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Oil Price Shock Means China Is At Risk Of Blowing Up

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http://www.telegraph.co.uk/money/main.jhtm...7/ccview107.xml

The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.

The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.

No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.

Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.

"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".

Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.

China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.

Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.

North Carolina's furniture industry is coming back from the dead as companies shut plant in China. "We're getting hit with increases up and down the system. It's changing the whole equation of where we produce," said Craftsmaster Furniture.

China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.

Is seems China is about to come off the rails and Asian banks will end up getting huge write-offs.

The entire financial system appears screwed.

Has China seen a big rise in home ownership since the economic boom?

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My tip is to buy any required cheap consumer goods as soon as possible. I'm getting a new dishwasher today.

Massive inflation is on the way in terms of consumer goods as China collapses. This will be coupled with astonishing asset price deflation in the West.

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Good find !

I've been saying to friends for a couple of years now that the China low cost model would be derailed if fuel or labour prices rocketed. Obviously I didn't think it would happen so quickly, but the signs were there.

The madness of some of these "business plans" * was breathtaking. Once their models blow up, they will find that they can get the same product / service closer to home. eg. shoes made in the UK/Italy/France/Spain for the same price. Unfortunately, the "price" will be higher for the customer, adding to the govt. inflation figures ;)

* I wonder how long the Scottish prawn seller will be sending his catch across to Asia to be shelled and packaged? Can't be much cheaper now ?

<edited for poor spelling>

Edited by Agentimmo

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Guest DissipatedYouthIsValuable
Good find !

I've been saying to friends for a couple of years now that the China low cost model would be derailed if fuel or labour prices rocketed. Obviously I didn't think it would happen so quickly, but the signs were there.

The madness of some of these "business plans" * was breathtaking. Once their models blow up, they will find that they can get the same product / service closer to home. eg. shoes made in the UK/Italy/France/Spain for the same price. Unfortunately, the "price" will be higher for the customer, adding to the govt. inflation figures ;)

* I wonder how long the Scottish prawn seller will be sending his catch across to Asia to be shelled and packaged? Can't be much cheaper now ?

<edited for poor spelling>

I can accept many things. Prawn price inflation is not one of them.

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A friend of mine runs a business making injection moulded plastics. He says that although his labour costs are much higher in the UK, he can compete with Chinese suppliers since they are all having to buy the same raw materials. Any larger items with low packing density end up costing too much to ship to the UK so he wins that sort of business.

Apparently, there is some UK manufacturing left.

VMR.

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Accoring to a TV programme I saw, the Chinese domestic property market is very different from ours, more like our car market. Houses are at their highest value in China when new, and depreciate from then on. So property speculators buy new houses as an investment and keep them empty.

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On top of which their dollar assets are rapidly depreciating in value.

It's almost as if someone is trying to bring them down with a collapsing dollar and rising oil prices. I wonder who that could be?

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It's almost as if someone is trying to bring them down with a collapsing dollar and rising oil prices. I wonder who that could be?

Who keeps Atlantis off the maps?

2007_03_16_stonecutters.jpg

Edited by ParticleMan

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Accoring to a TV programme I saw, the Chinese domestic property market is very different from ours, more like our car market. Houses are at their highest value in China when new, and depreciate from then on. So property speculators buy new houses as an investment and keep them empty.

Exactly the same as here then. 50% off in 12 months.

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The Chinese government is only too aware of the problems caused by a rapid increase in prices - this is what led to the Tianamen protests in 1989, which almost brought down the government. Also, the reason for the communist victory in 1949 was more to do with Chiang Kai Shek's economic problems - high inflation etc- than the communist's military prowess.

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This evans-pritchard guy is a hoot-I think he may well be right, will be interesting to see how things turn out. However, if you regularly read his column, the tone almost always verges on hysterical. must be a very tiring having to be dr doom every Monday.

http://www.telegraph.co.uk/money/main.jhtm...7/ccview107.xml

Is seems China is about to come off the rails and Asian banks will end up getting huge write-offs.

The entire financial system appears screwed.

Has China seen a big rise in home ownership since the economic boom?

Share this post


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Good find !

I've been saying to friends for a couple of years now that the China low cost model would be derailed if fuel or labour prices rocketed. Obviously I didn't think it would happen so quickly, but the signs were there.

