China's 'resource imperialism' a risk for Australia: James Dines

Leading American investment analyst James Dines has criticised Australia for allowing China to buy large swathes of its natural resources in what he calls "resource imperialism".

Australia was in danger of squandering it's "irreplaceable inheritance ... traded for easily printed paper", Mr Dines said.

Mr Dines, the keynote speaker this week at the RIU Victorian Resources Roundup conference, told an audience of mining executives, brokers and investors that the end of capitalism as we knew it had arrived and that we were in the second great economic depression.
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His entertaining, if alarming, speech would have prompted mixed feelings among a crowd that included executives with a strong Chinese presence on their share registries.

State-owned Chinese companies are also becoming a major foreign investor in Australia.

Mr Dines, editor of the Dines Letter and author of numerous books, described natural resources, including farmland, as a source of real wealth that should be kept for "your descendants".

By pursuing resource imperialism, China was building stockpiles of commodities well above its immediate needs, such as rare earths - it already produces 97 per cent of the world total - and copper.

The Australian Foreign Investment Review Board blocked a $252 million bid by state-owned China Nonferrous Metal Mining to acquire Australian rare earth miner Lynas in 2009.

China's motivation

The world's most populous country wants to secure its resource needs for centuries to come.

Instead of seizing the means of production, as Karl Marx advocated, the Chinese Communist Party was legally buying it in what Mr Dines believes is the end of capitalism as we know it.

"They are not buying a copper mine to re-sell at a higher price. They are buying it to use all that copper for China," he said.

"China are storing (commodities) as a form of hard money for next century and beyond."

Mr Dines said he was not being anti-China.

"What they're doing is legal and far-sighted thinking."

He contrasted that with the US, where investors were fixated on quarter to quarter earnings.

Currency collapse

In contrast, the US and Europe had not learnt from history and had brought about a second economic depression by incurring massive debts and trying to make repayments by printing more money, he said.

He believes it will ultimately lead to the currency system collapsing.

The doubling of the money supply to pay for World War I led to inflation in the 1920s and the Depression of the 1930s, he said.

Mr Dines says what's needed is a currency linked to gold stores to limit printing.

America's government debt will swell to an estimated $US20 trillion in the next nine years was, something it will never repay, he says.

China currently holds $US3 trillion in foreign exchange assets and could "buy the whole world".

So, how should Australia and the world respond to this new world order?

The prevailing view here is that the mining boom is a great thing and will last indefinitely, with a rapidly urbanising China and India buying our resources.

But Mr Dines points out that heavy demand from the developing countries of the world will put a strain on finite resources, with oil certain to run out this century.

He says Australia should ensure that a percentage of all mines and farmland is kept in Australian hands, to protect the country's food and resource security.

High food prices prompted violent social unrest in the Middle East this year.

He also recommends relying less on mining and more on renewable industries such as tourism, crops and seafood.

"Sooner or later, Australia is going to need those rare earths for its own (hi-tech) manufacturing, or else your kids will be buying your own rare earths back from China, with a significant mark-up," Mr Dines said.

If he did have a positive message, it was to invest in gold and silver, which, he says, are the ultimate monetary metals, with gold having risen in value every one of the last 11 years.

AAP

China's green energy revolution ~ NYT.

C. H. Tung, the first Chinese-appointed chief executive of Hong Kong after the handover in 1997, offered me a three-sentence summary the other day of China’s modern economic history: “China was asleep during the Industrial Revolution. She was just waking during the Information Technology Revolution. She intends to participate fully in the Green Revolution.”

I’ll say. Being in China right now I am more convinced than ever that when historians look back at the end of the first decade of the 21st century, they will say that the most important thing to happen was not the Great Recession, but China’s Green Leap Forward. The Beijing leadership clearly understands that the E.T. — Energy Technology — revolution is both a necessity and an opportunity, and they do not intend to miss it.

We, by contrast, intend to fix Afghanistan. Have a nice day.

O.K., that was a cheap shot. But here’s one that isn’t: Andy Grove, co-founder of Intel, liked to say that companies come to “strategic inflection points,” where the fundamentals of a business change and they either make the hard decision to invest in a down cycle and take a more promising trajectory or do nothing and wither. The same is true for countries.

