RioTinto's China crisis: Stern Hu, State Security and Iron Ore geopolitics

Post GFC China is flexing its focus, I suspect that the "old" rules are under strain. The Chinese must have been under the impression that Hu was on their side and the failure of the Chinalco bid was a wake up call that he wasn't which cast his no doubt strong relationships with the chinese resource purchasing execs in a "new light", whereas the Chinese can't deeply penetrate the aussie iron ore biz due to worries about "market power" but on the other hand whats good oligopoly wise for BHP/RIO is just business, so sorry.

Or maybe these close commercial relationships were suspect for ages from the Chinese perspective and only the prospect of a stake in the biz stayed hands.



Its an interesting case: he shoulda bailed.

The man whom he replaced, iron ore consultant Philip Kirchlechner, explained how the Chinese "legal" system works. "China is one of the freest countries in the world, except in some circumstances," he said.

"In this case, a serious commercial dispute, they can get you for small irregularities that are usually overlooked."

The criminal system can be fiercely arbitrary, turning on people without warning, and providing them with little cause for redress.

And almost everyone who watches business in China says it is impossible to separate politics and vested interests from this sort of criminal investigation.

"My sense is it's part of the very complicated context of the Chinalco deal, the iron ore negotiations, the Rio-BHP Billiton deal," said John Frankenstein, a China business watcher at the City University of New York.

Mr Hu grew up in Tianjin and met his wife at the prestigious Peking University.

He is fiercely proud of his son, who wants to work in hotel management and has just spent a year studying in Europe and the US.

Both Mr Hu's wife and son are in Shanghai and struggling to come to terms with his disappearance. And they want to defend their privacy.

Some detainees, like the American-Chinese professor Song Yongyi, have been sucked into China's state security system and been released after little more than a month, following pressure from the US Government.

But this case is the exception.

No one, it seems, expects Mr Hu to be released soon.

The international context of Mr Hu's detention suggests to many observers that his case has already received some sort of tick from Beijing.

The fact that the Shanghai State Security Bureau acknowledged his detention and that the Ministry of Foreign Affairs said it had evidence to support the investigation suggests they do believe in their case.

And even if they change their minds, the public nature of their comments means they will be greatly reluctant to back down.

Even if Mr Hu is released and cleared of every allegation, close observers say it will be difficult for him to work effectively in China again.

"He's already ruined," said a family friend of Mr Hu.




Malcolm Maiden
July 10, 2009

Confusion and not a little fear are abroad in the Australian business community in China after last Sunday's detention of four of Rio Tinto's Shanghai-based employees, including Stern Hu, a senior executive who was responsible for marketing Rio iron ore to Chinese steel mills.

The affair could take several paths from here and most of them lead to places Rio and the Australian Government do not want to be.

Here are the facts so far: Chinese officials believed to belong to China's main security agency, the Bureau of State Security, raided Rio's office at the top of the ultra-modern Hong Kong New World Tower on Shanghai's Huai Hai Road on Sunday, detained the four and removed computers.

Rio has not been in contact but the Chinese Government now says they have hard evidence the Rio executive stole state secrets and damaged China's economic security.

Hu is Rio's general manager, commercial, in China and oversees Rio's ore sales to Chinese steel mills, placing him at the intersection of one of the world's most important commodity routes. Rio is the second-biggest iron ore exporter in the world and China now accounts for about half of global consumption.

There were reports in the Chinese press yesterday that the Rio raid was one of several and that the Chinese Government was cracking down on side deals for iron ore tonnage, the growth of spot sales for iron ore and on deals that may have involved kickbacks.

A southern Chinese business paper, 21st Century Business Herald, reported the authorities also detained an iron ore executive with Shougang Group, a Chinese steel company that produces more than 12 million tonnes of steel a year.

The executive was said to be personally known to Hu, but that is not unusual: part of Hu's job is to know his customers.

The detention of the Rio executives is a conspiracy theorist's goldmine.

It has come amid a stand-off on this year's iron ore contract pricing negotiations, during which Beijing pushed Baosteel and other steel companies aside and inserted the country's industry association as peak negotiator.

It also came after Rio's decision a month ago to abandon a plan to raise $US19.5 billion ($24 billion) by selling stakes in its assets and shares in itself to double state-owned Chinese metals group Chinalco's stake in Rio to 18 per cent.

