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STEPHEN ROACH: As China becomes more rational in managing its investment and growth process, a commodity intensive activity, its demand for commodities will slow and I think you will see a return to a more active two way trading in many of our commodity markets.
I have no doubt that China will still show high demand for resources in at least the next ten years, probably longer. That especially goes for energy resources (gas, coal, uranium, oil). Yes, it is true that computers are getting more energy efficient... but most Chinese don't have a computer at all and it is getting difficult to do anything meaningful (even agriculture) without a computer. There are millions of computerised gadgets and entertainment gear that need electricity... they are only going to get more popular as the Chinese get wealthier.
Then there's the factories that need to keep running. I can't see them moving out of China in a hurry. China is moving towards higher quality goods but then their output quality has been pretty darn good for some time now. I don't see them as having a big problem with quality -- sure you buy equipment that falls to bits in less than a year but look closely and it is because of designed-in defects (usually a bad choice of bearings) rather than sloppy construction. Those Chinese power drills and kitchen blenders are intended to burn out after a year so you have to go buy another one.
Where China is moving higher is in the design component of manufacturing. Building the machines that build the machines. Consider that their current factories include components from Singapore and Japan -- but China wants to have an end-to-end system where the factories are built from Chinese parts and produce Chinese designs. Even when they achieve this (and it won't be in a few years), there is no reason to close the existing factories or no longer take part in the full manufacturing process.
ANDREW ROBERTSON: That's economic speak for falls in the price of oil, iron ore, copper, coal and other raw materials which have been at record highs in recent times, adding billions of dollars to Australia's export income. If those prices do fall, so too will the share prices of Australia's leading resources companies such as BHP Billiton, Woodside Petroleum and Zinifex.
Those prices may fall a little but they won't fall a lot. I actually suspect that they will gradually work their way up higher (although the typical day-to-day economic fluctuations are inevitable).
Computer aided manufacturing coupled with cheap and skilled labour results in manufacturing that is very, very easy to do in bulk. That is to say that the "value add" step of turning raw materials into usable goods has become a small step -- partly because of China but mostly because our technology has made it that way. If it isn't China cranking out the goods it will be India or Pakistan or Mexico or South America. Even Japan manages to produce a good number of cars in a highly competitive market and about 90% of those cars are built by robots because that's the way to achieve high volume production at a low cost.
If there isn't much value in the manufacturing step then the value goes to other things that can't be reproduced in bulk:
Land always goes up in value but you can't build an economy around trading in land (much though Australia keeps trying to).
The big one is resources... especially energy resources, and I'll also point out that you need oil and gas to make plastics (and just look at how many things are made from plastic).
STEPHEN ROACH: Commodity producers, commodity currencies, whether they are Australian, New Zealand, Canada, Brazil, to some extent will all feel the implications of a return to a more cyclical climate in commodity markets.ANDREW ROBERTSON: Over in Wall Street, Stephen Roach has a reputation for being bearish but he says the flipside of any global slowing is that world interest rates are at their peak and will probably start to come down next year.
Ummmm, take a look at the amount of US military spending.
Check out the cost of the Iraq War, (yeah it uses javascript to make the number keep counting, I snapshot the number at $351,366,693,415 right now). That sort of spending doesn't happen without repercussions and one of those will be higher interest rates in the US. Australia is largely tied to being a few percent higher than the US because we are trying to hold onto US investment so for the moment, our interest rates are going to be high as well. George Bush has blown out the biggest deficit in US history and we are supposed to believe that interest rates won't blow out?
Can Europe remain isolated from the US debt?
To some extent, Europe should benefit from US debt because Europe has all it needs to be self-contained. On the other hand, to keep hold of the investment dollar, they can't offer interest too much lower than the US so I see them being driven up as well. Let's not forget that the US dollar pretty much has to fall against both the Asian currencies and the Euro which will make it just about impossible for Europe to export anything to the US. Also, the countries selling US dollars are usually buying Euros forcing the Euro up even further.
We can see that the countries holding US dollars are seriously looking for a way out.
The trouble is, of course that once you have been suckered into buying a lot of currency (effectively propping up the market price of your own assets) then selling it again kills your own value. Worse than that, you may have to buy more to keep the value up. It's a game that the sucker can't win but China is smart enough to know that it might as well get out now.
Here's more reports of it happening.
The India, China and other countries have started dumping US Dollar quietly and buying Euro. That put a very serious pressure on US Dollar. Chinese and Indian central bank officials denied such reports. But Foreign exchange traders say they are quite convinced of Indian and Chinese moves. According some traders, there are many other countries specially oil rich Middle Eastern countries running away from dollar.
Naturally, the trick is to get off the boat early and discretely and I'm sure they will all make loud statements that there is nothing to see here. The louder the statements get, the more they are trying to get away with.
Once that US dollar falls a bit more, the US government will have to either raise interest rates or watch the dollar fall further. Oil on the other hand, will still be useful no matter what the US dollar happens to fall to... and it the US decide to attack Iran, oil will become even more valuable.
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