Icbccss&p500usd Discussion Threads

[energyi] 17/8/2004 18:57

Chart in Header...

SSE back near lows!

[energyi] 17/8/2004 18:56

The Chinese will send 550 billions of SMS within 2004

12 August - an increasing passion for the SMS, than within the end of the year could touch quota 550 billions, is feeding the profits of the operating ones of mobile telephony in China


Ericsson, contract for Gsm in China

12 August - the producer of instruments for the mobile telephony Ericsson has signed a contract from 27 million dollars in order to expand its net gsm in the Chinese city of Chongqing

[snowflake34] 17/8/2004 14:54

From Morgan Stanley:

Taiwan: Weakening Exports, Resilient Consumption

Andy Xie (Hong Kong)


I spent three days in Taiwan last week visiting investors and businesses. It appears that consumption and property are holding up well, but exports are beginning to turn down. August is likely the turning point for the export cycle, and the downturn may be sharper than the market expects, in my view.

Taiwan’s exports go disproportionately to the US market, directly or via mainland China’s production base. Taiwanese business sentiment about exports suggests that the US economy is in trouble.

Taiwan’s domestic demand appears quite resilient. The property market is holding up well, which is surprising after the post-election turmoil. Consumption may be moderating after the strong bounce from the SARS crash last year—but it is still growing at a good pace. I believe Taiwan’s domestic demand may show substantial resilience even as exports turn down.

Exports Look Set to Turn Down Significantly

From my conversations with Taiwanese businesses last week, exporters have sensed a sharp downturn in demand over the past few weeks. This sentiment appears to be forward-looking, as the July data still showed strong exports across the region. The combined exports of mainland China, Taiwan, and Korea showed a 33.5% YoY increase in July compared with annual increases of 34.5% in the first half and 25.5% in 2003.

I believe the current situation resembles that in 1995. In mid-1995, the combined exports of mainland China, Taiwan, and Korea were growing at about a 30% annual rate. The growth rate decelerated sharply thereafter, and began to show negative growth in the spring of 1996. The transition occurred after the US Federal Reserve shifted into a tightening mode, which triggered the Mexican peso crisis in 1995.

The peso crisis, which many view as the shock that knocked down Asian exports, was just a manifestation of a liquidity bust after a long period of low Fed funds rates. In this cycle, I think the oil shock, which reflects a long period of negative Fed funds rates, is playing a similar role.

Asian exports turned down significantly in 1995, 18 months after the first Fed hike. Why should exports turn down quicker this time? The main reason, I believe, is that the Fed provided more stimulus and for longer this time. The real Fed funds rate was 0.5% in 1992, 0.1% in 1993, and 1.6% in 1994. In this cycle, it was 1% in 2001, 0.1% in 2002, -1.1% in 2003, and -1.3% in the first half of 2004.

The long period of negative real interest rates has sparked a global property bubble, which, in turn, has created strong demand for Asian exports. The combined exports of mainland China, Taiwan, and Korea experienced 17 months of above 20% annual growth up to the middle of 1995; they have already experienced 25 months of above 20% annual growth in this cycle.

Bubble-induced growth is borrowing from the future. It is very sensitive to any deterioration in liquidity conditions. The expectation of a rising Fed funds rate has been tightening liquidity conditions. The rising oil price is worsening the US trade deficit, further straining US liquidity conditions. US money with zero maturity (MZM) registered growth of 15.8% in 2001, 12.9% in 2002, and 7.3% in 2003. US MZM decelerated to 2.6% annual growth in July 2004. Liquidity conditions are now poor for financial assets and, hence, for Asian exports.

I suspect that the downturn in Asian exports in this cycle will be much quicker than the market is expecting. What Taiwanese businesses are seeing suggests that this month may be the turning point. I suspect that Asian exports could travel from 30% annual growth to low-single-digit or even negative growth within 12 months.

Domestic Demand Is Holding Up

Taiwan’s domestic demand has surprised me on the upside. I thought that the post-election turmoil could thrash the property market, causing consumption to weaken quickly. The property market seems to be holding up surprisingly well. Consumer confidence, though decelerating, remains high.

I believe the main reason for the resilience of Taiwan’s domestic demand is that its fixed investment is already very low. Its gross fixed investment declined to 17.5% of GDP from 23.5% in 2000. The low fixed investment has boosted return on capital in general, and, hence, there is less pressure to retrench labor to boost returns. A stable labor market is bolstering stability in consumption and the property market.

Much of the investment retrenchment has shown up in rising net exports. Taiwan’s net exports increased to 7.2% of GDP in 2003 from 2.3% in 2000. The surplus has caused the real interest rate to decline. The real housing loan rate, for example, has dropped to 0.7% from 3.3% in 2003 and 4.6% in 2002. The low real interest rate has enabled the property market to survive the post-election turmoil.

Further upside in consumption is possible, in my view. A low real interest rate will motivate financial institutions to create new products to boost consumption. Distributors should also come up with new ways to distribute and price products to encourage consumption. I see considerable upside potential for Taiwan’s domestic demand.

Cross-Strait Tension Is Increasing the Risk Premium

Rising cross-strait tension is the major threat to a relatively good domestic economy, in my view. Taiwan’s business community sees a significant probability that some sort of conflict between Taiwan and mainland China will occur in the next few years. When I visited Taiwan just before the election, I did not sense this level of concern over a conflict with the mainland.

The concern appears to be consistent with the evidence in mainland China. According to the mainland press, China may pass a reunification law soon, possibly after the US presidential election, which may stipulate a timetable for reunification with Taiwan. A similar timetable was stipulated before the Sino-British negotiations over Hong Kong’s handover two decades ago.

Anticipation of a worsening cross-strait relationship appears to be a factor affecting business decisions in Taiwan. Because it increases the risk premium, capital spending is unlikely to revive, in my view. This continues to keep the real interest rate low, which supports the property market. However, if cross-strait tension undermines confidence in property, that could trigger serious economic weakness.

[shoggoth] 16/8/2004 05:43

Summary CHINA 16/8/04 :
-China to lower QFII entry threshold to attract more foreign funds
-China Securities chairman says firm to obtain 4.8 bln yuan to support ops
-Guangdong province drafts new anti-corruption law
-China Mobile suspends Sohu's mobile phone picture service for 1 yr
-Shanghai Pudong Devt Bank H1 net profit up 32.98 pct on lending growth
-Lanzhou Aluminium H1 net profit 93.91 mln yuan vs 89.95 mln
-Lanzhou Aluminium H1 net profit up 4.4 pct on higher sales
-Torch Automobile H1 net profit 70.76 mln yuan vs 125.14 mln
-Torch Automobile H1 net profit down 43.46 pct on surging provisions
-FAW Car H1 net profit 322.48 mln yuan vs 141.10 mln
-Huaxia Bank H1 net profit 495.35 mln yuan
-Huaxia Bank Q2 earnings up 33.42 pct yr-on-yr on loan growth
-Wuhan Steel plans to buy 3 steel groups to boost capacity
-Wumart to open 1st dept store in Beijing next month - co official
-Xi'an Minsheng fails to disclose 190 yuan deal with shareholder
-GM to start selling first made-in-China Cadillac in early 2005
-China Huarong AMC to auction NPLs, NPAs with book value 3 bln yuan

[snowflake34] 10/8/2004 11:24

Aug. 10 (Bloomberg) -- China's industrial production rose in July at the slowest pace in a year as government restrictions on bank lending curbed manufacturing of cars, cement and glass in the world's fastest-growing major economy.