Rio's decision to replace the Chinalco deal with a general share issue and a Pilbara iron ore joint venture with BHP Billiton was the worst possible outcome for China Inc - a loss of face and a loss of strategic position.

Chinalco was dumped after agreeing to a deal with Rio last February at a time when Rio was friendless and struggling.

The Rudd Government did not have a direct role in that but it enabled the switch by extending its Chinalco foreign investment decision by 90 days, time enough for the markets to recover and for options to open up for Rio.

From here, the situation could develop in several ways.

One scenario, a diplomatic nightmare for the Rudd Government and a strategic blow for Rio and any company hoping to extend ties with China, is that this is a brutal Beijing-directed reprisal for any or all of the Chinalco snub, Australian Government unease about direct Chinese investment here and the iron ore price stand-off.

That's unlikely. But the issue becomes only slightly less diplomatically and commercially challenging if the four Rio employees are pawns in an attempt by Beijing to reassert control over the iron ore market.

The Government has fewer problems if the raid was based on claims about side deals in iron ore, but such claims, if proved, would still be a setback for Rio - and the Chinese Government is now clearly signalling it has broader and more serious concerns about corporate espionage.

The best outcome for Rio and the Government would have been that the orders to detain the executives came from lower, even local levels, of the Chinese Government and that the suspicions that motivated the detention of the Rio four were unfounded.

That seems a faint hope now.

http://business.smh.com.au/business/riotintos-china-crisis-escalates-20090709-derw.html

CHINALCO has launched its first frontal attack on Rio Tinto's integrity as the China-Australia spy scandal threatens to derail the political and perhaps economic relationship between the countries.

Chinalco's vice-president and spokesman, Lu Youqing, strongly denied yesterday that the company had any connection with the Shanghai State Security Bureau's investigation into Rio Tinto's iron ore chief in China, Stern Hu, and three of his senior Chinese staff.

But Mr Lu also revealed the extent of Chinalco's anger about apparently groundless speculation that the Rio case was linked to commercial bribery.

"Rio Tinto has no business credibility as a company. It is not unlikely that a few staff are suspected of breaching law," Mr Lu said.

As the rhetoric from Chinalco intensified, sources at the China Iron & Steel Association were also denying any involvement in the Hu arrest and detention.

Mr Hu is Rio's top iron ore negotiator in China.

Australian officials said last night the Chinese investigation had exposed the brittleness of Australia's political relationship with its largest trading partner.

"This sort of thing can only happen if the top political leaders on both sides do not trust each other," said an Australian official involved in managing the China relationship. He said the dangers were greater to Australia. "China can do without Australia, but at a cost. Australia cannot do without China."

Meanwhile, China's peak trade group in Australia has declared it is "business as usual" within the resources-hungry nation as Australian companies say they are not recalling staff from China.

Australian businesses with a presence in China admit they are watching what happens to the four detained Rio executives, who have been held since Sunday on suspicion of espionage.

The Victorian president of the Australia China Business Council, Jason Chang, said while the detention was "a bit odd" there was no information that Australians or other foreigners were at any increased risk.

"As far as I am concerned and the ACBC is concerned I would say that right now it is business as usual until further notice," he said. "I haven't seen any correspondence at this point other than through the papers.

"These things happen from time to time but it is very hard to comment before knowing what precisely happened."

A spokesman for BHP Billiton said it was "operating as normal" in China. Similarly, iron ore miner Fortescue Metals has not issued any directive for China-based staff to return home.

On Wednesday the Department of Foreign Affairs changed its travel advice, saying "Australians in China who find themselves in a business or civil dispute may be prevented by authorities from leaving the country until the matter is resolved". But a spokesman said the change in advice was not linked to Mr Hu's case.

Queensland Liberal Michael Johnson, chairman of the Australia-China Business Forum, said business figures were waiting for more detail on the arrest of Mr Hu before deciding whether to alter their plans.

"If there is evidence to substantiate it, then I think business won't be as dramatically affected," he said.

"But if he has been detained without compelling evidence, that's when I think Australian business, in terms of the depth and breadth and the pace, will be affected."

