, including the European central banks and Middle Eastern banks,'' said Mansoor Mohi-Uddin, head of currency strategy at UBS AG in London. ``The market has got nervous and has continued selling the dollar.''

The dollar fell to 103.87 yen at 11:15 a.m. in London, from 105.54 late yesterday in Toronto, according to EBS, an electronic foreign-exchange dealing system. It dropped to $1.3216 per euro, from $1.3068. U.S. markets were closed yesterday for a national holiday. UBS forecasts the dollar will fall to a record $1.40 per euro by year-end.

``Support for the dollar is quickly disappearing,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. ``This Korean story is having quite an impact because it feeds into suspicion that others are also seeking to cut their exposure to the dollar.''

Pimco's Call

The dollar has dropped for the past three straight years against the euro and the yen, in part on concern demand for U.S. assets will fail to match a widening current-account deficit. The gap was a record $164.7 billion in the third quarter, meaning the U.S. must attract $1.8 billion a day to fund the shortfall and support the dollar's value, according to Bloomberg calculations.

``I'd prefer not to own dollars,'' said Andrew Bosomworth, a former European Central Bank economist and a fund manager at Pacific Investment Management Co. in Munich. Pimco manages about $415 billion in assets. ``The list of fundamentals doesn't add up to a stack of positives for the U.S. currency.''

Korean investors, including the central bank, are the fifth- biggest foreign holders of U.S. Treasuries, with $69 billion as of December, the most recent figures available, according to the Treasury Department. Japan, the largest, has $711.8 billion. The Bank of Korea report was given to some legislators on Feb. 18 and reported by Reuters yesterday.

`Still Have Faith'

``The likes of Thailand, Taiwan and smaller, medium-sized central banks may follow suit'' in diversifying their reserves, said Stephen Jen, global head of currency research at Morgan Stanley in London. Japan and China, the two largest holders of Treasuries, probably won't shift out of the dollar, he said. They ``cannot diversify while the dollar is under pressure.''

China has kept its currency pegged to the dollar since 1999. Japan sold a record amount of yen in the first quarter of last year to help stem its advance. The dollar in 2004 fell for the third straight year against the yen and the euro. It is up about 3.6 percent from a record-low $1.3666 per euro on Dec. 30.

``In the long run I still have faith in the U.S. dollar,'' said Jen, who raised his forecasts for the currency on Feb. 10. Jen predicts the dollar will trade at $1.24 per euro and 96 yen at year-end, up from previous estimates of $1.32 and 92 yen.

The Bank of Korea report, distributed to members of the parliament's finance and economy committee in advance of a debate scheduled for Feb. 24, also said the bank will expand investments into assets with lower credit ratings than the South Korean government. The plan must be approved by parliament.

`Sheer Size'

``The sheer size of Korea's reserves makes it unignorable,'' said Tetsu Aikawa, currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``That revives the memory in people's minds how badly the dollar was sold when Russia said it was diversifying.'' The U.S. currency may weaken to $1.32 per euro today, he said.

The dollar fell to a then record against the euro on Nov. 23 after Russia's central bank said it may increase the amount of euros in its reserves. The dollar fell as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.

Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004. Fifty-two percent said they reduced exposure to the dollar.

`Good to Diversify'

U.S. Treasuries were the second-worst performing major government market in the world last year, returning 3.5 percent to investors, according to Merrill Lynch & Co. indexes. Only Japanese bonds, which returned 1.3 percent, did worse among the world's largest government bond markets.

``To have a high proportion in U.S. assets is far from ideal so it's good to diversify,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London. HSBC forecasts the dollar will fall to a record $1.40 per euro and to 98 yen, the weakest in a decade, by the end of the year.

``South Korea wants to start picking up higher yields so that includes moves in to the Australian currency and sterling, and they'll be buying government bonds,'' said Austin.

The yen's advance began earlier today on speculation Japan's economy will recover from its fourth recession since 1991. The U.S. currency also weakened versus the euro.

Traders may renew bets on the yen after it retreated 3 percent from a five-year high of 101.69 on Jan. 17, said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein. Japan's trade surplus widened for a second month in January, a government report tomorrow may show.

Japanese Economy

``Investors are increasingly realizing that the second-half recession in 2004 was the low point in Japan and that it's most likely getting better,'' said Singapore-based Jacobs. ``That's helping the yen.''