The madness of some of these "business plans" * was breathtaking. Once their models blow up, they will find that they can get the same product / service closer to home. eg. shoes made in the UK/Italy/France/Spain for the same price. Unfortunately, the "price" will be higher for the customer, adding to the govt. inflation figures ;)

* I wonder how long the Scottish prawn seller will be sending his catch across to Asia to be shelled and packaged? Can't be much cheaper now ?

<edited for poor spelling>

Check out the energy intensity per $ on these charts. They only go to 2005 but indicate that China uses one hell of a lot of energy 7900 btu2 / $2000 of GDP. In contrast Uk uses 6000

Difficult to say how much of this is down to differences in the nature of industry. But one should bear in mind the relatively high amounts of energy used for personal consumption in the UK rather than the manufacture of goods.

http://www.eia.doe.gov/emeu/international/...onsumption.html

Edited by Kurt Barlow

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This evans-pritchard guy is a hoot-I think he may well be right, will be interesting to see how things turn out. However, if you regularly read his column, the tone almost always verges on hysterical. must be a very tiring having to be dr doom every Monday.

Yes he is a very interesting guy alright I think he just signs off on articles that clearly send out the required message of the time.

The other thing to consider is that oil barrel per capita use/year in US is 20 in China 2 and India 1. Petrol prices going up doesn't have the same impact in China as it does in the US.

There is a lot written about this guy have a look here a bit dated but there is more to this guy than first appears.

http://members.tripod.com/~american_almanac/britolig.htm

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A friend of mine runs a business making injection moulded plastics. He says that although his labour costs are much higher in the UK, he can compete with Chinese suppliers since they are all having to buy the same raw materials. Any larger items with low packing density end up costing too much to ship to the UK so he wins that sort of business.

Apparently, there is some UK manufacturing left.

VMR.

Injection-moulded plastics are one small area where the UK still has a large presence and a lot of engineering skill with the precision-cut steel moulds needed. Also, CAD has taken off in a large way and is now integrated better with the manufacturing, so trained product designers are making a good wage... their university education is 100% useful to both them and our economy.

Just to give an example I'm familiar with, Games Workshop is a UK company with hundreds of stores across America and Europe and worldwide distribution. The business model goes something like "make bit of plastic for 20p, sell bit of plastic for £20", so there's enough wealth for them to afford advertising in the form of loss-making stores and a loss-making glossy magazine.

What else do we still make? (other than weapons, that's an obvious one ;) )

Edited by DementedTuna

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A friend of mine runs a business making injection moulded plastics. He says that although his labour costs are much higher in the UK, he can compete with Chinese suppliers since they are all having to buy the same raw materials. Any larger items with low packing density end up costing too much to ship to the UK so he wins that sort of business.

Apparently, there is some UK manufacturing left.

VMR.

With the ramp-up of oil prices this 12,000 mile-supply-chain business is going to come to an end. Globalisation is going to go into reverse.

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With the ramp-up of oil prices this 12,000 mile-supply-chain business is going to come to an end. Globalisation is going to go into reverse.

Good reason to live in China then, where everything is made ;)

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Injection-moulded plastics are one small area where the UK still has a large presence and a lot of engineering skill with the precision-cut steel moulds needed. Also, CAD has taken off in a large way and is now integrated better with the manufacturing, so trained product designers are making a good wage... their university education is 100% useful to both them and our economy.

Just to give an example I'm familiar with, Games Workshop is a UK company with hundreds of stores across America and Europe and worldwide distribution. The business model goes something like "make bit of plastic for 20p, sell bit of plastic for £20", so there's enough wealth for them to afford advertising in the form of loss-making stores and a loss-making glossy magazine.

What else do we still make? (other than weapons, that's an obvious one ;) )

Even with the mark-up, I've never understood how they can afford their stores. I suspect that this sort of spend will be hard hit by a recession.

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I,ve always been a prawn. Or was it pawn.

I think you mean you've always been under the paw...I know I am, and am grateful that I can be the willing servant to her majesty.

(Tragic isn't it?! :blink: )

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If you guys think China is in trouble then you wana look in the mirrow.

Sugestions that america is destoying it's own currency are not true it's just that every man and his dog wants out of the fiat $UDS and it's just that they can not all rush for the door at the same time else the value of other USA assets they hold will implode.