Production rose 15.5 percent from a year earlier after climbing 16.2 percent in June, the Beijing-based statistics bureau said on its Web site. Growth in auto output slumped to 5.4 percent from 20.4 percent, as General Motors Corp. and China's Geely Automobile Holdings Ltd. said customers are finding it harder to get loans.

The slowdown may ease pressure on the central bank to raise interest rates for the first time in nine years to cool an economy where manufacturing is still growing three times faster than U.S. production. Premier Wen Jiabao, 61, said Sunday more needs to be done to reduce inflation and alleviate power cuts.

``This is consistent with the gradual slowdown in the economy,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. ``If we continue down this road, the central bank can afford to be more patient.''

China's economy expanded 9.6 percent in the second quarter, less than the 9.8 percent pace reported for the previous three months, and growth in M2, the broadest measure of the nation's money supply, in June fell within the central bank's target for the first time in 1 1/2 years.

Higher Rates

China's sedan production rose 0.5 percent last month after climbing 19.9 percent in June, today's report said.

``Customers are coming into the showrooms, but they're not buying,'' said Lawrence Ang, executive director of Geely Automobile, which makes $5,000 cars aimed at first-time buyers. Ang said in an interview last week that customers are finding it harder to secure financing.

Even as China's industrial production slows, its economy, the seventh largest, is expanding faster than any other of the world's 20 biggest economies and the nation's inflation rate reached a seven-year high of 5 percent in June.

About half of the senior economists at state research agencies predict interest rates will be raised in the next six months, the statistics bureau reported last week, citing an official survey of 50 such analysts.

China's benchmark lending rate was last changed in February 2002, when the central bank cut it to 5.31 percent. The People's Bank of China hasn't raised it since July 1995.

Autos, Steel

The yield on China's benchmark government bond maturing in 2010 closed unchanged at 4.58 percent in Shanghai. That's down from a high of 5.03 percent on May 11, reflecting reduced investor expectations for an interest rate increase.

Last month's gain in industrial production, to 441 billion yuan ($53 billion), was the smallest since May 2003, allowing for the impact of the Lunar New Year holiday. Economists generally combine figures for the first two months because of distortions caused by the timing of the holiday, which can fall in either month.

Output was expected to have risen 15.9 percent last month, according to the median forecast in a Bloomberg News survey of seven economists. The Hang Seng China Enterprises Index, which tracks 37 mainland companies that have so-called H shares trading in Hong Kong, closed 1 percent lower at 4160.82.

Production is slowing after Wen in April and May told banks to restrict lending to industries including autos, steel and aluminum. In addition, the central bank has raised reserve requirements for banks three times since September to slow lending growth.

Credit Crackdown

Difficulty in getting bank loans forced China's East Hope Group to cut by half the scale of an aluminum smelter that would have been China's largest, company spokesman Cao Yong said in May. East Hope used its own capital to fund the first 500,000 tons-a-year of capacity.

Wuhan Iron & Steel Group, China's third-largest steelmaker by output, was in May forced to halt construction of a plant in the eastern port of Ningbo after the government said the company had failed to secure the necessary approvals for the project.

Fixed-asset investment, which accounts for about half of China's economy, increased 29 percent in the first half, less than the first quarter's 43 percent gain, official figures show. Investment in real estate rose 29 percent in the first half, having surged 41 percent in the January-March period.

Power Cuts

Glass production increased 21 percent last month after climbing 34 percent in June and cement output growth slowed to 11 percent from 13.2 percent. Power generation rose 12 percent, less than June's 14.6 percent gain.

The government is trying to boost power generation to alleviate power cuts, which have affected 24 of China's 27 provinces and major cities this year.

The outages are also affecting production. General Motors, the world's largest automaker, halted production at its Shanghai venture for 11 days last month after the city government asked companies to take rotating one-week breaks to ease a worsening electricity deficit.

``The moderation in industrial production probably has as much to do with power shortages as with credit tightening,'' said Dong Tao, a Hong Kong-based economist at Credit Suisse First Boston. ``Interruptions because of transport bottlenecks and power outages play a big role.''

For the first seven months of this year, China's industrial production rose 17.3 percent to 2.9 trillion yuan, today's report said. In the first two months, production rose 17 percent, the government reported previously.

[shoggoth] 10/8/2004 08:37

With US$ falling I'd expect more US based money to flow into the far east. If Chinese banks squeeze credit, then western finance will be more than ready to soak it up. IMO this is a red herring.

[hectorp] 10/8/2004 08:33

A useful and interesting article Snowflake.
So will what could be an accidentally triggered credit squeeze panic occur? and if so , would it trigger a hard landing ?
I believe a hard landing can only occur considering China's massive strong growth , if the banks did nothing at all and simply continue to lend lend lend. This is what happened in Japan in the late 80's and see the result. We do not want China to spend the next 14 years in 'low growth and low interest' regime!
Therefore tricky and awkward as Mr Lieu's instructions may be, this ''tinkering' with 3-4 main industries should help avoid a hard landing of any traditional sort
. The gobvernment is acting like a bull, but a tethered bull, not harmful to a large extent.
PS I'll be interested in how Mr Lieu's tinkering with industries affects the value of base mteal commodities such as copper and zinc. This latter interests me as an investor in a zinc mine project. Auto engines need a fair amount of zinc I believe.
H.

[snowflake34] 09/8/2004 16:09

Aug. 8 (Bloomberg) -- China is collecting accolades for efforts to slow down the nation's allegedly excessive growth. The jury is still out, though, especially with respect to the government's instructions to the banks.

While most countries of the world despair about a lack of growth, China says its economy is expanding too fast. And the government of China believes this so much that it has embarked on policies to slow the economy.

The official goal of the government is to slow growth to 7 percent this year. China's economy grew 9.6 percent in the second quarter and 9.8 percent in the first three months of this year.

To slow growth the government has concentrated on certain rapidly expanding industries that it decided needed to be suppressed. The suspect growth industries include steel, cement, property and automobile manufacturing.

Accordingly, Premier Wen Jiabao in April and May ordered domestic banks to restrict lending to the targeted industries. In effect, the banks have become a policy arm of the government as it attempts to centrally plan the reduction in the country's economic growth.

`Reined In Effectively'

And the banks were more than happy to comply, though it may turn out they went too far. The China Daily reported that new bank loans in the first six months fell 350 billion yuan ($42 billion) from a year earlier.

