PREMIER WEN’S EMMY AWARD

PREMIER WEN’S EMMY AWARD

The shock waves that accompanied Chinese Premier Wen Jiabao’s CNN interview last September have subsided, but not permanently. For those who didn’t see the program, it was the reclusive Premier’s first interview in five years.

He granted the privilege to CNN’s most respected global personality, Fareed Zakaria. During the course of a wide-ranging 45-minute interview, Zakaria raised a number of topics that are utterly taboo to discuss within China. There were a number of breathtaking and dramatic moments as Premier Wen and his interpreters struggled to cope with a situation that would have registered as an unimaginable insult in China’s hierarchical society.

It was likely the drama of the moment that won Zakaria an Emmy nomination for the interview, but on reflection the interview was memorable for entirely different reasons. Last week CNN aired the interview again, and I was amazed at how much it revealed. (You can watch it yourself by going to http://www.cnn.com/CNN/Programs/fareed.zakaria.gps/ on the CNN website or simply google the search terms Fareed Zakaria gps).

For those who doubt the Chinese leader’s mastery of capitalism, watch how he handles questions about the free market. To Zakaria’s apparent surprise, Premier Wen refers eloquently to the concepts from Adam Smith’s seminal books on capitalism. Wen makes the case that Smith’s “invisible hand” of market forces can coexist with the “visible hand” of government intervention.

He was prophetic. Within six months of the first airing, both Beijing and Washington had pumped more than a trillion dollars of stimulus money into their respective economies to stave off a global financial catastrophe.

Premier Wen also refers to the twelve books of the “Meditations” written by the Roman emperor, Marcus Aurelius. In his writings, the stoic Aurelius argues against indulgence in emotion, a skill which, he says, will free a man from the tumult of the material world. He says the only way a man can be harmed is to allow his emotional reaction to overpower him. Wen argues against over-reaction to the financial crisis.

This is what is so memorable about Wen’s rare interview, not the emotional restraint we see as the interviewer broaches Chinese taboos. Instead it is Wen’s intellectual breadth and worldliness that gives a clear sign to the world that we are dealing with a Chinese leadership which is determined to engage itself with the real, post-communist, unabashedly capitalist world.

Asked if he is nervous about Chinese holdings of U.S. debt, Premier Wen makes it clear that he wishes for constructive engagement with the U.S. economy for many decades to come.

On the issue of China’s status as a superpower, Premier Wen demurs. He says China has no claim to be a superpower and no desire to infringe on America’s claim to superpower stature. Clearly, the Premier is taking a “walk softly and carry a big stick” approach to China’s international status. China certainly has the money and the political clout to wield more international power, but Wen deftly avoided being snared. He ducked questions about using Chinese influence to curb Iran’s nuclear ambitions although he does take credit for helping manage ongoing problems in North Korea.

Surprisingly, Premier Wen tacitly admits to the imperfections of the Chinese justice system by arguing that it must be reformed. The rule of law is essential to civil order, and currently China is plagued by tens of thousands of angry demonstrations every year. Provincial courts and administrators have made it extremely difficult for China to impose the regulations and laws essential to a smoothly-functioning capitalist system.

The Chinese Premier also acknowledges the need to move towards a governmental system that is more representative of the will of the people. Not surprisingly he stops well short of a call for American-style democracy. But it is significant that Wen represents a force for gradual change and reform.

He is a subtle and restrained man. As an admirer of Adam Smith, Premier Wen has sent a signal that he is well-informed and sincerely committed to the principles of capitalism.

I highly recommend that you set aside 45 minutes to watch Premier Wen’s interview. In the vast wasteland of television, it is an enlightening and subtle experience that is essential to understanding the leadership of modern China.