Japan's trade surplus probably grew to 508.5 billion yen ($4.84 billion) from a year earlier, according to the median forecast of 24 economists surveyed by Bloomberg.

Finance Minister Sadakazu Tanigaki said on Feb. 20 Japan's economy will ``improve in the latter half of this year,'' after it contracted at an annualized 0.5 percent pace in the fourth quarter. The economy contracted for three straight quarters.

Japan's Cabinet office kept its assessment that the economy is recovering, in its February report released today. The government removed currency moves as a risk for the economic outlook in its report. A stronger currency may slow export growth by making Japanese goods more expensive abroad.

Heineken NV, the world's third-largest brewer, said today profit may fall for a second year, in part because the dollar's drop against the euro will crimp U.S. revenue. The firm may shed 50 million euros in net income this year because of currency effects, Chief Financial Officer Rene Hooft Graafland said on a conference call today.

****

Prudent Investor Says,

If the article is accurate to say that South Korea's Central Bank is intending to diversify into Canadian and Australian currencies, then this simply exhibits the Bank's recognition of the unfolding commodities 'boom'.

Reuters: Oil Exporters Behind Weak Dollar-Soros

Oil Exporters Behind Weak Dollar-Soros
Mon Feb 21, 2005 05:23 AM ET

By Mona Megalli, Gulf Economics Correspondent

JEDDAH, Saudi Arabia (Reuters) - Moves by Middle East oil exporters and Russia to switch some revenue from dollars to euros lie behind the U.S. currency's weakness, and a further rise in crude prices could prompt more declines, the billionaire investor George Soros said on Monday.

Soros told delegates to the Jeddah Economic Forum that the dollar's fall should help to lower the U.S current account and trade deficits, but warned that a fall beyond an undisclosed "tipping point" would severely disrupt markets.

The U.S. current account deficit is more than five percent of gross domestic product despite the currency's three-year slide. The dollar, however, has staged a comeback recently, gaining about 3.6 percent against the euro and three percent versus the yen so far this year.

"The oil exporting countries' central banks ... have been switching out of dollars mainly into euros and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros said.

Soros, dubbed "The Man who broke the Bank of England" for his role as a hedge fund manager in betting the pound would drop in 1992, said he was not predicting further falls in the value of the dollar. But he linked its fate to the price of oil.

"The higher the price of oil the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."

U.S. crude hit a record $55.67 a barrel late last year and prices remain close to $50 a barrel.

In later comments to Reuters, Soros said the U.S. current account deficit could be financed at the current level of the dollar. "There are willing holders of the dollar. There are the Asian countries that are happy to accumulate dollar balances in order to have an export surplus and a market for their dollars," he said.

Soros would not make detailed comments on why long-term borrowing costs have fallen in the face of short-term rate increases, a development U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he found difficult to explain.

"A flattening of the yield curve is usually an indication of a slowing economy, but here I don't know," Soros said.

The Hungarian-born financier, a critic of U.S. involvement in Iraq, said he was considering backing an Arab foundation to promote the ideals of civil and open societies in the region.

CBS MarketWatch Barbara Kollmeyer:Storming foreign shores

Storming foreign shores
Non-U.S. stocks gain favor among investment advisers
By Barbara Kollmeyer, MarketWatch
Last Update: 8:37 PM ET Feb. 16, 2005
CBS-MarketWatch

LOS ANGELES (MarketWatch) -- Conventional wisdom suggests devoting 10 percent to 15 percent of an investment portfolio to international stocks, but nowadays that advice might be short-sighted.

Recommended allocations of 20 percent, 30 percent and even 50 percent have become increasingly popular as financial advisers and investment professionals look outside of the U.S. for better stock bargains and corporate earnings growth.

"Valuations look better overseas right now. Prospects for stocks look good around the world, but foreign markets are a little cheaper on average," said Tom Hazuka, chief investment officer at Mellon Capital Management.

The firm's model portfolio favors stocks over bonds and cash, Hazuka said, with two-thirds of that stance earmarked to non-U.S. companies.

While shareholders of large U.S. multinational stocks will gain exposure from the foreign revenues those companies generate, most U.S. investors are short of even a 10 percent portfolio allocation to international markets. Yet for others, the importance of non-U.S. stocks is not lost in translation.

According to TrimTabs Investment Research, $48.2 billion flowed into international mutual funds (not including U.S. stocks) in 2004, the biggest tally since $31.2 billion poured into that sector in 1996.