According to a report on the People's Bank of China's Web site, the decline in new loan creation in June alone was 239.5 billion yuan.

The central bank reports these numbers under the header: ``The faster-than-desired expansion of credit was reined in effectively.'' Elsewhere, the Bank claims the growth in aggregate credit ``currently stands at an appropriate level.''

The banks are in a peculiar situation. They are supposed to be commercial enterprises on one hand but instruments of the government's policy makers on the other.

Where does this lead? At this rate, what China isn't going to produce is a legion of battle-tested, market-savvy commercial bankers. Instead, the successful Chinese banker will have one eye on his customers and the other on what will be the next round of central planning policy to come down from the top of the government.

Precarious Exercise

In the immediate time, the question is that if the banks overreacted by cutting loans faster than the government wanted, as China Daily reported, then is there a scenario wherein the government's directives could set off a collapse of credit?

If you accept that possibility, you have to concede that the government's industry policy is very much a precarious exercise in confidence engineering.

Start with the question of what should a profit-maximizing self- interested bank do when the government instructs the entire banking community to shun certain industries?

The answer is duck for cover.

When a government commands certain basic industries must be cut out of the credit chain, it invites a possible chain-reaction style financial panic. Sensible banks would respond by pulling back exposure everywhere because a credit crunch in an industry like steel or automobiles could have vast implications for debtors in all industries.

Credit 101

And this is what must be happening right now. The only reason why it hasn't happened on a large scale is that the bankers must have some unshakable faith the government is ultimately in control of the economy. So how wrong can things go, they might be figuring.

What in turn does the government think about the banks?

We learn something of how competent the government thinks of its bankers by reading the recent remarks of Liu Mingkang, chairman of the China Bank Supervisory Commission.

Liu must think he knows how to run a bank since he has taken to give Chinese bankers instructions in what could be called Credit 101.

According to the Commission's website, the chairman has told banks to improve their ability to differentiate between profitable clients and those who might turn into bad credit risks. Presumably this advice is suspended if a profitable client is from among the shunned growth industries.

Chinese Banking

That aside, it is very sensible Mr. Chairman, but it should be clear that if Chinese bankers need to be told this at this late date, then there is no hope for the future of Chinese banking.

Still, the advice is good. Or it was good until the chairman followed it up with another precept that banks should try to help clients with repayment plans before cutting credit lines.

By one interpretation this is like telling a bank to maximize its exposure to known problem loans. Some precept of banking.

In other words, act like a capitalist bank until you find out your loans have gone sour -- then put on a red suit and play like Santa Claus.

[hectorp] 07/8/2004 11:54

I'm very interested in the growing relationship between China and the Nation of Nippon. If these two really get in bed together over the next 10 years , their presence is S Asia with the markets of the other local 'supply' nations like Thailand and Viet Nam, they can dictate world trade and its direction in their favour... and China's currency fund andgames shows them very capable ofdoing so.
Short term I'm still wary there could be a hard landing. This would set things back maybe by 3 years , but again allows us, great investment opportunities eg buying low cost Fleming China Investment Trust stock, STAN bank etc.
At present I've no China investments except an exposure to GFM Griffin Mining.

[mcbeanburger] 03/8/2004 20:16

China's crude oil import to break 100 mln tons this year



According to an analytical estimation by Ministry of Commerce China's crude oil import will for the first time break through 100 million tons this year to hit a record of 110 million tons, a year-on-year increase of 21 percent. The import of refined oil is to reach 40 million tons, a rise of some 40 percent.

As the customs statistic indicates: the import of crude oil in the first half of the year reached 61.02 million tons valued at USD15.169 billion, which was a respective increase of 39.3 and 57.4 percent. The import of refined oil reached 19.85 million tons at a value of USD 4.457 billion, witnessing a respective increase of 56.6 and 66.1 percent. The total imported value of the crude and refined oil in the first half of the year added up to 19.626 billion US dollars, taking up 7.4 percent of the country's total imported value and a rise of 7.306 billion US dollars as against that of last year.

The analysis of the Ministry of Commerce holds, affected by many such factors as the global economic recovery, OPEC output reduction and unstable situation in the Middle East the later half of the year will see the oil to maintain a high price in international market. As the state has adopted the macro-control measures the intensive situation for the supply of crude and refined oil will in somewhat way be eased at home market while the import of crude and refined oil will decrease a little bit in the later half of the year. However, the increase of import value will be bigger than the import amount.

Experts concerned are of the opinion that the continuous big increase for the import of crude and refined oil at a high price level will be sure to cause some negative impact on the balance of trade, industrial production and transportation cost and operation of national economy.

As learned from the specialist in statistics with General Customs Administration, at present China's dependence on oil import has already exceeded one third of its needs and is still on the increase. According to the customs statistics, China's import of crude oil reached 91.12 million tons at a value of 19.81 billion US dollars and the imported refined oil of 28.24 million tons valued at 5.86 billion US dollars in 2003. If cut off the exported crude oil of 8.13 million tons and refined oil of 13.82 million tons in that year, the imported crude oil plus the amount of the refined oil converted into crude oil exceeded 100 million tons already. Along with the shortage in the supply of refined oil at home the export of crude and refined oil from China is on a big decrease year by year. As learned from the General Customs Administration, the first half of the year saw only 3.07 million tons of crude oil and 5.10 million tons of refined oil exported, a respective decrease of 27 and 25.9 percent as against the same period of last year.

Starting from last year China has become a big country of oil import and consumption next only to the United States in the world. The oil import has witnessed a continuous expansion and the import of oil products has become the biggest foreign exchange user in China. In 2003, the balance of crude and refined oil import and export showed 2.029 billion US dollars in the red. And in the first half of the year the import and export of the crude and refined oil told an unfavorable balance of 17.3 billion US dollars while the unfavorable balance of all other trades was less than 7.0 billion US dollars. This year the annual oil trade is expected to exceed 30.0 billion US dollars in deficit. The drastic increase of imbalance in the oil trade has brought about some bad influence upon the national trade balance.

As the international crude oil price remains at a high stake the annual unit-price of crude and refined oil China imported rose greatly last year as against that of the year before. And the first half of this year saw a continuous rise of the unit-price for the import of crude and refined oil. The price rise for the import crude and refined oil raised the production cost of transportation and petrochemical industry and other related industries. The domestic gasoline price has reached its climax in recent years and this has increased the burden of auto-consumers. Chen Haoran, President of China Minerals and Chemicals Import and Export Association has been engaged in international oil trade for quite a long time. When accepting an interview of the reporter, he said, as a country short of energy resources China sees a serious waste of energy and the wealth created as per-unit energy consumption is far less than that of the developed countries.