CANCELING AMERICA’S CREDIT CARD

CANCELING AMERICA’S CREDIT CARD

It has only been three months since Chinese Premier Wen Jiabao demanded that the United States “guarantee” the safety of China’s massive holdings in U.S. dollar. The amount of China’s dollar holdings is unclear but estimates vary between 70 percent and 82 percent of China’s two trillion dollar mountain of foreign reserves.
As Premier Wen explained in March, "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets…To be honest, I am definitely a little worried."
Wen didn’t get his guarantee from the Obama administration which continues to pile up debt. China last spoke out on the dollar later that month when Zhou Xiaochuan, the governor of China’s central bank, said the time had come to end the dollar’s reign as the world’s reserve currency before a G-20 meeting.
With little response from Washington or the rest of the developed world, China has been moving quietly and cautiously away from the dollar. In order to avoid setting off a panic, China has been hedging its holdings and diversifying in a number of ways. Recently we told you about China’s increasing gold reserves, but gold is believed to make up only two percent of China’s total reserve hoard.
As the dollar began falling due to concerns about America’s AAA debt rating, China quietly began taking the first steps to make the yuan a more convertible currency. The most significant is a decision by the State Council (China’s Cabinet) to enable selected importers in five of China’s largest cities to settle cross-border trades through Hong Kong in yuan. In Shenzhen alone 100 companies have been selected to trade in yuan.
Beijing followed up by selecting two banks with an enormous presence in Hong Kong to sell yuan bonds. HSBC Holdings and the Bank of East Asia will be allowed to sell bonds denominated in yuan in a move that is widely seen as furthering Beijing’s goal of promoting the yuan as a recognized alternative to the U.S. dollar for international trade and for reserves.
Hong Kong may be first in line to become a yuan trading hub, but Beijing is acting rapidly to spread the yuan throughout Asia. China’s central bank has signed agreements to lend yuan to South Korea, Malaysia, Indonesia as well as Belarus and Argentina. It’s expected that Beijing will ultimately allow yuan trade throughout the ASEAN trading bloc, another step on the road to becoming a widely accepted trading currency.
While promoting the yuan, China has been taking subtle steps to reduce its reliance on U.S. debt instruments. Dumping the dollar would be self defeating for the Chinese but Beijing has been selling off the debt of government sponsored enterprises like Fannie Mae and Freddie Mac to buy treasuries, and not just any treasuries.
The stark fact is that China is selling its long-term Treasuries for short-term notes and Treasury bonds. By sticking to short-term instruments, China is improving its options to liquidate dollars relatively quickly in favor of other reserve currencies such as the euro or the yen.
As the co-chair of the House Appropriations Committee, Representative Mark Kirk remarked, “It would appear, quietly and with deference and politeness, that China has cancelled America’s credit card. Kirk says not very many people on Capitol Hill realize this is now happening.
So, if you hear politicians try to reassure the American public that China remains the top buyer of U.S. Treasuries, keep in mind that China’s buys are not new money. China is merely rotating its large holdings of short term Treasury bonds and notes much more frequently. There is no indication whatsoever that China is selling off euros and yen to buy larger dollar reserves.
Don’t expect dramatic moves from Beijing, despite an alarmist prediction by famed economist Nouriel Roubini that the yuan was positioned to usurp the greenback as the world’s reserve currency. Beijing would indeed enjoy the prestige and flexibility that comes with that privilege, but that won’t happen quickly. Beijing’s problem is that the yuan would be a strong, attractive currency, considering China’s reserve holdings and its important trade position. That would means its value would rise if it were traded freely. And if the value of the yuan went up, China’s beleaguered export industries would suddenly become less competitive. Beijing won’t let that happen.
The vice-head of China’s Banking Regulatory Commission acknowledged the many barriers that remain before Beijing would meet all of the conditions to allow the yuan to become an international reserve currency. The commissioner did allow that the yuan could make up more than three percent of global foreign exchange reserves by 2020.
Without doubt, that is a conservative estimate considering the speed at which Beijing is spreading the usability of its currency throughout Asia and the world.
Just as the Chinese are doing, it makes sense for investors to diversify internationally to hedge against fluctuations in the dollar and the U.S. economy.

Breakthrough Means Big Gains For Taiwan, Greater China

Breakthrough Means Big Gains For Taiwan, Greater China
The investment spotlight has abruptly snapped from Shanghai to Taipei, as we continue to track the world’s fastest-growing stock markets. The market breakthrough started last week when state-owned China Mobile (CHL) agreed to buy 12 percent of Taiwan's Far EasTone Telecommunications for $529 million.
China Mobile's surprise acquisition of a modest stake in Far EasTone has suddenly sparked hopes of more Chinese investments in Taiwan, driving Taiwan's benchmark index higher last week, and fueling its largest percentage gain in nearly 18 years!
The deal represents a startling shift in the decades-long hostility between the island nation and mainland China, and much more is to happening.
One day after the China Mobile deal the Taiwanese government announced that it will allow institutional investors from China to buy into the island’s stock market for the first time since the two sides split in civil war. The financial and political repercussions are enormous and should seize the attention of international investors everywhere.
Starting this week, mainland institutional investors will be able to apply to buy Taiwanese shares as long as the holding does not exceed 10 percent of a listed firm’s total share value, according to Taiwan’s Financial Supervisory Commission. As stocks on the Shanghai Exchange flirt with excessively high valuations, there is considerable Chinese capital looking for undervalued stocks, and this new opening to Taiwan provides an opportunity for mainland China investors to push up stocks in Taipei. That appears to be happening with lightning speed.
The China Mobile deal breaks the ice in relations between the mainland and Taiwan by shepherding in the first important investment by a Chinese company into a Taiwanese firm. This one breakthrough transaction in the politically sensitive telecom industry could also lead to more openings for investments in Taiwan’s cash-hungry financial services industry.
Already, envoys from the two sides have signed a financial cooperation agreement that paves the way for the two sides to open banks and other financial service institutions in the other's territory. Taiwan has long banned such arrangements, fearing they would allow Beijing to gain control of its economy. But Taiwan’s new President, Ma Ying-jeou has pushed aggressively for closer economic ties since he took office last May, stressing they are crucial for Taiwan's continued economic integration in the region.
Not surprisingly, financial, telecom and high-tech shares are now surging on the Taipei exchange.
The sudden thaw in relations with the mainland could provide more opportunities for Taiwanese companies to export semi-finished products to China for completion by China’s low cost labor force and to export finished goods to the U.S. and the European Union. The huge domestic market in China also offers new opportunities for Taiwanese exporters.
Investors should also consider the possibility of a peace dividend. For decades Taiwanese shares have been shadowed by the threat of war between the Mainland, which has always claimed that Taiwan is an integral part of Chinese territory. Until last year’s election, Taiwan’s former president inflamed relations with China by threatening to declare independence, the very words that could spark an invasion.
China put up furious resistance to Taiwanese statehood by blocking diplomatic recognition of Taiwan and by barring Taiwanese entry into world bodies. But in the final hours before the May Day holiday, China dropped its longstanding opposition to Taiwan’s participation in the World Health Organization’s annual assembly, also paving the way for the island to attend a UN meeting next month for the first time since 1971.
Breakthrough events are happening on the Taiwan front with breathtaking speed. An investment revolution appears to be following the political revolution as a possible peace dividend pays off at last.