The U.S. is at just such a strategic inflection point. We are either going to put in place a price on carbon and the right regulatory incentives to ensure that America is China’s main competitor/partner in the E.T. revolution, or we are going to gradually cede this industry to Beijing and the good jobs and energy security that would go with it.

Is President Obama going to finish health care and then put aside the pending energy legislation — and carbon pricing — that Congress has already passed in order to get through the midterms without Republicans screaming “new taxes?” Or is he going to seize this moment before the midterms — possibly his last window to put together a majority in the Senate, including some Republicans, for a price on carbon — and put in place a real U.S. engine for clean energy innovation and energy security?

I’ve been stunned to learn about the sheer volume of wind, solar, mass transit, nuclear and more efficient coal-burning projects that have sprouted in China in just the last year.

Here’s e-mail from Bill Gross, who runs eSolar, a promising California solar-thermal start-up: On Saturday, in Beijing, said Gross, he announced “the biggest solar-thermal deal ever. It’s a 2 gigawatt, $5 billion deal to build plants in China using our California-based technology. China is being even more aggressive than the U.S. We applied for a [U.S. Department of Energy] loan for a 92 megawatt project in New Mexico, and in less time than it took them to do stage 1 of the application review, China signs, approves, and is ready to begin construction this year on a 20 times bigger project!”

Yes, climate change is a concern for Beijing, but more immediately China’s leaders know that their country is in the midst of the biggest migration of people from the countryside to urban centers in the history of mankind. This is creating a surge in energy demand, which China is determined to meet with cleaner, homegrown sources so that its future economy will be less vulnerable to supply shocks and so it doesn’t pollute itself to death.

In the last year alone, so many new solar panel makers emerged in China that the price of solar power has fallen from roughly 59 cents a kilowatt hour to 16 cents, according to The Times’s bureau chief here, Keith Bradsher. Meanwhile, China last week tested the fastest bullet train in the world — 217 miles per hour — from Wuhan to Guangzhou. As Bradsher noted, China “has nearly finished the construction of a high-speed rail route from Beijing to Shanghai at a cost of $23.5 billion. Trains will cover the 700-mile route in just five hours, compared with 12 hours today. By comparison, Amtrak trains require at least 18 hours to travel a similar distance from New York to Chicago.”

China is also engaged in the world’s most rapid expansion of nuclear power. It is expected to build some 50 new nuclear reactors by 2020; the rest of the world combined might build 15.

“By the end of this decade, China will be dominating global production of the whole range of power equipment,” said Andrew Brandler, the C.E.O. of the CLP Group, Hong Kong’s largest power utility.

In the process, China is going to make clean power technologies cheaper for itself and everyone else. But even Chinese experts will tell you that it will all happen faster and more effectively if China and America work together — with the U.S. specializing in energy research and innovation, at which China is still weak, as well as in venture investing and servicing of new clean technologies, and with China specializing in mass production.

This is a strategic inflection point. It is clear that if we, America, care about our energy security, economic strength and environmental quality we need to put in place a long-term carbon price that stimulates and rewards clean power innovation. We can’t afford to be asleep with an invigorated China wide awake.

http://www.nytimes.com/2010/01/10/opinion/10friedman.html

China denounces U.S. banks for 'evil intent' with derivatives

Outside vanilla derivative products their sole function is to flog off hidden risk. The western banks mentioned monitised their cred and died, end of story.

BEIJING -- A senior Chinese official who oversees the country's largest state-owned enterprises has publicly slammed Western investment banks for "maliciously" peddling complicated derivative products that caused huge losses for Chinese companies over the last year.

In Beijing's strongest criticism on the matter to date, Li Wei, vice director of the state-owned Assets Supervision and Administration Commission, singled out Goldman Sachs, Morgan Stanley, Merrill Lynch, and Citigroup in a long and highly critical article in the latest issue of an official Communist party newspaper.

The large losses suffered by Chinese state companies were "closely associated with the intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions," Mr Li asserted. "To a certain extent some international investment banks were the chief criminals and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo."

In his article, Mr Li said 68 of the 130-odd state companies controlled directly by Sasac had been buying derivatives to speculate or hedge against rising commodity prices and fluctuating currencies and interest rates, even though some of them were not authorised to do so.