While speculation continues that the iron ore arrests may have something to do with recent price talks, there is still no confirmation that Chinese steel makers have agreed to a 33 per cent cut.

Meanwhile, Rio has received an upgrade from ratings agency Standard & Poor's following its successful $15 billion rights issue.

http://business.smh.com.au/business/spurned-chinalco-denies-role-in-rio-arrest-20090709-dert.html

You wanted prophecy? Well, then here it is...

Spooky stuff...



Sometime around the year 2005, perhaps a few years before or after, America will enter [the Crisis]....

The new mood and its jarring new problems will provide a natural end point for the Unraveling-era decline in civic confidence. In the pre-Crisis years, fears about the flimsiness of the social contract will have been subliminal but rising. As the Crisis catalyzes, these fears will rush to the surface, jagged and exposed. Distrustful of some things, individuals will feel that their survival requires them to distrust more things. this behavior could cascade into a sudden downward spiral, an implosion of societal trust.

If so, this implosion will strike financial markets--and, with that, the economy. Aggressive individualism, institutional decay, and long-term pessimism can proceed only so far before a society loses the level of dependability needed to sustain the division of labor and long-term promises on which a market economy must rest. Through the Unraveling, people will have preferred (or, at least, tolerated) the exciting if bewildering trend toward social complexity. But as the Crisis mood congeals, people will come to the jarring realization that they have grown helplessly dependent on a teetering edifice of anonymous transactions and paper guarantees. Many Americans won't know where their savings are, who their employer is, what their pension is, or how their government works. The era will have left the financial world arbitraged and tentacled: Debtors won't know who holds their notes, homeowners who owns their mortgages, and shareholders who runs their equities--and vice versa.

At about the same time, each generation's approach to its new phase of life will set off loud economic alarms, reminding people how weakly their Unraveling-era nation prepared for the future. The Boomers' old age will loom, exposing the thinness in private savings and the unsustainability of public promises. The 13ers will reach their make-or-break peak earning years, realizing at last that they can't all be lucky exceptions to their stagnating average income. Millennials will come of age facing debts, tax burdens, and two-tier wage structures that older generations will now declare intolerable. As all these generations enter their Crisis constellation, the Unraveling era's wry acceptance that people might never get much back from Social Security will crystallize into a jolting new fear that everything from Treasury bills to remortgage instruments to mutual funds could become just as suspect.

At some point, America's short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed. With savings worth less, the new elders will become more dependent on government, just as government becomes less able to pay benefits to them. With taxes hiked, the new midlifers will get to pocket even less of their peak-year incomes. With job offers dwindling, the new youth will face even taller barricades against their future.

Before long, America's old civic order will seem ruined beyond repair. People will feel like a magnet has passed over society's disk drive, blanking out the social contract, wiping out old deals, clearing the books of vast unpayable promises to which people had once felt entitled. The economy could reach a trough that may look to be the start of a depression. with American weaknesses newly exposed, foreign dangers could erupt.

From this trough and from these dangers, the makings of a new social contract and new civic order will arise. In the initial, jerry-built stages, people will not be entitled, but authorized to receive whatever they get from government. This will lead to conflict, as people do battle to establish where, how, and by whom this authority is to be exercised....

From Strauss and Howe's "Fourth Turning".

Hat tip to Charles Powell for http://animalspiritspage.blogspot.com/2009/02/crisis-at-end-of-saeculum.html

In Search of Dignity

I don't often agree with David but Brooke baby is spot on here...

July 7, 2009
Op-Ed Columnist
In Search of Dignity
By DAVID BROOKS

When George Washington was a young man, he copied out a list of 110 “Rules of Civility and Decent Behavior in Company and Conversation.” Some of the rules in his list dealt with the niceties of going to a dinner party or meeting somebody on the street.

“Lean not upon anyone,” was one of the rules. “Read no letter, books or papers in company,” was another. “If any one come to speak to you while you are sitting, stand up,” was a third.

But, as the biographer Richard Brookhiser has noted, these rules, which Washington derived from a 16th-century guidebook, were not just etiquette tips. They were designed to improve inner morals by shaping the outward man. Washington took them very seriously. He worked hard to follow them. Throughout his life, he remained acutely conscious of his own rectitude.