Investors have pumped an estimated $4.6 billion into non-U.S. equity funds this year through Feb. 9, according to Emerging Portfolio Fund Research data. The pace reflects an "extensive asset allocation shift taking place," the report noted, with cash going to global/international, emerging markets, Europe, Japan and Pacific funds. Meanwhile, investors have pulled about $1.6 billion from U.S. equity funds, EPFR said.

U.S. dollar weakness is a key reason for the favorable interest. The dollar's 20 percent decline versus the euro in 2004 alone put wind in the sails of many non-U.S. stocks, especially those with large-scale European operations. That, in turn, tended to lift results for related mutual funds.

Faraway eyes

Ben Tobias, a certified financial planner at Tobias Financial Advisors in Plantation, Fla., invests aggressively outside of the U.S. on behalf of clients, allocating 25 percent to 35 percent of a portfolio to non-U.S. stocks.

"If you believe in true globalization, and I do... capital markets overseas over the long term will have to grow faster than the markets in the U.S. to achieve equality," Tobias said. More rapid growth, he added, should deliver higher returns over time, but he advised keeping a wide geographic moat.

"A very big risk overseas as opposed to the U.S. is the currency and political risk," he said. "It's important to be well-diversified overseas between countries and sectors and continents."

Tobias recommends four mutual funds for broad international exposure: American Funds EuroPacific (AEPGX: news, chart, profile) ; Julius Baer International Equity (BJBIX: news, chart, profile) ; DFA International Value (DFIVX: news, chart, profile) and DFA International Small Company (DFISX: news, chart, profile) .

The Julius Baer fund, for example, counts among its top holdings energy giant BP (BP: news, chart, profile) (UK:BP: news, chart, profile) and telecommunications leader Vodafone (VOD: news, chart, profile) (UK:VOD: news, chart, profile) , both U.K.-based, and OTP Bank (OTPGF: news, chart, profile) , a top financial services provider in Hungary.

Chris Orndorff, managing principal for Payden & Rygel Investment Management, advocates more targeted international exposure. He suggests that investors divide a 25 percent non-U.S. stock allocation by putting 5 percent in Europe, 10 percent in Asia and 10 percent in emerging markets.

"The fastest economic growth is in the emerging markets -- Korea, Taiwan, China, Mexico," Orndorff said.

A place for emerging markets

The emerging-market theme is a common strategy among advisers who are increasing allocations to non-U.S. stocks.

Leila Heckman, president of Heckman Global Advisors in New York, which advises mutual funds, said exposure to Asia, both developed and emerging markets, is a top recommendation.

"We continue to like emerging markets because they tend to be cheaper. Interest rates are coming down in general, and they continue to have momentum money flow in," she said.

But given the volatility of emerging markets, Heckman advises investors rely on a fund or financial adviser with experience in this specialized area.

One often overlooked advantage to investing outside of the U.S. is that increasing exposure to international stocks beyond a 15 percent allocation can actually reduce overall portfolio risk, Heckman added.

"The riskiness of a portfolio is determined by several things," she said. "One is the volatility of the assets you're investing in, and the other is the correlation of the stocks or countries you're investing in. When you put those things together...around 20 or 30 percent you actually get a reduction in risk from a 100 percent U.S. portfolio."

Brad Durham, EmergingPortfolio.com's managing director, said he favors a 50-50 divide between non-U.S. and U.S. stocks.

Emerging-markets stocks belong in a portfolio for several reasons, Durham said. He pointed to four consecutive years of superior returns and improved corporate credit quality and economic growth in these regions.

"The Julius Baer International Equity fund has a 20 to 25 percent weighting in emerging markets. It's no coincidence that it's one of the top performing international equity funds," Durham said.

John Rice, investment officer at Keats, Connelly and Associates in Phoenix, allocates about 50 percent of his clients' portfolios to international stocks. Almost half of that investment is given to large-capitalization companies, 30 percent to smaller stocks in developed markets and 25 percent to emerging markets, he said.

"If you're going to go after the exposure for overall stock markets, you should have half outside the U.S.," Rice said. After all, he noted, "Half of the world market is outside of the U.S."

Barbara Kollmeyer is a reporter for MarketWatch in Los Angeles.