Chen Haoran holds, if China is going to build a well-off society it can only be a society of a frugal type. There is no condition for China to follow a production and lifestyle of a high-energy consumption and high spending. It requires China to raise as quick as possible the energy utility with great efforts made to develop the energy-saving products, such as energy-saving construction materials and energy-saving automobiles and so on. At present moment, when autos are entering homes in great number the state has to take some measures for restricting high-energy consumption and autos of big displacement while encouraging the development of autos of economic type with the priority given to the development of rail and public transportation and communication.

By People's Daily Online

[snowflake34] 03/8/2004 14:48

Interesting piece from Morgan Stanley about Hong Kong and Singapore:

Asia Pacific: Twin Troubles

Andy Xie (Hong Kong)


Hong Kong and Singapore are twin city economies with a British colonial past. The two have traveled different paths. The market perceives Hong Kong as more laissez faire and Singapore as more government-controlled. The truth lies somewhere in between. As they try to solve problems in a post-high-growth environment, they have to converge towards a middle path that balances between profit and quality of life.

Grass Is Greener on the Other Side

Many Singapore-based fund managers expressed bullish sentiment towards Hong Kong when I met them one week ago. The main argument was that Hong Kong has China and Singapore has Indonesia. But, Hong Kong-based fund managers told me that China’s cyclical downturn would hit Hong Kong harder than Singapore and that there was less social tension in Singapore. Is this a symptom of ‘grass greener on the other side’?

Hong Kong and Singapore have had similar economic performance since 1997. Hong Kong’s per capita income dropped by 13% and Singapore’s by 14% in nominal dollar terms between 1997 and 2003. Both increased the current account surplus by about 15% of GDP during the same period to adjust a major decline in fixed investment. Singapore had 20% depreciation, and Hong Kong went through a similar amount of deflation under a pegged currency. Obviously, deflation would cause more social tension than devaluation.

Are there fundamental differences between the two for a dramatically different investment case? To answer this question, we need to study how these two cities have grown so rich.

Incredible Wealth in Hong Kong and Singapore

Hong Kong and Singapore are extraordinarily wealthy. Hong Kong’s stock market capitalization, bank deposits and residential property are worth 12 times its GDP. Business and property assets that Hong Kong residents own abroad could be another 2-3 times GDP. There may be double counting due to foreign residents owning Hong Kong assets. For example, non-residents probably own more than half of the stock market and a significant portion of bank deposits. With all reasonable adjustments, I still see net wealth at over 10 times GDP for Hong Kong.

Singapore’s property, stock market, bank deposit, and pension benefits are probably worth 7 times GDP. Singapore residents probably do not own as much as Hong Kong residents abroad. Foreign residents also do not own as many Singapore assets. On balance, I would put 7 times GDP as the net wealth position for Singapore.

The contrast between Hong Kong, Singapore and their neighbors is quite stark. Hong Kong’s wealth is similar to China’s, even though China has 186 times as many people. Singapore with a population of 4 million is probably richer than Indonesia with a population of 219 million.

…Acquired by Profiting from Inefficient Giant Neighbors

Most wealthy economies have wealth of 4 times GDP. Hong Kong and Singapore are out of the range and bear similarities to tax havens like Monaco or Switzerland. But, Monaca and Switzerland have accumulated wealth over centuries. Hong Kong and Singapore have gone from poverty to incredible wealth in just half a century.

Extraordinary wealth is usually a result of arbitrage, i.e., profiting from other people’s inefficiencies. Hong Kong and Singapore were no exceptions. They profited enormously from the inefficiencies of their giant and fast-growing neighbors – China and Indonesia. Their giant neighbors suffered from poor infrastructure for trade (mainly, ports and financing), insufficient economic freedom, and lack of protection for private wealth. Hong Kong and Singapore filled the void and became Rotterdam, London and Zurich rolled into one. China and Indonesia achieved rapid economic growth despite their shortcomings, because China had lowest labor costs and Indonesia had abundant natural resources. However, the wealth that their growth created flowed disproportionately to Hong Kong and Singapore.

China began to open up in the early 1980s. The bonanza for Hong Kong began. China adopted the ‘gradualist217; approach to opening the economy to the world and began the process with a free trade zone next to Hong Kong. It presented three arbitrage opportunities for Hong Kong. First, economic freedom for local residents was extremely limited. Hence, the free trade zone next to Guangdong was essentially for Hong Kong businessmen to employ cheap Chinese labor for export production. As China’s labor supply was so huge relative to the number of Hong Kong entrepreneurs, the latter took almost all the wealth created from this labor arbitrage. These entrepreneurs spent their money in Hong Kong, as China was not a viable place for consumption then.

Second, China did not have port infrastructure to support its trade boom. Hence, the trade went through Hong Kong’s ports. This source of rapid demand increased the value of Hong Kong’s land and real wages. Third, when corruption became China’s biggest problem in the boom ten years ago, most of the corruption money came to Hong Kong, mainly for purchasing properties. It was essentially wealth redistribution from a poor to a rich population.

The arbitrage opportunities allowed Hong Kong to widen its income lead over Guangdong – the province that opened up to trade first, though economic theory would predict convergence. Hong Kong’s per capita income was 24 times Guangdong’s in 1987 but widened to 30 times in 1995. The ratio began to decline convincingly only after 1997. It is now 13 times. Singapore’s story is almost identical to Hong Kong’s. The only major difference is that labor arbitrage was not the main source of wealth creation in the Indonesian story. Rather, it was the exploitation of Indonesia’s energy, forestry and mineral resources.

…But Distributed Differently

The biggest difference between Hong Kong and Singapore was in public housing. As an economy grows, much of its wealth increase shows up in rising land price. How a government conducts land policy will fundamentally affect social stability in its society. For example, the United States gave most of the land to its citizens very early in its industrialization. Hence, market forces drove its land market. This is why the US, though it has one now, has never had a property bubble as big as that experienced by Asian economies. Market forces have made housing affordable to an overwhelming majority of the people in the US. Low food and housing prices were the pillars for the remarkable political stability during the country’s industrialization.

Singapore pursued cheap housing and cheap food policies very early in its development, which, I believe, was intended to increase support for the government. The public housing program in Singapore must be the most generous in the world. A public housing flat in Singapore is similar in quality to the quality of a private flat in Hong Kong that would cost a lifetime’s income.

Hong Kong, on the other hand, minimized income taxation but maximized land price to fund the government. It sold land slowly and developed infrastructure in restricted areas. Even though Hong Kong has plentiful land, its policy kept the price of land artificially high. and it often rose faster than income, triggering waves of property speculation during its growth. Hong Kong also developed public housing, but of poor quality. This forced tenants to work exceptionally hard to obtain decent housing.

Hong Kong’s low tax and high land prices were essentially a form of leverage – borrowing growth from the future. They exaggerated Hong Kong’s per capita income even above what the arbitrage opportunities in China could support. Thus, Hong Kong residents felt richer on the way up than their Singaporean counterparts did. The reverse is occurring on the way down. Hong Kong residents are apparently under much more pressure than Singaporeans are at present. Housing is the difference, in my view.

