China and the World Outside

Vantage Point Important. The Talmud teaches us that we see things as we are – not as they are. Thus, Westerners are focusing on “who will lead China”. We believe that the strongman eras of Mao and Deng are over.

Leadership issues: 2,200 delegates on October 21 selected the 200 members of the new Party Central Committee This Central Committee chooses its 20 – odd member Political Bureau. This Political Bureau chooses the core leadership group – the Politburo Standing Committee. That just happened.

Key issues:

  • Centralization. Beijing is extending its reach into the provinces and to the local level in every township. Without this reach, any policy edicts (including Central Bank “tightening”) are just loud gongs, with no effect. This is an attempt to change the age-old adage that the mountains are high and the emperor is far away.

  • 700 million farmers. Enforcing the Property Law, which was enacted on October 1. This is the first of its kind in China. In particular, by the end of this year, land rights documentation will be given to 90 percent of all farmers. Farmers will be given means by which to register their lands – so that these cannot be seized arbitrarily by local government officials who sell the land to factories. Also, if properly implemented, upon land registration, these farmers will be given 30 – year land rights. The only way to implement farmers’ property rights is to hook the political careers of local officials to how well they co-operate in implementing the Property Law. This gets back to our point about the role of intra-party democracy.

  • Once they properly own their land, these farmers could create US$500 billion in land wealth – which in turn would boost domestic consumption, and their income inferiority to urbanites would fall. Currently, urbanites earn 3 times more than rural populations do! This income discrepancy is a political powder keg.

  • “Intra – party” democracy. Back to the Talmud: we Westerners must not confuse our goal of democracy with Beijing’s. We ideally want full participation and thus consensus. But Beijing wants to tighten its grip on power – by instituting more checks and balances within the Party as well as within the government at the local level! This is how Hu is addressing the “key issue” just suggested.

GLOBAL INVESTMENT STRATEGY

  • Beware of October. Punters finally have moved from oblivion concerning the worsening Economic Time in the G-3, skipped denial, and are now bearish

    Short term. Preserve profits and avoid all markets. Wait for the buying opportunity. It will arise because “bail out Bernanke” has been joined by “bail out Paulson”: even the Fed is appalled that the Treasury has introduced the big banks’ sub prime support package. Avoid banks.

    Currencies. Go long yen and Swiss Franc. On account of their very low interest rates, these two currencies have been favourites in when placing carry trades. But with markets unraveling, punters will want to buy these currencies back in order to re-pay their debts. See next.

THE DOLLAR

Where is the dollar headed – and why?

  • It is headed south – a trend that has been in place since the early 1970s when it floated. At the time, it bought 360 yen; now it buys about 115 yen - or less than half of what it used to!

  • The key reason is that superpower (SP) currencies have to deteriorate. Superpowers spend so much money defending their empires that they run out of money. So they print more money – and that increases its supply. So down goes the price of the currency.

    Then, there is Congress. In its eagerness to dictate to China, it wants the RMB re-valued. So the dollar has to go down against the RMB.

  • Finally, with stagflation looming in America – courtesy of higher imported inflation on account of a lower dollar – US interest rates have to fall. So commodity currencies like Sterling and the Australian dollar provide a higher relative yield.