These 68 companies had booked total combined net losses of Rmb11.4 billion on the Rmb125 billion worth of financial derivatives products they had bought by the end of October 2008, Mr Li said.

The government has not previously revealed the full extent of losses suffered by Chinese companies that made ill-fated bets on over-the-counter, mostly offshore derivatives.

In September, Sasac warned that some of the contracts were illegal and might be invalidated, a move that prompted some Western banks to agree quietly to renegotiate contracts behind closed doors.

Air China, China Eastern Airlines, Cosco, China Railway Engineering Corp., China Railway Construction Corp., and Citic Pacific were among the companies that lost the most from buying complex derivatives.

Some of the biggest losses came from the airlines and shipping companies' purchases of options to hedge against rising oil prices between June and August last year, when oil hit a historic peak of more than $140 a barrel.

When prices fell during the financial crisis, these companies were saddled with large losses, partly because they had chosen riskier -- and cheaper -- derivatives products to hedge against rising prices.

Mr Li said the most important reason for the derivatives losses was unnecessary speculation and attempts at arbitrage by these state companies.

He also cited weak risk management procedures, a lack of expertise, and intentional breaking of rules that restrict most kinds of financial derivatives in China.

But he said China should "not give up eating for fear of choking" and that it was imperative for Chinese companies to keep using financial derivatives.

China Unstoppable ~ Saxena

WINDS OF CHANGE
by Puru Saxena
Editor, Money Matters
November 13, 2009

The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.

It is our observation that throughout history, no empire has managed to rule forever. If you look back in time, you will realise that various empires rose to power, they prospered and spread their influence. Thereafter, they over-extended themselves and then decayed. In fact, all the glorious empires had one thing in common – the spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century, however it has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is proof that the world’s largest economy is well past its prime. Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider Figure 1 which shows the total obligations of the US government.

Figure 1: US Government Obligations (trillions of US dollars)



Source: Sprott Asset Management

As you can observe from Figure 1, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to figure out that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will sky-rocket and we will witness an epic currency crisis.

Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC’s Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks.

Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options:
Raise taxes (not sufficient to meet obligations)
Cut back on spending (highly unlikely)
Default (unimaginable)
Print money (only viable option)

Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air – a short-term fix but a long-term disaster.

Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world’s most dominant economy.

If you are sceptical about our claim, you may want to note that twenty years ago, China’s economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.62%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world’s largest economy.

It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China’s foreign exchange reserves have surged to US$2.27 trillion!

Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings.

In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom (Figure 2). All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting.

Figure 2: China’s stimulus is working



Source: China National Bureau of Statistics

Look. China is the future and you can be rest assured that over the following years, the Chinese will raise their standard of living and domestic consumption will explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world’s largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.

So, as an investor, you have a choice. Either you can continue to listen to the ‘China bashers’ or you can hop on the Orient Express and make a small fortune. It goes without saying, we have allocated capital to superb businesses in China and the ongoing correction in Chinese stocks is a great opportunity to accumulate more positions in this exciting economy. Apart from China, we have also allocated capital to India and Vietnam. It seems to us that in this low-growth world, investors will flock to these fast-growing economies; thereby pushing up asset prices. In fact, we will be bold enough to state that the next asset bubble will probably form in the developing nations of Asia and we have every intention of participating in the festivities. In summary, if you have not done so already, we suggest that you take advantage of the ongoing market correction by investing in China, India and Vietnam.

http://www.financialsense.com/editorials/saxena/2009/1113.html

THE ‘BEIJING PUT’ AT WORK IN GOLD ~ Willie

China has begun to show its patterned behavior. They buy gold precisely at weak technical points, thus maximizing accumulation at optimal price. They buy gradually, thus permitting the market to bring more supply at prices as they ratchet higher. The Chinese Govt has become entrenched in an accumulation program of gold, expected to become a part of whatever new global reserve currency evolves. But as they buy in quantity, the price goes up in direct response, frustrating their intention to collect as much as possible, before any collapse of the USDollar. The Chinese are reportedly amplifying their purchases at points of weakness, dictated by technical analysis. In effect, the Chinese could be using a reverse strategy from technical analysis methods, dictated by chart patterns, by pressuring the bid harder with more purchases when the technical indicators say they should be selling. They would thus position themselves opposite to the USGovt, which routinely smacks gold down prior to USTreasury auctions, or when the USDollar threatens to break below support. They would also position themselves opposite to professional traders, who tend to follow the technicals and USGovt official control banter. The Chinese will continue to obstruct the gold interventions, as the US-UK fascist tagteam loses control.