Diminishing Arbitrage Opportunities

Both Hong Kong and Singapore have seen declining income since 1997. Part of it is cyclical. Indonesia’s bubble, which exaggerated Singapore’s income, burst. Singapore’s income had to adjust. Also, the excessive capital inflow into Hong Kong over post-handover optimism exaggerated income that had to adjust afterwards.

Diminishing arbitrage opportunities, however, are a major structural force that is keeping the income of both countries weak. Indonesia has been experiencing political instability. Lack of confidence is keeping investment away from Indonesia, preventing it from resuming normal growth. Singapore’s value to Indonesia is proportional to the latter’s growth. Singapore’s future is tied to Indonesia’s, in my view.

Hong Kong is facing an entirely different situation. China is growing strongly. The challenge for Hong Kong is that China has been investing in infrastructure and opening further to the world. The former has effectively deflated the excess value for Hong Kong’s infrastructure. The second has forced Hong Kong businesses to compete against global companies for the opportunities in China.

More seriously, reverse arbitrage has been occurring. As China’s infrastructure ha developed sufficiently, it increasingly makes sense to carry out much of the services for trade inside China. Hong Kong’s financial services and trading businesses have been shifting Hong Kong-based jobs to Guangdong across the border, which could mean a two-thirds reduction in labor cost.

Reinventing Is Hard To Do

Hong Kong and Singapore are experiencing strong economic growth at present. Hong Kong’s nominal GDP in 1Q04 registered 2.2% growth from last year, the first positive year-on-year nominal increase since 2000. Singapore’s real GDP increased by 7.5% in 1Q04 from last year. The exceptionally strong trade in the past year and the bounce from SARS-induced economic weakness last year are the main reasons for the strong growth now.

The future, however, is quite uncertain for both. Indonesia’s political uncertainty is not yet over. It is virtually impossible to predict when investor confidence there could revive. The reverse arbitrage for Hong Kong remains a serious challenge. It is notable that Hong Kong is not experiencing inflation now, even though China is experiencing serious inflation. The reverse arbitrage is offsetting the inflationary pressure from China’s growth, in my view.

The reverse arbitrage requires a painful adjustment that involves further reduction in land prices and wages. However, its impact on the household balance sheet is a serious social problem. The government has been shrinking land supply further to stop or slow the adjustment process. As long as the Hong Kong government continues to manage the supply of land to artificially support its price, structural adjustment has not ended. This is why it is too early to declare victory over deflation in Hong Kong, in my view.

[snowflake34] 02/8/2004 15:45

From The Globalist:

How Japan Embraces China

By John Nathan | Monday, August 02, 2004

While Japan and China have shared thousands of years of history, their relationship has been somewhat remote until recently. John Nathan, author of "Japan Unbound," explains Japan's turn towards China — and the move away from the United States.


Japan’s economy is stalled, but the society is in motion.

Times are changing

Predictions about where precisely it is headed are best left to fortunetellers. But changes occurring in the national psychology are certain to affect the course of the country’s history in the 21st century.

The most significant are a growing disenchantment with the United States and the gradual rediscovery of an affinity with the rest of Asia in general — and China in particular — which goes beyond economic interests.

More recently, the Japanese have come to view America’s professed motives with increasing uneasiness and skepticism. Since early in January 2003, Shintaro Ishihara — Tokyo’s governor — has been referring to the United States as “the second Mongol Empire.” This may be typical Ishihara bombast, but many Japanese are listening, and wondering uneasily if he may be correct.

Renewing an old friendship

If Japan is emerging from thralldom to the United States and the mystique of America, it appears that the Japanese are also reengaging with China on multiple levels.

The most obvious has to do with business. Since the mid-90s, Japan has been investing heavily in China. Toyota and Nissan are both producing cars and trucks in joint ventures with China.

Others head the call

In September 2002, Carlos Ghosn — CEO of Nissan —purchased a half interest in the Dongfeng Motor Corporation and began production of 80,000 Nissan subcompacts a year at an existing plant in Guangzhou.

Nissan expects to be producing 550,000 vehicles a year by 2006 — and 900,000 a year by the end of the decade.

In March 2003, Sony announced plans to move its entire production of PlayStation 2 game consoles to China by 2004.

Fuji Xerox is preparing to spend $300 million to expand its sales and service network in China. The company plans to triple its sales of printers and copiers there to 700,000 a year and to double sales volume to $500 million a year by 2005.

Joining forces

The recent surge of business activity on the mainland is increasing the Japanese presence in China month by month.

In the fall of 2003, a Chinese pharmaceutical manufacturer will open a ten-story hospital for Japanese nationals in Shenzhen, the Chinese twin city to Hong Kong. The hospital will be staffed with Japanese as well as Chinese doctors and nurses and will employ a team of interpreters.

Asian camaraderie

Japan’s investment in China is beginning to pay off. While exports to the United States have remained fixed since 1990 at just under 30% of the country’s total, Japan’s exports to China during the same period have increased from 9.6% to 15.7% of the total — climbing 32.3% in 2002 alone.

There is no question that younger Japanese in particular are turning toward China with open curiosity and eager interest.

In the single month of December 2002, Japan shipped products worth $6.5 billion to China — two-thirds of the total it shipped to the United States.

It is likely that China will overtake the United States as the principal consumer of Japanese goods in the near future. Japan is also importing Chinese goods at an increasing rate. In 2002, Chinese imports out-valued imports from the United Stares for the first time.

Rediscovering deep roots

The growing interdependence of their two economies appears to be revitalizing a cultural bond between China and Japan that is deeply rooted in 1,500 years of tradition.

Buddhism reached Japan from China via Korea in the mid-sixth century. Throughout the medieval period, there was constant cultural exchange between Chinese and Japanese monks, scholars, teachers and artists. Beginning in the 17th century, Japanese society was regulated for 250 years by Confucian values adopted from China.

Language barrier?

Language accounts for another enduring bond. While spoken Chinese and Japanese are entirely unrelated languages, Japanese is written with Chinese characters.

Beginning in the eighth century, official documents in Japan were written in classical Chinese.

During the Tokugawa Period (1600 — 1868), at the temple schools in their feudal domains, the male children of samurai families spent hours each day memorizing and reciting the Confucian classics in a hybrid Sino-Japanese.

Literary relations

In view of the long tradition of Chinese studies, it is not surprising that the most important critical works on classical Chinese philosophy, philology and literature have been — and continue to be — written in Japan by Japanese scholars.

To this day, comprehensive literacy in the Japanese language requires an extensive knowledge of Chinese compounds and allusions — which color the Japanese lexicon as richly as Greek and Latin do English.

Chinese is back in Japan

The recent Japanese language boom — a reflection of the nationalist emphasis on reconnecting with the past — has led many Japanese to the discovery of the importance of Chinese in their own language and has stimulated interest in learning Chinese.

In the past five years, Chinese-language schools have begun to appear in urban areas. Chinese-language enrollment at Japan’s universities doubled in 2000 — and doubled again in 2002.