In so doing, he turned himself into a new kind of hero. He wasn’t primarily a military hero or a political hero. As the historian Gordon Wood has written, “Washington became a great man and was acclaimed as a classical hero because of the way he conducted himself during times of temptation. It was his moral character that set him off from other men.”

Washington absorbed, and later came to personify what you might call the dignity code. The code was based on the same premise as the nation’s Constitution — that human beings are flawed creatures who live in constant peril of falling into disasters caused by their own passions. Artificial systems have to be created to balance and restrain their desires.

The dignity code commanded its followers to be disinterested — to endeavor to put national interests above personal interests. It commanded its followers to be reticent — to never degrade intimate emotions by parading them in public. It also commanded its followers to be dispassionate — to distrust rashness, zealotry, fury and political enthusiasm.

Remnants of the dignity code lasted for decades. For most of American history, politicians did not publicly campaign for president. It was thought that the act of publicly promoting oneself was ruinously corrupting. For most of American history, memoirists passed over the intimacies of private life. Even in the 19th century, people were appalled that journalists might pollute a wedding by covering it in the press.

Today, Americans still lavishly admire people who are naturally dignified, whether they are in sports (Joe DiMaggio and Tom Landry), entertainment (Lauren Bacall and Tom Hanks) or politics (Ronald Reagan and Martin Luther King Jr.).

But the dignity code itself has been completely obliterated. The rules that guided Washington and generations of people after him are simply gone.

We can all list the causes of its demise. First, there is capitalism. We are all encouraged to become managers of our own brand, to do self-promoting end zone dances to broadcast our own talents. Second, there is the cult of naturalism. We are all encouraged to discard artifice and repression and to instead liberate our own feelings. Third, there is charismatic evangelism with its penchant for public confession. Fourth, there is radical egalitarianism and its hostility to aristocratic manners.

The old dignity code has not survived modern life. The costs of its demise are there for all to see. Every week there are new scandals featuring people who simply do not know how to act. For example, during the first few weeks of summer, three stories have dominated public conversation, and each one exemplifies another branch of indignity.

First, there was Mark Sanford’s press conference. Here was a guy utterly lacking in any sense of reticence, who was given to rambling self-exposure even in his moment of disgrace. Then there was the death of Michael Jackson and the discussion of his life. Here was a guy who was apparently untouched by any pressure to live according to the rules and restraints of adulthood. Then there was Sarah Palin’s press conference. Here was a woman who aspires to a high public role but is unfamiliar with the traits of equipoise and constancy, which are the sources of authority and trust.

In each of these events, one sees people who simply have no social norms to guide them as they try to navigate the currents of their own passions.

Americans still admire dignity. But the word has become unmoored from any larger set of rules or ethical system.

But it’s not right to end on a note of cultural pessimism because there is the fact of President Obama. Whatever policy differences people may have with him, we can all agree that he exemplifies reticence, dispassion and the other traits associated with dignity. The cultural effects of his presidency are not yet clear, but they may surpass his policy impact. He may revitalize the concept of dignity for a new generation and embody a new set of rules for self-mastery.

Copyright 2009 The New York Times Company
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THE VANISHING OF THE GOLD BASIS and its implications for the international monetary system

THE VANISHING OF THE GOLD BASIS and its implications for the international monetary system A paper presented at the Santa Colomba Conference on the International Monetary System at the Palazzo Mundell, July 2009. Antal E. Fekete San Francisco School of Economics The basis for agricultural commodities shows a clear annual cyclical pattern that closely follows the crop year. It starts with contango just after harvest, and ends with backwardation when supplies are drawn down just before the new crop is brought in.


The behavior of the gold basis lacks this cyclical pattern characteristic of the markets for agricultural goods. Contango obviously follows the fluctuations of the interest rate up or down, the adjustment being practically instantaneous. But, in addition, there is a rather curious phenomenon that can be described as the secular vanishing of the gold basis. This means that, as a percentage of the carrying charge (interest) the gold basis has been steadily eroding and by now has all but reached zero. Reversals in the trend, if any, are minor and temporary. It is difficult to imagine any combination of circumstances in which there could be a major reversal in the trend of the gold basis, unless there was an explosion of interest rates.