China Goes for Gold

Beijing has just revealed a state secret that has gold bugs all over the world chattering. Since 2003 China’s foreign exchange ministry has been quietly hoarding tons of gold. The big question now is why?
The total increase in China’s gold reserves was publicly announced to be 1,054 tonnes. (A metric ton is 1000 kilograms, which is approximately 200 pounds heavier than the ton we are used to in the United States.) That sounds like quite a lot but it amounts to $30.9 billion, just a fraction of China’s holdings of the U.S. dollar.
Nevertheless, gold bugs jumped on the news that China was buying even though Beijing’s gold hoard is still not impressive by global standards. The newly revealed gold cache accounts for only about 1.6% of China's total foreign exchange holdings and is little more than one-tenth of the value of the U.S. gold reserve, still the world's biggest.
But, only six countries hold more than 1,000 tonnes of gold, and China is now ranked fifth in the world. With Beijing’s surprise revelation, China has leap-frogged ahead of Switzerland, Japan and the Netherlands in terms of total gold reserves.
Where is this secret stash of gold coming from? Standard Bank in Hong Kong says China has been buying via government channels from South Africa, Russia and South America. But Beijing says it purchased its 1,000-plus tonnes of gold domestically, which it could do as the world’s largest gold producer.
China appears to be slowly and quietly hedging its bets against a rapid decline or collapse in the value of the U.S. dollar.
Regular readers will recall that China spoke up before this month’s G-20 summit, calling for a new international reserve currency to replace the dollar. It was an unexpected challenge to the world’s strongest currency considering the fact that China is now the largest holder of U.S. dollar reserves, with its hoard of various dollar-denominated assets believed to be somewhere between $700 million and a trillion dollars.
It was no surprise to anyone that the G-20 failed to agree on a replacement for the dollar. There was discussion of Special Drawing Rights, (SDRs) an IMF monetary instrument that has gained little traction outside of governmental or banking circles. An alternative suggested by a U.N. advisor was a basket of Asian currencies to create a regional currency in Asia something like the Euro. That is also unlikely to happen given regional tensions.
The alternative is a shocker. There are subtle indications that China is making early moves to replace the dollar with its own currency, the yuan, as a reserve currency, beginning in Asia.
Since last year, China has signed deals with six countries, including South Korea, Malaysia and Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, rather than the dollar. Beijing is also taking steps to settle trade accounts with neighboring states using the yuan. In addition China is spreading the yuan's influence in Asia by making yuan denominated loans and investments in the region.
Accumulating an increasingly large hoard of gold to back up its currency makes obvious sense if your trading partners are to have confidence in the yuan. It is significant that China now has more gold than Japan and there’s no real assurance that we know about all of China’s gold reserves, considering the nation’s secrecy and its preeminence as the world’s biggest gold producer.
What does this mean for investors? It certainly does not mean that we should rush out and buy gold. China moves slowly and subtly. But Beijing effectively called for a new world order at the G-20 meeting, and we are seeing a hint of what this new financial order will look like perhaps a decade or more down the road.
China appears to be laying the groundwork to establish the yuan as the world’s new reserve currency or at least as an alternative reserve currency to the dollar. Beijing called strongly for more say in world financial developments at the recent G-20, and that’s a refrain we’re likely to hear again and again.
Get ready for Shanghai to compete with New York for dominance in the financial system.
The bottom line to prudent investors is this: Diversify your investments internationally, particularly in China as a new financial star rises in the east. Investments in the U.S. may follow the shaky path of the dollar in the years ahead!