Tourism between Japan and China is also thriving. According to the Japan Travel Bureau, package excursions to China’s major cities are now more popular than tours to the United States — with the exception of Hawaii. And Tokyo’s hotels are packed with large tour groups from China’s mainland.

Blurring borders

Walking on the Ginza today, you will overhear more Chinese than English. The Chinese presence feels pervasive in a way it never has until now. And the teashops are everywhere, crowded with young Japanese, offering dozens of varieties of Chinese tea.

There is no question that younger Japanese in particular are turning toward China with open curiosity and eager interest. It also appears that China’s attitude toward Japan is changing.

More to come

None of this is intended to suggest that Japan and China are about to become “one another’s best.” But a communality among the societies of Asia constructed around a partnership between Japan and China makes economic and political sense.

And it has a basis at the deepest level in a genuine cultural affinity that cannot be denied.

[snowflake34] 26/7/2004 16:12

From Morgan Stanley:

China: A Visit to Guangxi

Andy Xie (Hong Kong)

Morgan Stanley organized an investor tour to Guangxi Province to visit resource, infrastructure and agriculture sectors. We found that credit and land-supply tightening, electricity shortage and overloading crackdown were slowing the economy. However, the region was still growing rapidly.

Overcapacity and overbuilding appeared to be a serious problem in a relatively backward province. Property speculation also appeared to be serious. We observed that soft commodities were still strong, but prices of hard commodities were quite soft, and property prices stopped rising.

China's Brazil

Guangxi Province is China's southern province bordering Vietnam. It is surrounded by Yunnan Province to the west, Guizhou and Hunan Province to the north, and Guangdong Province to the East. Mining (e.g., coal, bauxite, iron ore, and limestone) and agriculture (e.g., tea, lychee, longan, sugarcane, and banana) are the main economic activities. Its economy depends on demand for such commodities and low transportation cost.

There are many ethnic groups in Guangxi. Cantonese is the lingua franca along the coast. The dialects in the north fall into the family of the dialects prevalent in Sichuan, Guizhou and Yannan Province. Cantonese speaking population (about 10% of the national population) and Yangtze Delta dialects-speaking population (also 10% of the national population) dominate the Chinese economy today as well as historically. There is little doubt that Guangxi Province is integrating into Pearl River Delta. The improvements in land and inland water transportation are making the integration closer overtime.

It is a poor province throughout Chinese history due to its mountainous terrain and poor soil condition. Before modern transportation was available, the value of its output was low. The province became well known in modern Chinese history as the launching pad for the Great Taiping Rebellion (see 'God's Chinese Son: The Taiping Heavenly Kingdom of Hong Xiuquan' by Jonathan D. Spence). The tough miners from its many mining sights formed its core fighting force. The movement swept through half of China and was finally crushed by an alliance between Yangtze Delta gentry and western powers. The Communist Revolution shared many similarities with this movement.

Riding the Investment Boom

Guangxi has benefited from China's credit boom. Nanning, the provincial capital, is virtually a construction site. The city is the permanent site for Pan-Asean expo. I think that it is just a concept for selling properties. Nanning's property price has risen by 60-100% in the past three years according to local opinions. But the national statistics show only 1% increase for the city in the past three years. I think that the national statistics on property prices are not reliable.

Property was obviously on everyone's mind. Whenever property became a discussion topic, everyone's eyes lighted up. The locals blamed Wenzhou people for pushing up property price. This is a common excuse across China. I am not sure there is good evidence to support this claim. The property bubble is due to the negative real interest rate, in my view.

The signs of overcapacity and overbuilding were quite visible. Many buildings didn't appear to be well occupied. The highways looked hugely underutilized. The government still has big plans to expand the infrastructure. While everything is needed, eventually, building many projects now would be quite wasteful, in my view. However, as long as the credit spigot stays on, the government will continue to build.

Tightening Signs

Local government agencies and businesses all felt the tightening measures imposed by the central government. The impact was still limited. Most investment projects kept going. This is consistent with the rapid loan growth in the first half of the year.

The tightened rules over land use conversion were quoted as a factor that was slowing down the new projects. Local governments were able to approve the conversion of agriculture land for other uses and sent the fait accompli to the central government for validation. Local governments now have to receive approval from the central government first before they can allow a project to begin. As a high proportion of fixed investment requires land, the new rules are postponing new projects from coming online. Hence, it is quite likely that fixed investment would slow discernibly in the second.

Credit tightening was also felt as a constraint. However, as construction activities appeared buoyant, this can affect only new projects. The loan expansion in the second quarter was close to the average since the beginning of 2002 and more than twice the average between 2000 and 2001. The loan growth so far has not adjusted much at all.

Borrowing through Hong Kong vehicles was also observed. The borrowed money would come into China as foreign direct investment (FDI). It seems to me that China's FDI may also be substantially exaggerated. Further, it raises doubts on how much foreign debt China has. A significant portion of China's FDI outstanding ($532 billion) could be indirect foreign debt.

Also, Chinese households and businesses have $151 billion of foreign currency deposit in Chinese banks. Chinese banks apparently have been making foreign currency loans for fixed investment. I don't know if it is counted as foreign debt. The Chinese government reported $202 billion of foreign debt in the first quarter.

Electricity shortage apparently stopped production at big factories in Guangxi. It seems that electricity shortages will persist. It takes time to build new plants. Coal availability was also an issue.

Lastly, the crackdown on overloading was having a widespread impact on the economy. Because highway tolls were proportional to the marked tonnage of trucks, most truckers bought vehicles that had bigger capacity than marked. Truck manufacturers catered to this market by building trucks that looked skinny but could carry a lot.

Trucks with heavy loads but skinny wheels are damaging China's newly built highways rapidly. It was common to rebuild after only two years. We saw a bridge in Guangxi that was under reconstruction. The locals told us that the bridge had to be rebuilt every year due to overloading.

Truck overloading is a typical Chinese story that subsidizes production inefficiently with public money. Because truckers are underpaying, the demand for highway transportation is exaggerated. It artificially depresses demand for inland water and rail shipping. Essentially, it is massive misallocation of resources due to an implicit and inefficient public subsidy.

As the central government is now enforcing the loading regulations, transportation costs are rising and bottlenecks are visible. The prices for trucked products (e.g., fruits and vegetables) have risen substantially. But it should decrease bad debts overtime; the low final price in China often happens at the expense of rising bad debts. Over time, more trucks will be built and inland water and rail shipping capacities will expand. The crackdown on overloading is probably the biggest efficiency gain to the Chinese economy in the past two years, in my view.

Softening Property and Commodity Prices

The tightening measures have a limited impact on the economy so far. Overcapacity, however, is having a bigger impact. Property prices in Nanning appear to have stopped rising. Local people were expecting decline. The prices of construction materials (e.g., aluminum, cement) are either stagnant or declining.

