Tags: China's | Economy | Dire | Straits: | Report

China's Economy In Dire Straits: Report

Wednesday, 09 March 2005 12:00 AM

1. China's Economy In Dire Straits: Report
2. Japan Not Afraid To Act On Dollar Plunge
3. Expert: Oil Hike Is Only Mania, Can't Be Sustained
4. Fed Says Dollar Plunge Will Boost Growth, Not Depress It

1. China's Economy In Dire Straits: Report
2. Japan Not Afraid To Act On Dollar Plunge
3. Expert: Oil Hike Is Only Mania, Can't Be Sustained
4. Fed Says Dollar Plunge Will Boost Growth, Not Depress It

1. China's Economy In Dire Straits: Report

China's vigorous economic growth in recent years has led to a bubble economy on the verge of collapse, according to Strategic Forecasting Inc. (STRATFOR), a leading private intelligence service.

In its latest Decade Forecast report, STRATFOR claims China's economy is already on life support - with an estimated $500 billion in bad debts threatening its banks, rapidly rising unemployment, widespread government corruption and mismanagement, and dwindling foreign investment.

"Capital flight by Western investors has already begun," the 2005-2015 Decade Forecast notes. Asian investors have been stepping in to fill the gap, "but they will be unable to sustain adequate levels of investment for very long."

A flood of foreign investment in recent years masked the Chinese economy's underlying weaknesses, STRATFOR says, but that won't last.
"Already there is dissent forming in the international community, and the need for quicker profits is driving companies and investors to look elsewhere."

Looking ahead, the STRATFOR Decade Forecast for 2005 through 2015 sees China's economic growth continuing to decline, leading to increased internal tensions as well as social upheaval and violence, which the central government in Beijing may be unable to control after 2008.

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2. Japan Not Afraid To Act On Dollar Plunge
 
Hiroshi Watanabe, Japan's vice finance minister for international affairs, welcomed recent stability in dollar-yen trade but warned he was ready to act should the U.S. unit suddenly fall.

The market had taken on a more balanced outlook on the dollar – different from the previous overly negative one where any news was used as an excuse to push down the American currency, said Watanabe.

Washington's plan to cut its budget deficit was "a very firm commitment," he told reporters.

"Even though I have some big concerns (that) the yen is overvalued today, I have no intention of making any verbal intervention. But if there is an abrupt movement or an overshoot, we are going to freely step into the market," he said Tuesday.

It has been about a year since Japan intervened in the currency market, buying up a massive sum of dollars in 2003 and early 2004, when Japanese authorities feared a higher yen would harm the country's export-driven recovery.

In regard to creating a single regional currency, Watanabe said Asia would probably begin with a basket of five key currencies, including the euro, yen and the dollar.

To avoid duplicating the regional liquidity crisis of 1997 and 1998, Asian countries have tried to establish bilateral currency swaps and develop bond markets denominated in regional currencies.

"Five years ago, most Asian people said it would take 70 to 80 years (to create a single regional currency), but now ... 20 years is one of the targets we have at this moment," Watanabe said.

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3. Expert: Oil Hike Is Only Mania, Can't Be Sustained

A growing number of observers may believe high oil prices are here to stay as crude trades above $50 a barrel – but some aren't so sure.

Vincent Delisle, strategist at Scotia Capital, rejects the "new era" argument for oil and even compares today's fixation on energy stocks to the infatuation with technology stocks in the 1990s.

"Recent market complacency is one of the main triggers of our current discomfort with the energy sector and, to a lesser extent, growing concerns with other commodity stocks. If one is looking for signs of mania, this has to be it," Delisle said, according to Canada's National Post.

He sees the rally in oil producers as unsustainable and recommends investors wait for a drop in share prices before adding to positions. Those who own shares in oil or companies in the S&P/TSX composite index and the S&P 500 should consider selling.

This pits him against other analysts who believe oil will maintain it's high prices thanks to tight supplies and strong energy demand in China.
Conversely, Delisle believes that today's oil prices are being driven mainly by hype, which is overriding suggestions that energy demand could be at a peak.

For example, oil inventories may rise in the United States as winter ends. In recent years, oil prices and U.S. oil inventories have tended to move in opposition, meaning that rising inventories could take the sting out of oil prices.

In addition, there are indicators that world economic growth might be softening – most importantly in China, where industrial production grew 8.9%, down considerably from the five-year average of 13%.

Figures indicate that China's crude oil imports for January were down 24.1% year-over-year. If the figure for February is lower than expected, Delisle expects crude oil prices will also drop.

"Basing long-term scenarios on energy prices remaining in the US$45 to US$55 a barrel range would appear to ignore the historical cyclical nature of commodities," Delisle said.

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4. Fed Says Dollar Plunge Will Boost Growth, Not Depress It

A substantial plunge in the value of the U.S. dollar is likely to boost economic growth � not cause the economic crisis feared by some economists, a Federal Reserve study says.

According to reports, the Federal Reserve analyzed 23 episodes of current-account adjustments in developed countries in past decades, in search of a "disorderly correction" of current-account deficits � or a sharp decline in the exchange rate that pushes interest rates up, depresses stock prices and weakens economic activity.

Reports claim the study found almost no historic evidence of such a scenario, but rather a positive correlation between economic growth and the decline in the exchange rate.

"It was among the episodes where gross domestic product growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred," the Fed reported.

But most world experts disagree with this outlook. In its early 2004 World Economic Outlook, the IMF said that "even an orderly current account adjustment � would likely be associated with a slowdown in gross domestic product (GDP) growth."

But the Fed study instead supports the traditional economic view that a falling dollar should boost economic growth and reduce the current-account deficit as it makes U.S. exports more competitive and imports less so.� The study found that the greater the fall in the real value of the currency, the larger the increase in growth.

However, the study does warn that its figures might not apply to the United States, since its deficits are profoundly larger than those of the countries examined � the U.S. current account deficit is estimated at $600 billion.

--Make Money With Foreign Currencies - Go Here Now.

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1. China's Economy In Dire Straits: Report 2. Japan Not Afraid To Act On Dollar Plunge 3. Expert: Oil Hike Is Only Mania, Can't Be Sustained 4. Fed Says Dollar Plunge Will Boost Growth, Not Depress It1. China's Economy In Dire Straits: Report 2. Japan Not Afraid To...
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Wednesday, 09 March 2005 12:00 AM
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