New York Times' Keith Bradsher: 2 Big Appetites Take Seats at the Oil Table

2 Big Appetites Take Seats at the Oil Table
By KEITH BRADSHER
New York Times

MUMBAI - India, sharing a ravenous thirst for oil, has joined China in an increasingly naked grab at oil and natural gas fields that has the world's two most populous nations bidding up energy prices and racing against each other and global energy companies.

Energy economists in the West cannot help admiring the success of both China and India in kindling their industrialization furnaces. But they also cannot help worrying about what the effect will be on energy supplies as the 37 percent of the world's population that lives in these two countries rushes to catch up with Europe, the United States and Japan. And environmentalists worry about the effects on global warming from the two nations' plans to burn more fossil fuels.

With engineering expertise and equipment more available around the world, one result is that oil executives and drillers in remote spots increasingly speak Mandarin or Hindi, not English. Their newfound commercial confidants live in pariah states like Sudan and Myanmar, one sign that the political dynamics of the world oil market pose a difficult challenge for the Bush administration.

The prospect of China's consuming ever growing lakes of oil has been noted over the years, although it is gaining new urgency as Chinese consumption continues to soar. China's oil imports climbed by a third last year as its oil demand exceeded Japan's for the first time.

Now India is joining China in a stepped-up contest for energy, with both economies booming recently just as their oil production at home has sagged. China trails only the United States in energy consumption; India has moved into fourth place, behind Russia.

Voracious energy demand is coming from people like Kalpana Anil Gaikar, a 35-year-old unemployed widow with three children here who keeps running up costly electricity bills. Her appetite, millions of times over, is pushing India and China to vie for control of oil and natural gas fields from Sudan to Siberia.

Both countries are also expanding their navies as they become increasingly dependent on lines of oil tankers from the Mideast, posing the beginnings of an eventual challenge to American influence in the Indian Ocean and South China Sea.

As millions of Indians and Chinese buy cars, television sets and air-conditioners, the fossil fuels burned to power their purchases have become some of the fastest-growing contributors to global warming. Chinese emissions alone soared close to 15 percent last year.

Under the Kyoto Protocol, neither India nor China faces any specific limits on its emissions of global warming gases. Both countries joined the agreement with promises to try to restrain emissions, but even environmentalists hesitate to demand stringent restrictions on China or India. That is because their energy consumption per person remains less than one-sixth the American level.

Ms. Gaikar pays $9.30 a month in rent for her tiny apartment in a public housing project here in Mumbai, formerly known as Bombay, but up to another $4.50 a month for electricity to power the lights, ceiling fan and other amenities. That is a hefty electrical bill for someone who earned less than $30 a month at a bedsheet factory until she lost her job in late December because of a broken leg.

Her children need the lights to study for school, however, and she has no intention of cutting the power. "Whatever my leg, I'll have to go back to work," she said.

To meet the demand, India's government, like China's, is looking to tap countries the Bush administration and the European Union have tried to isolate.

During a recent conference in New Delhi, a succession of top Indian officials saluted Omer Mohamed Kheir, the secretary general of the Ministry of Energy and Mining in Sudan, who sat beaming in the middle of the front row. The Oil and Natural Gas Corporation, which is controlled by the Indian government, recently began producing oil in Sudan in cooperation with Chinese state-owned companies. It is now building a pipeline in Sudan and negotiating to erect a refinery as well.

"The Asians came to Sudan in a very difficult time, and we created a very good strategic relationship with them," Mr. Kheir said in an interview.

He dismissed Western accusations that militias with links to government forces have been raping and murdering large numbers of villagers and refugees in the Darfur region. "Darfur is not a deeply rooted problem; we think it is quite artificial," he said.

Three government-controlled Indian companies concluded a $40 billion contract with Iran on Jan. 7 for the purchase of liquefied natural gas over 25 years and for stakes in oil fields there. The Indian government followed up on Jan. 13 by concluding a deal with the military government of Myanmar for the construction of a gas pipeline.

Subir Raha, chairman and managing director of the Oil and Natural Gas Corporation, said that Western countries had been arbitrary in their imposition and removal of sanctions on countries like Libya, so his company could not be expected to follow their practices for countries like Sudan and Myanmar.

"If you talk about pariah states, Libya is an excellent example," he said. "One fine morning, you see there are no sanctions."

China has also been in the spotlight lately because of suspected sales of missile technology to Iran, one of the biggest sellers of oil to China and other Asian markets.

China's deputy foreign minister, Zhou Wenzhong, took similar positions to India's in an interview in the summer of 2004. "Business is business," he said then. "We try to separate politics from business. Secondly, I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them."