Try ringing up a money trader as asking him to sell $50bn and see what price the trade executes at and then try with another $50bn and you will do well to get 4 pounds to the dollar.

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Guest Bart of Darkness
Who keeps Atlantis off the maps?

2007_03_16_stonecutters.jpg

Who holds back the electric car?

stonecutters_song_1.jpg

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If you guys think China is in trouble then you wana look in the mirrow.

Sugestions that america is destoying it's own currency are not true it's just that every man and his dog wants out of the fiat $UDS and it's just that they can not all rush for the door at the same time else the value of other USA assets they hold will implode.

Try ringing up a money trader as asking him to sell $50bn and see what price the trade executes at and then try with another $50bn and you will do well to get 4 pounds to the dollar.

http://www.gold-eagle.com/gold_digest_03/droke101003.html

After repeated warnings from currency analysts and market advisors (including yours truly) that the U.S. currency system is on the verge of becoming a blocked, two-tier system we now have confirmation that the country is one step closer to realizing this. When fully implemented, the new U.S. dollar will mean a "banana republic" type currency and across-the-board devaluation.

According to a CNN/Money news wire report of Oct. 7, the new U.S. $20 bills will be released this week at banks across the country. Meanwhile, the Fed and its Bureau of Engraving and Printing (BEP) will hold a nationwide series of publicity events as part of a $33 million campaign to let the world know of the new bills and to acclimate the public to their strange new appearance.

The new $20s are peach-toned with the presence of blue ink, making it the first time in almost 100 years that a mass-circulation U.S. note has prominently contained a color besides green and black. They also contain an embedded vertical plastic strip and color-shifting ink, whose appearance changes from copper to green as the bill is tilted against the light. Below is what the front of the new $20 bill looks like (from the BEP website).

So what is the significance of this change of color in the U.S. $20 note? Well according to the Feds it is designed as a deterrent to stop counterfeiters. But accordingly to currency analyst Lawrence Patterson, who authored the 1994 monograph titled "Currency Recall", which accurately forecast the new multi-colored notes, the new colored money is part of a two-tiered currency system that will have drastic implications for investors and non-investors alike here in the U.S.

Patterson calls the new notes "crayola currency" and claims they will circulate domestically while the normal green currency that we've grown accustomed to will circulate offshore all over the globe. According to commentator Terry Savage, "Two-thirds of the U.S. paper currency is circulating in foreign countries." With the coming two-tiered currency system, foreigners will continue to be allowed to use the greenback while U.S. citizens will be stuck with the "crayola currency" which cannot be exchanged.

Patterson forecasts the coming use of foreign exchange controls for the U.S. dollar domestically, which would prohibit Americans from transferring capital to any other world currency. Again, this is discussed in Patterson's now-classic monograph "Currency Recall" (which I've read and highly recommend to students of currency policy and investors seeking to retain the value of their investments).

Patterson states, "I want every one...to think carefully about this...because we are coming very, very close to the end of the freely convertible domestic dollar. They cut in value could be as much as 50%...I believe those holding gold bullion bars offshore and bullion coins domestically will be very surprised to find that special regulations will prohibit them from profiting."

http://en.wikipedia.org/wiki/Devaluation

Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of money supply and money demand. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistent surpluses and capital inflows may lead them towards revaluation). However, that a devaluation would reduce trade deficits depends on fulfilling the Marshall-Lerner Condition: the sum of exports and imports elasticities (in absolute value) must be greater than 1.

Reducing the trade deficit seems a good enough reason to be to try and devalue the dollar.

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My tip is to buy any required cheap consumer goods as soon as possible. I'm getting a new dishwasher today.

Massive inflation is on the way in terms of consumer goods as China collapses. This will be coupled with astonishing asset price deflation in the West.

I agree, I've quietly been buying things like spare monitors and disk drives because I think it will be a long time before we see these prices again.

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Check out the energy intensity per $ on these charts. They only go to 2005 but indicate that China uses one hell of a lot of energy 7900 btu2 / $2000 of GDP. In contrast Uk uses 6000

Difficult to say how much of this is down to differences in the nature of industry. But one should bear in mind the relatively high amounts of energy used for personal consumption in the UK rather than the manufacture of goods.

Exactly. We're leveraging our GDP off their energy use: we buy their energy intensive manufactured goods, mark them up, and sell them to one another (using debt of course).

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  • 401 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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