It is incumbent upon economic theorists to explain the peculiarity of the secular vanishing of the gold basis, which is not observed in the case of the basis of other non-agricultural commodities such as the base metals, for example.


The overwhelming fundamental fact about gold during the past half a century is the steady and relentless absorption of new supplies from the mines through individual hoarding demand. Half a century of gold production at peak rates of output has disappeared without a trace and is by and large unaccounted for. This is more gold than had ever been produced previously. At the same time also absorbed was whatever monetary gold governments and central banks have in their wisdom dishoarded.


It can hardly be doubted that if further supplies of monetary gold were dishoarded, it would be easily absorbed as well, and any setback in the price of gold on that account would be temporary. One should also remember that net dishoarding of gold by governments and central banks is a thing of the past. Countries such as China, Russia, Brazil, to mention but a few, are on record as wanting to buy all the gold they can without unduly disturbing the price. This means that the combined net private and official demand for gold will be insatiable for the foreseeable future. This is in full agreement with the secular vanishing of the gold basis.


The burning question is what happens when gold markets go to permanent backwardation, as is likely if present trends continue. Clearly, the gold futures markets will be no longer viable as they are presently constituted. The main source of gold for investment purposes will be permanently shut, as a negative gold basis means that all offers to sell cash gold have been withdrawn. To see this we have only to remember that paper gold promising future delivery can no longer be trusted under the regime of a negative basis, as explained above. The huge volume of trade in paper gold would disappear with the advent of permanent backwardation.

http://www.professorfekete.com/articles/AEFTheVanishingOfTheGoldBasis.pdf

I'm going to give you some financial advice...

Put 10% of your savings into silver and 10% into gold. Take a small position in alternate energy 5%(DYESOL)and uranium 5%(Paladin) and a larger one in NewCrest or Lihir.10%. Put the rest in the bank. I once also recommended a position in Oz Minerals, forgive me. Should have got out with Hegarty and not stayed with the nickel and zinc plated greedy idiots. Don't trade and DON'T go long on margin! I have given more or less the same general advice for the last five years and its been good for a 15% or so return. Due to the timing issues some people are down a bit in the worse meltdown in seventy years.

The regular financial advisors, meanwhile, are moonlighting as grief counsellors and really good people with sense (Simon, NOOOOoooo!!!) were going long on margin right up to the end of 2007 on the advice of self interested clowns.

The aussie financial advice industry is a large parasite infected shark with low life expectancy.

I see carnage.

The dirty secrets of financial planners
Stuart Washington
July 8, 2009 - 11:52AM

The financial planning industry has a series of dirty little secrets that make investment banks look like paragons of virtue. And that's pretty hard to do in this day and age.

Dirty little secret #1

Many financial planners work to sales targets. For these planners the need to increase revenues is included in financial planners' key performance indicators or in their job descriptions.

Have you experienced any tricks of the trade employed by financial planners? Have your say

In some cases these targets may be a figure - say $55,000 in revenue generated a quarter, breaking down to roughly $7000 a week. The way a planner gets to these targets is not by selling advice; it is by selling products with up-front fees and commissions.

Dirty little secret #2

Some banks' financial planners are ranked in "league tables'' based on who sells the most. This little secret blows away any thoughts that Joe Blow planner is a disinterested adviser.

If major planning groups keep and internally publish league tables on how their financial planners are performing in terms of "sales'' it is hard to see a workforce being motivated to offer impartial financial advice. It cements the above-mentioned industry bias towards sales people rather than advisers.

Dirty little secret #3

In the boom years, a planner on a $60,000 salary could earn up to $70,000 on top of that in commission-based payments.

Yes, we have heard a lot about commissions. Yes, we hear that commissions can lead financial planners to offer products they may not actually believe in.

But I wonder whether we fully understand that a planner regularly offering investors advice that is not attached to some form of commission are flirting with half their likely annual salary.

Dirty little secret #4

You can't go outside the system. I have spoken to two planners who left big planning groups because they felt they were unable to offer the advice they were required to (that is, sell more stuff) rather than the advice they felt they should professionally offer people (for example, go into a term deposit).

In both cases the planners say they were counselled about their perceived failure to convert existing clients into lucrative purchasers of commission-based products.