China is experiencing an investment bubble. Policy tightening could deflate the bubble earlier than its natural life, which would decrease the total economic loss from the bubble. It could also deflate naturally due to too much excess, similar to the tech bubble. Declining property prices would be the leading indicator. The expectation of rising property price is the linchpin for the bubble.

The debate in China on economic tightening is quite convoluted. Most think that tightening would cause the economy to go down and, hence, should stop. But, they do not consider how much more damage to the country would occur if the bubble lasts longer. Of course, Nanning could have high growth if it keeps putting up buildings. If these buildings were not be occupied, it would cause more bad debts.

China cannot fund high growth by accumulating bad debts forever. I believe the right approach is to make all the costs transparent and to achieve high growth through improving efficiency.

[johnwwwilkinson] 13/7/2004 18:13

China H1 oil, iron ore imports soar; steel, soybeans fall - Xinhua
Tuesday, July 13, 2004 4:13:35 AM


BEIJING (AFX-ASIA) - China's crude oil and iron ore imports showed little sign of a slowdown in June, although steel imports fell, indicating that government measures to cool surging investment and economic growth are only having an impact on demand for some raw materials.
Crude oil imports soared 39.3 pct year-on-year to 61.02 mln tons in the first six months of the year, up from 37.7 pct in the first five months, while iron ore imports rose 34.9 pct to 97.75 mln tons, compared with growth of 33.7 pct in the first five months, the Xinhua news agency reported, citing figures from the General Administration of Customs.
Growth in steel imports, which has been slowing over the past four months, turned negative for the first half as a whole, with imports down 2.5 pct at 18.04 mln tons, compared with growth of 3.9 pct in the Jan-May period.
Figures released yesterday by the Ministry of Commerce showed overall imports in June rose by 50.5 pct, much faster than the 28-33 pct expected by analysts, and much higher than the 35.4 pct growth seen in May. For the six months as a whole, imports rose 42.6 pct year-on-year to 264.90 bln usd, compared with 41 pct in the first five months. The Ministry provided no breakdown of the figures or any explanation yesterday.
Analysts were concerned that the surging growth in imports was driven by investment goods rather than goods processed for re-export, which would imply that government attempts to cool the economy were not having as much impact as it had indicated.
The additional breakdown provided by Xinhua indicates that the growth is coming from both general and processed trade. Imports of processed goods in the first half rose 41.8 pct to 99.91 bln usd, while imports of general trade rose 40.7 pct to 122.5 bln usd. Exports of processed goods in the first half rose 37.8 pct to 142.35 bln usd, while general trade exports rose 31.5 pct to 106.83 bln usd

Soybean imports, which had fallen 2.4 pct to 7.48 mln tons year-on-year in the first five months of the year, continued to slump in June as China continued its ban on imports of soybeans from Brazil because of quality problems. Soybean imports in the first six months fell 11.9 pct year-on-year to 8.94 mln tons, Xinhua said.
China's exports also picked up speed in June, rising 47 pct year-on-year to 50.5 bln usd compared with 32.8 pct growth in both May and June. Exports for the first half as a whole rose 36 pct year-on-year to 258.1 bln usd. Exports of machinery and electronic products in the first half rose 46.3 pct to 140.63 bln usd, compared with growth of 44.2 pct in the first five months of the year, Xinhua said. These exports accounted for 54.5 pct of overall exports in the first half, compared with 51.6 pct a year earlier

The EU, which became China's largest trading partner in May as a result of EU enlargement, remained in the top spot for the first half as a whole, with bilateral trade rising 37.4 pct to 80.72 bln usd, Xinhua said. Japan, China's second-largest trading partner and the largest source of imports, saw bilateral trade rise 28.6 pct to 78.3 bln usd

The US, which slipped down from first to third place in terms of trade with China in May, is still the country's largest export market, Xinhua said, although it did not provide a breakdown of exports. But bilateral trade rose 36.5 pct to 76.94 bln usd

China's bilateral trade growth with Canada and South Korea both topped 50 pct for the first time in the first half of the year, rising 55.4 pct and 50.5 pct, respectively

(1 usd = 8.3 yuan)
[e-mail] dl/nma/wpf For more information and to contact AFX: www.afxnews.com and www.afxpress.com

[snowflake34] 07/7/2004 12:44

US puts tariffs on China shrimps
By Edward Alden in Washington
Published: July 6 2004 21:12 | Last Updated: July 6 2004 23:32


The US said on Tuesday it would impose preliminary tariffs on more than $1bn of shrimp imports from China and Vietnam, hitting several Chinese producers with hefty new duties while levying more modest penalties against Vietnam.

The initial outcome in one of the largest anti-dumping cases filed is a partial victory for US shrimp fishermen who allege that the growth in imports - which now comprise more than 85 per cent of the US market - had made their catches unprofitable.

The Southern Shrimp Alliance, representing about 13,000 US shrimp fishermen from eight states, had asked for tariffs of between 133 per cent and 263 per cent to be levied against Chinese shrimp, and from 26 per cent to 93 per cent against Vietnam.

Shrimp is the most popular seafood in the US and total imports last year were valued at more than $3.5bn, of which nearly two-thirds could be hit with new tariffs. The commerce department is to rule this month on shrimp imports from Thailand, which account for one quarter of US imports, as well as Brazil, Ecuador and India.

The US said in its decision on Tuesday that the large Vietnamese companies, which account for three-quarters of the nearly $600m in Vietnam's shrimp exports to the US last year, would face extra duties of between 12.1 per cent and 19.6 per cent. The Chinese companies, which exported more than $400m in shrimp, will face duties of between 49 per cent and 112 per cent, though one large exporter will face no duties and another will pay only 7.7 per cent.

The decision to impose tariffs will not become final unless the US International Trade Commission rules early next year that US shrimp fishermen have been hurt by the rising imports. Under current US law, those fisherman would be entitled to a share of what could be several hundred million dollars in duties each year.

Opponents of the tariffs, including US restaurants, called the new duties "unjustified and very troubling", saying they would penalise efficient shrimp-farming operations and hurt US consumers to aid the small US shrimp fleet.

"The Bush administration has made a misguided trade policy decision that could have serious adverse consequences," said Wally Stevens of the Shrimp Task Force.

The decision continues a recent trend in which the commerce department has shown a greater willingness to treat "non-market economies" such as China and Vietnam by the same rules it grants to market economies. Traditionally anti-dumping investigations against non-market economies have resulted in high tariffs, on the assumption that government intervention in those economies distorts market pricing.

The US disappointed US furniture companies this month when it levied only modest preliminary duties against imports of Chinese wooden furniture after the commerce department deemed that most of those companies were responding to market forces.

In Tuesday's decision, the department similarly ruled that many Vietnamese and Chinese producers had shown the absence of government control, resulting in lower tariffs than US shrimp fishermen had sought.