Another Chinese market factor will work to put more money in gold investors hands. Their A-shares for mining firms have jumped 150% to 200% in recent months. So investors in certain stocks can redeem some profits to accumulate the real thing, gold bars. Qin Weihuan is a researcher at China Gold Assn. He told China Daily, “In the past, gold prices dropped back after it hit over $1000 per ounce. But I believe this time the price has really breached the $1000 ceiling and will stay at these levels for some time.” Qin believe gold has entered a new ‘Era’ as inflation fears and uncertainly over the world financial system will prompt investors to look for safe havens in bullion. China will soon take full control of the gold market, and render the global monetary crisis centered upon the USDollar ballistic.


THE COMPLETED PICTURE OF E.T.F. GOLD FRAUD

Fraudulent games have expanded in the gold market. In the last few months, much publicity has come (except to mainstream media) of how the COMEX can legally use Street Tracks GLD shares from their Exchange Traded Fund to satisfy short futures contracts in need of a buyer. Instead of rolling over the short contract, they ‘close it out’ by placing a GLD share in offset. So the corrupt pyramid of short gold futures contracts has been co-mingled with GLD shares from the ETFund. Challenges will soon come. The COMEX players and controllers do not locate and purchase gold bullion in order to satisfy the short contracts. They essentially infect the GLD shares instead. So would the real gold depository of the Street Tracks GLD fund please stand up???

In the last couple weeks, the London CME officials have had a terrible time avoiding a default. Some large players want the gold from their long futures contracts, in gold bullion from physical delivery. The Bank of England and one other unidentified central bank from the European Union have tried desperately to supply the delivery demand. In the process, they have provided and handed over more than a little ancient substandard gold bars. The London CME officials even offered a 25% dividend bonus if the gold contracts were satisfied in cash, rather than gold delivery in physical form. This entire incident centered on very high volume for gold also, not a trifling amount. Sounds like gold is worth $1300 per ounce to me!

This story grows worse, and again involves the Street Tracks GLD fund. Likely accounting fraud accompanies other efforts to confiscate their GLD backing of deposits held in gold.
The counter-parties in deep trouble are JPMorgan and Deutsche Bank, each heavily short gold and unable to produce it in the face of delivery demands. Central banks are probably aiding the plunder of private gold accounts. All integrity is at risk of being lost. Simultaneous irregularities have taken place during the LBMA ‘gold delivery incidents’ and official Gold Bar Lists maintained by the Street Tracks GLD exchange traded fund. Evidence points to the GLD gold bullion inventory taken to satisfy the London demand for gold delivery. Independent audits have begun in earnest by large private interests (mostly Arabs). Word came today the JPMorgan is accepting gold bullion in order to establish margin foundation for commodity futures trading accounts. They are indeed desperate, since a margin failure for clients would produce to JPM the gold.

So one might conclude that GLD shares are corrupted by virtue of satisfying the COMEX gold futures short contracts. So one might conclude that GLD deposits of gold as backing for the fund are corrupted by virtue of selling their gold bullion to the Gold Cartel in satisfaction of futures contract delivery demands. That seems to undermine the entire GLD fund, and to expose it as an Exchange Traded FRAUD. Fraud in physical gold deposit management is not the sole province of the Untied States and the Untied Kingdom. An Asian Depository has found ‘Good Delivery’ gold bricks to be gutted and filled with tungsten, another heavy metal. See Rob Kirby’s article entitled “Central Banking: A Blight on Humanity” (CLICK HERE) and also “Blight on Humanity Addendum” (CLICK HERE). What great financial forensic analysis work!

