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Mix-Ansicht- Faber: Chinamania - kingsolomon, 04.01.2005, 19:05
Faber: Chinamania
-->Booming China heads for collision with West.
Intransigence over fixed exchange rate will cause tension, ‘prophet of doom' Marc Faber tells Michael Sheridan
FROM where Marc Faber sits in his stately pleasure dome by the banks of the placid Ping river in northern Thailand, the latest corporate scandal in Asia over $550m (£285m) in trading losses by a Chinese oil company looks like a perfect storm.
It brings together three big themes that have fascinated the Swiss financial analyst since he moved to Hong Kong in 1973 for Drexel Burnham Lambert, made a mint in the markets, and then turned into a colourful “contrarian” commentator.
First is the awesome economic rise of China, symbolised by the presence of China Aviation Oil, which holds a monopoly on fuel for domestic airlines, in the Singapore oil futures market.
Second is the chaotic and contradictory nature of Chinese “capitalism”, which placed this commercial venture in the hands of a Communist party loyalist, Chen Jiulin, 43, who was arrested and bailed by Singapore authorities last month.
Third is the insatiable Chinese demand for resources that propelled the company to venture into tricky derivative trades as it sought to supply aviation fuel for a hungry industry at home.
“The Chinese are so big in these commodity markets that they can to some extent manipulate the markets,” said Faber.
“I'm surprised that it's a Chinese company that lost money being short of oil because Chen should have seen this huge demand coming from his own country. That is an irony.”
The Singapore courts will now sort out the case. But to Faber, whose Boom, Doom and Gloom report is addictive reading for many in the Asian financial markets, it is a useful illustration of China's economic power.
And this power will only become greater as China develops. “The 3.6 billion people in Asia, including India, Australia and New Zealand, consume 20m barrels of oil a day,” he said. “In America, 265m people consume 22m barrels a day.
“Per capita consumption in China is 1.7 barrels a year, in Japan and South Korea about 17 barrels and in America 28 barrels. So you start from 1.7 in China and 0.7 in India and, for sure, oil demand in Asia will go up. I think it will double in about 10 to 12 years.”
For the first time in the history of capitalism, said Faber, Chinese growth will exert a crucial influence on the rest of the world. “Their cost advantage, I have to stress, is not only based on cheap labour but on rapidly improving productivity and hard work and huge improvement in infrastructure,” he said.
In many commodity markets China is no longer just on the margin but has become the largest factor. Faber reels off stunning figures. More than 27% of global iron ore production is absorbed by China. “Take copper,” he added. “In 1990 the Chinese absorbed 6% of world production, in 2000 12% and now 22%.”
China has overtaken Japan as the second largest importer of oil in the world.
Whether a threat or a boon, the China effect will transform the world economy.
“US industrial production basically doesn't grow. But in China industrial production does grow,” said Faber.
Already, Japan's exports to America are declining but its exports to China have risen 30%-40% in the past 18 months, while Korean exports to China have soared by up to 50%.
“China is gradually displacing America as Asia's leading economic power and this will have geopolitical consequences throughout the world,” he said.
As a doom-monger who was one of few commentators to predict the 1997 Asian financial crisis, Faber has an interest in gloomy realism to correct what he calls “Chinamania”.
“China will have business cycles like every other economy. It would be most unusual for China to sail ahead and never have a crisis,” he warned.
“I think the Chinese know they are on a collision course with America. Statistically the United States has a $11.2 trillion economy and China is a $1.3 trillion economy. But these figures are totally misleading because many markets in China are already larger than in America. It's just that there is a huge price difference.”
Adjusted for purchasing power parity, Faber claimed, China's economy is already 60% of the size of America's. He cited big “physical markets” — more steel than America or Japan, 330m smokers, 250m mobile-phone users. “Geopolitically, tensions are inevitable.”
The prime source of tension is China's refusal to revalue its fixed exchange rate, which pegs the yuan to the dollar.
Faber has blunt advice for speculators who have piled into currency futures to bet on a revaluation: “My view is that they are not going to move. By keeping the exchange rate where it is, in their minds they guarantee the continuous shift of industrial production and capital spending into China and the rest of Asia.”
“The problem is really this. Today one US dollar equals 8.28 yuan. So they go to one dollar equals four yuan. At four the wages of factory workers in China will go from $100-$200 a month to $200-$400. You think manufacturing will move back to Switzerland and America because of wages doubling in China? No way.”
Aside from unheralded risks to growth and stability in Asia — civil wars, floods and other natural disasters — ultimately, he believes, Chinese growth will propel Asian financial markets, still down between 50% and 80% from 1990 levels, and Asian currencies to outperform America. The dollar, he pointed out, has lost 90% of its purchasing power since the creation of the Federal Reserve in 1914.
“Everything points to the dollar going the way of the Roman denarius,” said Faber.
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