India's oil imports climbed by 11 percent in 2004, and China's by 33 percent, straining the capacity of production operations, pipelines, refineries and shipping lines and helping to keep oil prices above $40 a barrel. The International Energy Agency expects them to use 11.3 million barrels a day by 2010, which will be more than one-fifth of global demand.

Western engineers and equipment for complex drilling are now readily available for hire, making it easier for India's and China's state-owned companies to work together and undertake ventures on their own.

Around the world, countries "are using their state oil companies to ally with each other," said William Gammell, the chief executive of Cairn Energy of Scotland, one of the biggest foreign oil companies operating in India. "The majors used to have all the technology, and now you can get the technology by buying it."

India's recent enthusiasm for energy security has extended to assets that are the subject of legal scrutiny as well. Companies controlled by the Indian and Chinese governments are the two main bidders publicly pursuing large stakes in the Yukos oil and gas assets that the Russian government recently confiscated in a tax dispute. The confiscation is the subject of litigation in Texas.

Mr. Raha said he would not be dissuaded from the pursuit by the controversy over how the Russian government obtained the assets. "I haven't seen a single deal or transaction basically that didn't have legal issues," he said.

A vigorous debate has emerged in India over whether this country's need for oil will inevitably put it at odds with China. Mani Shankar Aiyar, India's minister of oil and natural gas, said that India and other Asian nations needed to pursue their own interests in oil markets and that he wanted to cooperate with China, not compete with it.

Greater private automobile ownership and expanding industries have increased energy demand in China and India just as traditional sources of energy are fading away. In India, thousands of villages are switching from burning dried dung or brush for fuel to buying liquefied petroleum gas for stoves or plugging into the national electricity grid to power everything from ceiling lights to computers.

Beijing and now New Delhi are following a long tradition of rising economic powers seeking to secure energy supplies. Britain, Japan and the United States wheeled and dealed in the years leading up to World War II for control of oil fields around the world, with diplomats often working with oil company executives. Through the 1980's and early 1990's, government-controlled oil companies from Malaysia and Brazil also invested in distant oil fields, notably in China and the South China Sea.

As Chinese and Indian companies venture into countries like Sudan, where risk-averse multinationals have hesitated to enter, questions are being raised in the industry about whether state-owned companies are accurately judging the risks to their own investments, or whether they are just more willing to gamble with taxpayers' money than multinationals are willing to gamble with shareholders' investments.

"Sudan is the beneficiary," said Philip Andrews-Speed, a former BP geologist in China who now runs an oil policy study center at the University of Dundee in Scotland. "If these state-owned companies were not in the game, there would not be much interest in Sudan."

China made many of its investments in the 1990's, when oil fell as low as $10 a barrel, and signed large contracts for liquefied natural gas in 2002, before recent sharp increases in gas prices. India made its first big investment in Sudan three years ago, but its national leaders are calling for a greater effort to secure oil fields now despite high prices.

Some Western countries, like Germany, have dismissed as outdated the whole idea of owning far-flung oil fields. They have relied on being able to buy oil in world markets, instead of buying oil fields, and have emphasized energy conservation, notably through high gasoline taxes.

China and India have not only avoided imposing steep taxes, but have even regulated energy prices directly and indirectly for years. India in particular still keeps domestic prices for natural gas below world levels to subsidize power generation and fertilizer production, two industries with customers who still have the political power to prevent price increases.

"This is a basic reality of the Indian market," said Proshanto Banerjee, the chairman and managing director of GAIL (India) Ltd., a big state-controlled gas company, "and it would not be proper to ignore this."

***
Prudent Investor says,

Not limited to China, this article shows that India is likewise joining the hunt for securing energy resources. Pieces of the jigsaw puzzle clearly falling in place....

New York Times' Romero and Mouawd: Saudis in Strategy to Export More Oil to India and China

Saudis in Strategy to Export More Oil to India and China
By SIMON ROMERO and JAD MOUAWAD
New York Times

HOUSTON, Feb. 17 - Saudi Aramco, the world's largest producer of crude oil, is seeking to strengthen relations with energy companies in India and China as part of a strategy to increase Saudi oil exports there. Together, the two countries are expected to account for much of the increase in global oil demand over the next decade.