[mcbeanburger] 06/7/2004 15:10

Commodities

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Aluminum Price May Average 3.2% Higher in Second Half (Update1)
July 6 (Bloomberg) -- Aluminum prices may rise 3.2 percent in the second half to the highest six-month average in nine years, a survey of analysts showed, boosting profit for Alcoa Inc., the world's biggest supplier, and other producers.

Prices for aluminum, used to make aircraft, cars and drink cans, reached an eight-year high in April and averaged 76.1 cents a pound ($1,679 a ton) since Jan. 1, up 14 percent from the second half of 2003. Prices will probably average 78.6 cents a pound in the second half, the highest for a half-year since 1995, according to the median forecast of 16 analysts.

Demand for aluminum is expected to rise 8 percent this year as stockpiles of the metal at the London Metal Exchange have fallen by one-third. Prices may extend gains in the second-half as a curb on investment and power shortages slow aluminum output growth in China, the world's top producer of the metal.

``Aluminum demand has improved consistently not just in China, but also in the U.S., Europe and Japan,'' said John Barkas, head of research at Sydney-based AME Mineral Economics. ``Prices are being helped by the idea that Chinese production increases won't be sustained -- sooner or later, China will revert to being a net importer again, rather an exporter.''

Zinc and tin are also forecast to gain, according to a wider Bloomberg News survey of 22 mining analysts from Melbourne to London.

Copper

Chinese demand helped copper prices gain 62 percent and nickel 84 percent in the past year.

Nickel is trading at double its 15-year average of $3.25 a pound. Copper is 31 percent higher, lead is 45 percent, and aluminum is 10 percent higher.

``On average, prices will be pretty much stable'' in the second half, Jim Lennon, an analyst at Macquarie Bank Ltd. in London, said in an interview. ``The rate of global growth should start to ease going into the fourth quarter of this year and into 2005.''

An easing in shortages of copper, nickel and lead may see average prices for those metals fall as much as 4.7 percent in the second-half of this year, the survey showed.

``If the U.S., Japan and other economies outside China continue to strengthen in the second half, the tightness in metals supply will remain,'' said Tim Barker, who helps manage $30 billion at BT Financial Group in Sydney.

China, which accounts for a fifth of the world's metals demand, postponed or canceled some plans to build aluminum smelters because of power shortages.

The government is concerned over-investment in aluminum smelters will lead to excess capacity, causing prices to fall and smelters to default on loans.

Alumina

Shortages of alumina, used to make aluminum metal, will curb growth in China's production and next year force the country to become a net importer of the metal for the first time since 2000, said Alan Heap, a commodities analyst with Citigroup Inc. in Sydney.

China is ``suffering from shortages of alumina and the economics of smelting is being further squeezed by the power crisis,'' Heap said.

China is limiting power supplies to aluminum smelters to ration supply. About 15.1 megawatt hours of electricity is used to make a ton of the metal, making power the largest cost in making the metal, said the International Aluminium Institute.

Global aluminum demand may outstrip supply by almost 800,000 metric tons in 2005, causing inventories to plunge to an equivalent of 3.7 weeks' supply -- the lowest since the 1980s -- from 5.3 weeks this year, said Citigroup's Heap.

Coke, Pepsi

Higher prices may erode profits at Beijing Crown Can Co. and other Chinese makers of soft-drink cans, who need about 1 ton of aluminum to make 70,000 cans.

Beijing Crown, which used more than 5,700 tons of the metal last year, asked Coca-Cola Co., Pepsi Co. and other customers to pay an extra 5 percent for its cans this year, said Ma Zhaoguang, a sales manager in Beijing. ``Our can business is breaking even now, but if aluminum prices move higher, we'll be making a loss.''

Higher aluminum prices and increased demand for more expensive engineered products such as those used in jets and cars are helping Alcoa increase its margins. Pittsburgh-based Alcoa will likely say tomorrow that second-quarter net income rose to 47 cents a share, the average estimate of 16 analysts surveyed by Thomson Financial, from 27 cents in the year-earlier period.

Rio Tinto

Demand for aluminum is solid and looks like exceeding supply this year, said Gavin Wendt, a metals and mining analyst with Intersuisse Ltd. in Sydney.

``Aluminum supplies are largely controlled by fewer, larger companies,'' Wendt said. Producers this year will ``all be looking to make good returns.''

Nickel, used to rustproof steel, may average $5.85 a pound, or 4.7 percent less than in the first half, according to the median forecast of 15 analysts. Prices have averaged $6.14 a pound so far this year following a 131 percent surge in 2003, when Chinese consumption jumped 58 percent.

Prices may trade between $5.50 a pound and $6 a pound during the next 12 months, Kerry Harmanis, 55, executive chairman of Perth, Western Australia-based nickel miner Jubilee Mines NL, said in an interview.

`Ran for Cover'

``Everyone ran for cover a couple of months ago'' when China announced steps to cool its economy,'' Harmanis said. ``But now we're seeing the fundamental shortage bite.''

Inventories of the metal plunged 67 percent this year and 45 percent in the past quarter, Merrill Lynch & Co. Sydney-based analysts Vicky Binns and Mike Harrowell said on June 10.

There are few new production sources coming on and that's good for nickel, said Mark Ashley, managing director of LionOre Mining International Ltd.'s Perth-based Australian operations.

``But we shouldn't get hooked into believing these prices are going to go on forever. I think we'd have to go back to a $3.50 target price,'' Ashley said in an interview.

Prices for copper, used to make electrical cable and water pipe, may average $1.18 a pound in the next six months, 3.6 percent less than in the first half, according to the median forecast of 22 analysts and traders. Since Jan. 1, prices have averaged $1.22 a pound, or 41 percent higher than in the second half of 2003.

Copper reached an eight-year high of $1.403 on March 2 because of disruptions at the world's two biggest mines, Escondida in Chile and Grasberg in Indonesia, that cut 230,000 tons of supply.

Concentrates

``There is a lot more copper concentrates supply coming through in the second half, which should drive prices down on average in the second half versus the first half,'' Macquarie Bank's Lennon said.

Zinc, used to rustproof steel and as a casing for batteries, will probably average 50 cents a pound, or 3.5 percent more than its first-half average of 48.3 cents. Tin prices will probably be 0.9 percent higher, at $3.57 a pound, according to the median forecast of 12 analysts.

Average lead prices will probably be 2 percent less at 35.4 cents in the second half, according to the median forecast of 15 analysts. Its average this year of 36.1 cents is a 39 percent increase from the second half of 2003.



=================================================================
($/pound)
Aluminum Copper Nickel Lead Zinc Tin
High 0.900 1.36 6.80 0.395 0.540 4.218
Average 0.781 1.211 5.81 0.357 0.496 3.512
Median 0.786 1.180 5.85 0.354 0.500 3.574
Low 0.703 0.998 4.75 0.320 0.440 4.218

1st-Half
average 0.761 1.224 6.141 0.361 0.483 3.54

=================================================================
*T
Last Updated: July 6, 2004 02:45 EDT