MoneyNews
Wednesday, July 20, 2005

1. Out of Control: 10% China Economic Surge Worrisome
2. Will China Get the Message?
3. Currency Expert: Dollar Doomed – Bet on Euro

1. Out of Control: 10% China Economic Surge Worrisome

China's economy continues to grow like wildfire, flying in the face of analysts who have been expecting a slowdown. And the pace of development renews concerns of an overexpansion that could result in a crash landing.

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According to the The Los Angeles Times, for the second quarter Beijing is reporting a 9.5% expansion over the same period one year ago – even though the Chinese have been trying to manipulate the economy to achieve a soft landing that would allow growth to diminish slowly and not come to a catastrophic crashing halt.

This data confirms that earlier weakness (which was most likely engineered by the authorities to prevent gluts of raw materials boosting prices) is probably over and that the global economy will remain robust for the remainder of 2005.

The government had imposed lending restrictions and capital-gains taxes to bring overheated Chinese markets – like Shanghai – back down to earth.

But the latest figures suggest all measures are failing and that China – the world's seventh-largest economy – will go on driving global growth.

Of course, failure to rein in growth could certainly create an exceptionally dangerous bubble situation – a burst would have catastrophic consequences for not only China, but the rest of the world as well.

While China's National Bureau of Statistics claims the overall situation is "good," some analysts disagree.

One Chinese economist believes growth in China's GDP could illustrate the government's loss of control over capital inflows – especially as China's fragmented cities and regions continue to eagerly attract foreign investment.

And once again the U.S. is imploring China to revalue the Chinese currency. Many believe that this move would give China a firmer grasp on its own economic pace and progress – while alleviating the unfair trading advantage China currently enjoys.

2. Will China Get the Message?

Meanwhile, China's twin ambitions of achieving global brand recognition and securing ample energy resources are beginning to crumble.

China's Haier group elected to drop out of the race to acquire appliance maker Maytag this week. The news came after Whirlpool joined the bidding, effectively bumping up the price.

Haier had wanted to acquire Maytag's production, distribution and sales networks. But following the Whirlpool announcement Haier sent a letter to the Maytag board stating that they had decided "not to further pursue the transaction."

Meanwhile increasing hostility toward the CNOOC bid for U.S. oil producer Unocal is getting the Chinese a little hot under the collar.

Their offer for the company has remained higher than that of rival bidder Chevron.

But according to The Wall Street Journal, the Unocal board favors remaining in fellow American hands – although it has not publicly stated this.

So when Chevron recently raised the value and quality of its bid, CNOOC saw no reason to better its own terms. In fact, the company has commented that they will do so only if Unocal weighs in  with a public statement backing the Chinese move.

Now it's all becoming clear as egg-drop soup.

China's domestic economy is roaring, and ambitions to expand abroad are set to remain thwarted until China levels the playing field.

It's been traditionally difficult for outsiders to acquire state-owned Chinese assets, and foreign corporations have had little success establishing any traction once they have breached the world's most populous nation.

With continued irritation over the artificially low currency, it looks like China is beginning to hear a loud-and-clear message from other parts of the world.

It's simple: Unless they are prepared to deal on the terms of the developed world, don't expect to do business on any other terms.

That being the case, Chinese corporations will end up focused on their hot domestic economy while remaining desperate to expand … if only they could.

Round one to the west.

3. Currency Expert: Dollar Doomed – Bet on Euro

In a recent interview with Barron's, Axel Merk – who manages some $60 million in currency and precious metals for clients at his California-based Merk Investments – warned that the long-term outlook for the dollar is bleak.

His Merk Hard Currency Fund (Ticker: MERKX) rejects the U.S. dollar, investing almost solely in the euro, Swiss franc, British pound and Australian dollar. And another 20% of the fund's assets are held in gold, which generally moves in the opposite direction of the dollar.

The Merk fund makes it a rule not to buy currencies of countries that weaken their own money to aid their exporters – which means they avoid the yen and most other Asian tender.

Merk agrees with Financial Intelligence Report's view that the dollar is dangerous and investors should look to certain foreign currencies for protection.

But why?

"Because we are experiencing the greatest global imbalances in financial history," says Merk. "The U.S. trade deficit is more than 6% of GDP."

"Every day, over $2 billion in dollars and dollar-denominated assets has to be purchased by foreigners – just to keep the dollar stable. These trends aren't good for the dollar."

And while he is bearish on the U.S. currency, Merk is a bull on the euro – even in the face of all the recent EU-related turmoil in Europe.
 
The European economy is sluggish "because the European Central Bank has opted not to participate in the game of selling goods at any cost to the U.S. consumer."

And he foresees the euro becoming a reserve currency, which "causes continuous capital inflows, which stimulates the local economy."

But Merk also leaves the door open on other countries as well.

"It's possible our euro position will get smaller and we'll add countries like New Zealand to the mix."

So how does explain the dollar's rally in recent months?

He calls it a "short-term move." He says that recently it has been popular to be a dollar bear.

"When everybody pursues the same thing in public, there's bound to be a knee-jerk reaction in the opposite direction," says Merk.