At the same time, Abdallah S. Jumah, the president and chief executive at Aramco, the energy company controlled by the Saudi kingdom, said on Wednesday that the company was hoping to maintain its position as a leading supplier of petroleum to the United States, the largest consumer of Saudi oil.

Last year, for the first time since 1997, Saudi Arabia was eclipsed as the top supplier of crude oil to the United States, falling behind Canada.

That shift occurred as Saudi Aramco made several efforts to increase its reach in Asia's two largest countries. In India, Aramco was disappointed last year when an effort to acquire a stake in Hindustan Petroleum was thwarted after the Parliament suspended plans to allow foreign investments in the government-run oil marketing company.

"Since then, we have been in contact with our Indian friends to find other opportunities," Mr. Jumah said in an interview at Aramco's office in Houston. "So far we have not found the opportunity that would entice us or entice them but we continue to look because this is a very important market."

Aramco, which is based in Dhahran, Saudi Arabia, exports about 450,000 barrels of crude oil a day to India; it sends 500,000 barrels daily to China. Mr. Jumah said Aramco was pressing ahead with an expansion of a refinery venture in Fujian Province in China, where with Exxon Mobil and Sinopec, a Chinese energy company, it processes about 80,000 barrels a day.

The expansion would elevate the complex's capacity to about 240,000 barrels a day, giving Aramco an opportunity to increase oil exports to China. Mr. Jumah said Aramco would like to sell more oil to China, but the company was limited in its ability to do so by the "diet of their refining capacity." Aramco, he said, was considering other opportunities in China in cooperation with Sinopec.

Aramco's forays in India and China, together with the awarding of Saudi gas exploration contracts last year to Chinese and Russian companies, has generated concern that Saudi Arabia's traditionally strong relations with the United States, long the country's largest trading partner, might be fraying. Mr. Jumah was careful to point out that he expected oil exports to the United States to remain strong.

Saudi Arabia supplied the United States with 1.494 million barrels of oil a day in 2004, about 232,000 barrels a day less than the previous year. Still, Mr. Jumah said, "The U.S. needs us, and we need the U.S."

****
Prudent Investor quotes Nobel laureate economist Hyman Minski...
"Stability breeds Instability"

Earth Policy Institute's Lester Brown: CHINA REPLACING THE UNITED STATES AS WORLD'S LEADING CONSUMER

CHINA REPLACING THE UNITED STATES AS WORLD'S LEADING CONSUMER

Lester R. Brown

Although the United States has long consumed the lion’s share of the world’s resources, this situation is changing fast as the Chinese economy surges ahead, overtaking the United States in the consumption of one resource after another.

Among the five basic food, energy, and industrial commodities—grain and meat, oil and coal, and steel—consumption in China has already eclipsed that of the United States in all but oil. China has opened a wide lead with grain: 382 million tons to 278 million tons for the United States last year. Among the big three grains, the world’s most populous country leads in the consumption of both wheat and rice, and trails the United States only in corn use.

Although eating hamburgers is a defining element of the U.S. lifestyle, China’s 2004 intake of 64 million tons of meat has climbed far above the 38 million tons consumed in the United States. While U.S. meat intake is rather evenly distributed between beef, pork, and poultry, in China pork totally dominates. Indeed, half the world’s pigs are found in China.

With steel, a key indicator of industrial development, use in China has soared and is now more than twice that of the United States: 258 million tons to 104 million tons in 2003. As China’s population urbanizes and as the country has moved into the construction phase of development, building hundreds of thousands of factories and high-rise apartment and office buildings, steel consumption has climbed to levels not seen in any other country. (See data.)

With oil, the United States is still solidly in the lead with consumption triple that of China’s—20.4 million barrels per day to 6.5 million barrels in 2004. But while oil use in the United States expanded by only 15 percent from 1994 to 2004, use in the new industrial giant more than doubled. Having recently eclipsed Japan as an oil consumer, China is now second only to the United States.

Looking at energy use in China means also considering coal, which supplies nearly two thirds of energy demand. Here China’s burning of 800 million tons easily exceeds the 574 million tons burned in the United States. With its coal use far exceeding that of the United States and with its oil and natural gas use climbing fast, it is only a matter of time until China will also be the world’s top emitter of carbon. Soon the world may have two major climate disrupters.

In addition to steel, China also leads in the use of other metals, such as aluminum and copper. Not only has China overtaken the United States in use of these materials, but it is widening the gap, leaving the United States in a distant second place.