Dirty little secret #5

Churning = earning. A planner looking to lift earnings can simply recommend new clients switch from one superannuation fund to another. While this bumps the revenue up nicely for the planner, it has some particularly nasty consequences for the unwitting client.

One, they may lose the life insurance contained in the original industry superannuation. Two, if the planner offers a substitute insurance policy they frequently get the handsome up-front commissions on the new product (which are effectively paid for by the customer any way.)

While I freely accept there are honest, committed and sincere financial planners, they are currently caught in an industry structure so tangled that it's hard to pick the good from the bad.

And before those honest planners start crying foul about unfair generalisations (a big thanks to the planner who sent the e-mail with the subject line "Scummy journalism'' in response to a previous column), it's worth remembering that everything written above is based on criticism levelled by other financial planners.

These are not practices that appear in submissions made to the Corporations and Financial Services parliamentary committee currently charged with implementing change.

But it is worth spelling them out in some detail because they are practices that have threatened the integrity of the industry as a whole.

Both the industry and the parliamentary committee need to understand these practices and how they developed to fully comprehend the need for change. Let's hope they then make changes that put the industry on a completely new footing.

Hyperinflation or deflation?

At present, the investment community is divided as to whether the world economy faces hyperinflation or deflation. Some observers are convinced that the central banks’ printing press will take the world towards hyperinflation whereas others believe that the ongoing contraction in American private-sector debt will result in outright deflation. So, what will the future bring?

It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So, I maintain my view that due to the unprecedented policy responses around the globe, the world’s economy will face high inflation over the medium to long-term. And the general price level will double over the coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the ‘green shoots’ hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year. So, it is possible that before year-end, we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in US government bonds, US Dollar and Japanese Yen.

This near-term vulnerability in the markets is the reason why I have recently liquidated our ‘long’ positions in resources and emerging markets and gained a heavy exposure to long dated US Treasuries. In my view, a defensive investment stance is prudent at this juncture as it will protect our capital and allow us to profit from the expected contraction. Once the pullback in the markets is complete, I will liquidate our positions in US Treasuries and re-invest our capital in our preferred holdings in energy, materials, mining and emerging Asia.

Look. In the business of investing, the tape never lies and it is worth remembering that Wall Street is littered with the graves of those who got married to one particular outcome and then held on to their ill-conceived notions. At this point, when private-sector debt contraction in America is locking horns with central bank inflation, I prefer to have an open mind. Therefore, I am maintaining a defensive near-term investment position. If the market corrects over the following weeks, I will be in a position to profit from such a decline. On the other hand, if the major indices simply consolidate here and break above the recovery highs recorded last month, then I will have no hesitation in changing my defensive investment position. Put simply, I am currently watching and waiting patiently for the market to reveal its hand.

Coming back to the subject of this essay; the reason why I don’t foresee immediate hyperinflation is due to the fact that the velocity of money is currently weak. In other words, at least for the moment, the private-sector in America isn’t participating in Mr. Bernanke’s inflation agenda. Despite the fact that Mr. Bernanke has injected a massive amount of reserves in the banking sector, this money is currently sitting as excess reserves within the American banking system. The fact that this money isn’t being lent out rules out immediate hyperinflation. However, once the American economy stabilises and the velocity of money picks up, these excess reserves will trigger a massive inflationary wave.

As far as deflation is concerned, I am of the view that the policy responses and our fiat-money system will ensure that the purchasing power of cash will continue to diminish over the medium to long-term. In fact, I am willing to bet that cash will probably be the worst performing ‘asset’ over the coming decade. Remember, in today’s monetary system, central banks and governments the world over are free to create money out of thin air and this will prevent outright deflation in the global economy.

It is worth noting that in the past six months alone, China’s commercial bank credit has expanded by a whopping US$1 trillion! Figure 1 highlights the surge in Chinese bank lending. Furthermore, credit is also expanding frantically in other Asian nations. So, contrary to the West, monetary policy is still alive and well in the developing nations and this factor also rules out outright deflation in the global economy.

Figure 1: Explosion in China’s bank credit



Source: Bank of China

In my opinion, rather than hyperinflation or outright deflation, we will witness elevated inflation after the American economy has stabilised. In the interim however, investors should be prepared for another deflationary scare and the associated market panic.

Puru Saxena

Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com