In another key area, fertilizer—essentially nitrates and potash—China’s use is double that of the United States, 41.2 million tons to 19.2 million tons in 2004. In the use of the nutrients that feed our crops, China is now far and away the world leader.

In China’s consumer economy, sales of almost everything from electronic goods to automobiles are soaring. Nowhere is the explosive growth more visible than in the electronics sector. In 1996 China had 7 million cell phones and the United States had 44 million. By 2003 China had rocketed to 269 million versus 159 million in the United States. In effect, China is leapfrogging the traditional land-line telephone stage of communications development, going directly to mobile phones.

The use of personal computers is now also taking off in China. After a late start, the number of personal computers jumped to 36 million in 2003 compared with 190 million in the United States. But with the number of computers in use doubling every 28 months, it will only be a matter of time before China, a country of 1.3 billion people, overtakes the United States, which has a population of 297 million.

With household appliances, such as television sets and refrigerators, China has long since moved ahead of the United States. By 2000, for example, TV sets in China outnumbered those in the United States by 374 million to 243 million. With refrigerators, perhaps the most costly household appliance, production in China overtook that of the United States in 2000.

Among the leading consumer products, China trails the United States only in automobiles. By 2003, it had 24 million motor vehicles, scarcely one tenth the 226 million on U.S. roads. But with car sales doubling over the last two years, China’s fleet is growing fast.

And the race is far from over. With a per capita annual income in 2004 of $5,300, one seventh the $38,000 in the United States, China has a long way to go to reach U.S. per capita consumption levels. For example, despite China’s wide lead in total meat intake, the meat consumed per person is only 49 kilograms (108 pounds) a year compared with 127 kilograms (279 pounds) in the United States. As Chinese incomes rise at a world record pace, use of foodstuffs, energy, raw materials, and sales of consumer goods are continuing to climb.

China is now importing vast quantities of grain, soybeans, iron ore, aluminum, copper, platinum, phosphates, potash, oil and natural gas, forest products for lumber and paper, and the cotton needed for its world-dominating textile industry. These massive imports have put China at the center of the world raw materials economy. Its voracious appetite for materials is driving up not only commodity prices but ocean shipping rates as well.

The new industrial giant’s need for access to raw materials and energy is shaping its foreign policy and security planning. Strategic relationships with resource-rich countries such as Brazil, Kazakhstan, Russia, Indonesia, and Australia are built around long-term supply contracts for products such as oil, natural gas, iron ore, bauxite, and timber. These strategic ties it is forming are welcomed in countries like Brazil as a counterweight to U.S. influence.

China’s eclipse of the United States as a consumer nation should be seen as another milestone along the path of its evolution as a world economic leader. Its record-high domestic savings and its huge trade surplus with the United States are but two of the more visible manifestations of its economic strength. It is now China, along with Japan, that is buying the U.S. treasury securities that enable the United States to run the largest fiscal deficit in history.

The United States, the world’s leading debtor nation, is now heavily dependent on Chinese capital to underwrite its fast-growing debt. If China ever decides to divert this capital surplus elsewhere, either to internal investment or to the development of oil, gas, and mineral resources elsewhere in the world, the U.S. economy will be in trouble.

China is no longer just a developing country. It is an emerging economic superpower, one that is writing economic history. If the last century was the American century, this one looks to be the Chinese century.

Copyright © 2005 Earth Policy Institute

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Prudent Investor Says,

Deny until you can, but as the article shows this trend is shaping to be the new world order.

Financial Times: CIA issues warning on China’s military efforts

CIA issues warning on China’s military efforts
By Edward Alden in Washington
Published: February 16 2005 19:32
Financial Times

The director of the US Central Intelligence Agency has warned that China's military modernisation is tilting the balance of power in the Taiwan Strait and increasing the threat to US forces in the region.

Delivering the agency's annual assessment of worldwide threats on Wednesday, Porter Goss, a former Republican congressman who was named in September to head the CIA, dropped any mention of the co-operative elements of the US-China relationship that characterised recent CIA statements. Instead, he said China was making determined military and diplomatic efforts to “counter what it sees as US efforts to contain or encircle China”.

Mr Goss's statements on China were a small part of testimony that highlighted the threat Islamic terrorism poses to the US and emphasised concerns over Iran and North Korea. He has also said that he wants to refocus the agency on its traditional mission of assessing threats and avoid statements that could be interpreted as setting US policy.

But the statement on China indicated the CIA is paying growing attention to what it considers potential military threats amid China's growing economic ties with its neighbours and the US. Mr Goss referred to US concerns over the increase in Chinese ballistic missiles deployed across the Taiwan Strait and the improvements in China's nuclear and conventional capabilities.

The change in tone was notable given US concerns over Europe's plan to end its embargo on arms sales to China. Experts on China said that, while warnings about China's military capabilities were not new, the CIA had in the past underscored the co-operation between the US and China.

In testimony last year, George Tenet, former CIA head, praised China for co-operation in the war on terrorism and for its participation in the nuclear talks with North Korea. In 2003, Mr Tenet described US-Taiwan relations as relatively placid and said China was trying to assert its influence through “economic growth and Chinese integration into the global economy”. James Lilley, a former US ambassador to China, said that, while it was appropriate for the CIA to focus on longer-term threats, the growing economic ties between China and Taiwan were making conflict less likely.

James Steinberg, deputy national security adviser in the Clinton administration, said: “It is a little surprising that it didn't say anything about the enormous emphasis China places on a stable international environment and constructive relations with the US.”

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Prudent Investor says,

Inveterate inwardly looking local cynics continue to ignore the shaping geopolitical developments that may appear to determine both economic and political fortunes of the region and the world. This article is simply one of the the few pieces of the complex jigsaw puzzle that may serve as a clue on how your investment decisions should be made.

World Bank Press: Half World's People To Live In Cities By 2007 According to the UN

Half World's People To Live In Cities By 2007: UN

UN Secretary-General Kofi Annan on Wednesday presented a report by the UN Commission on Population to the UN Economic and Social Council, which stated that half the world's population will live in cities in two years, a huge jump from the 30 percent residing in urban areas in 1950, Reuters reports.

The commission’s report states that some 3.2 billion of the world's 6.5 billion people live in cities today, and the number will climb to 5 billion - an estimated 61 percent of the global population - by 2030. The number of very large urban areas was also rising, the commission said. Twenty cities now have 10 million or more inhabitants, compared with just four - Tokyo, New York-Newark, Shanghai and Mexico City - in 1975 and just two - New York-Newark and Tokyo - in 1950.

The five biggest cities today in population are Tokyo, with 35.3 million people, Mexico City (19.2 million), New York-Newark (18.5 million), Bombay (18.3 million) and Sao Paulo (18.3 million). The next 15 largest are Delhi, Calcutta, Buenos Aires, Jakarta, Shanghai, Dhaka, Los Angeles, Karachi, Rio de Janeiro, Osaka-Kobe, Cairo, Lagos, Beijing, metropolitan Manila and Moscow. By 2015, the five largest cities will be Tokyo, with 36.2 million residents, Bombay with 22.6 million, Delhi with 20.9 million, Mexico City with 20.6 million and Sao Paulo with 20 million, it said.

Despite the growing number of vast urban agglomerations, about half of all city dwellers live in far smaller urban areas of fewer than 500,000 inhabitants. Urban residence patterns vary depending on an area's development status, the commission found. About three-quarters of people in more developed regions lived in cities, while just 43 percent lived in them in less developed areas.

Dow Jones adds the United States is the most highly urbanized area of the world with 87 percent of its population living in cities. Latin America and the Caribbean followed, with 78 percent of the population living in urban areas, the report said. Forty percent of the people of Africa and Asia live in cities. The report also predicted that in less developed regions, the number of urban dwellers will equal the number of rural dwellers by 2017.

The Associated Press further notes the report said that the number of elderly people is rising rapidly, prompting a need for economic and social changes. The biggest problem for developing countries was high mortality rates, while wealthy countries faced falling birth rates and the decline in the working-age population.

Annan said the population of all countries will continue to age substantially, but the increase will be faster in developing countries and social security systems that depend on workers to pay for those who are retired will be affected. "Such rapid growth will require far-reaching economic and social adjustments in most countries," he said.

The report highlighted there were 600 million people over the age of 60 in 2000, three times the number in 1950, and that figure was expected to triple again over the next 50 years to around 2 billion elderly. The average number of children a woman gives birth to, meanwhile, declined from five around thirty years ago to three by the beginning of this century, the report said. Mortality declined sharply during the 20th century, except in Africa, which has been hard hit by the AIDS epidemic. Overall, the world's population reached 6.5 billion in 2005 and could stabilize at 9 billion just after 2050, Annan said.