GET OUT OF THE 'GLD’ AND ‘SLV’ FUNDS, WHICH ARE IN ALL LIKELIHOOD DEEP FRAUDS THAT HOLD SHRINKING BULLION IN DEPOSITS. In time the GLD might be exposed as having little or no gold, and certainty inadequate amounts to back their fund for legitimacy. In time, my forecast is that the GLD fund will eventually sell at a 25% discount to the gold spot price, due to suspicion of fraud in its gold deposit management. Later, my forecast is that the GLD fund will eventually sell at a 50% discount when the investor lawsuits pile up and formal challenges are lodged. The weapon to pry open the vaults will be discovery and ordered independent audits with teeth. The final chapter of the GLD in my view will be its liquidation, with extreme discounts paid to angry investors. Their laziness and stupidity will be worthy of a footnote in history. The managers of the GLD fund and that for the SLV silver fund, are both main members in the Gold Cartel. JPMorgan is custodian to the GLD fund. Barclays manages the SLV fund. Those who believe the tactics and activity behind the curtains are different are indescribably naïve. They too deserve a meat cleaver outing with Sir Darwin on personal wealth.

http://www.financialsense.com/fsu/editorials/willie/2009/1021.html

Copyright © 2009 Jim Willie, CB

The Ascent of China ~ Niall Ferguson

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.

"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.

The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."

As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.

"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.

GEAB N°38 is available! Global Systemic Crisis – The European Union at a crossroads in 2010: an accomplice or a victim of the collapse of the dollar?

The major trends at work in the 4th and 5th phases of the global systemic crisis (the decanting phase and the global geopolitical dislocation phase) are unveiling every day (1). Everyone has now realized that the United States is being swept into an uncontrollable spiral involving widespread insolvency of the country and gross incompetence of the U.S. elite in implementing the necessary solutions. The foretold US default is well underway as exemplified by the falling dollar and the flight of capital from the country: only the name of the liquidator and the recognition of the bankruptcy are still missing, but it shouldn’t be long now. Following the example of its leader, the Western bloc (which Japan has undertaken to move away from, implementing completely new political, economic, financial and diplomatic policies (2)), is in total decay symbolized by NATO’s coalition in Afghanistan (3).

According to LEAP/E2020, in 2010, the European Union having four strategic core requirements, will be compelled to take a number of urgent decisions in a context of a fast collapse of the Western camp that could be summed up as the US Dollar’s fate. The decisions taken by the EU will define the role the Europeans will be playing in the post-crisis world: either they start to appear as key-players in recasting tomorrow’s world and bring forward their own vision of the future, seeking the partners they need with no exceptions; or they remain the willing victims of a sinking Western Bloc, blindly following Washington's descent into hell. In the first case, the EU fulfills its historic purpose of restoring the Europeans’ command over their collective destiny; in the latter, it would just prove to be the Western equivalent of the Comecon (4), a futureless appendix of the protective superpower.

Heavy trends are already visible which, according to our team, have began to push Europe in a number of predictable directions. However, the intellectual weakness of Europe’s present political leadership (in the EU and member-states alike) compels us to soften our forecasts.

In all cases, since the EU is the world’s largest economic and trade power (5), the continuing development of these trends will soon impact directly on a large number of major economic, financial, and strategic factors: exchange rates, commodity prices, growth, social systems, budget balances, global governance…

In this 38th issue of the GEAB, besides ‘strategic and operational recommendations to survive the crisis’ and their ‘crisis-related country-risk anticipations for 2009-2014’, our team has decided to analyze these four requirements to which the EU will be compelled to find answers full of consequences:

1. Addressing the failure of the monetary system based on the USD and not becoming helpless when 1EUR=2USD
2. Avoiding exploding budget deficits like those in the US and UK
3. Responding to the aggravation of the Iran/Israel/USA crisis and war in Afghanistan by defining a specific European position
4. Learning to deal independently and constructively with the new key players of the post-crisis world: China, India, Brazil and Russia in particular.

It impossible to envisage waiting later than 2011 to deal with everyone of these crucial aspects (crucial for both the Europeans and the rest of the world). Just imagine what would happen if the Europeans remained passive beyond 2010, while faced with these four requirements:

1. If the Europeans are content to watch the Dollar sink, their exports to the US and the dollar-pegged countries will fall dramatically, exacerbating the economic and social crisis in the EU.
2. If the Europeans, their leaders in particular, are content to let public deficits swell, like France is currently doing, the Eurozone will soon become prey to profound disagreements between Northern and Southern Europe.
3. If European leaders are content to follow the Israel/Washington line in dealing with Iran’s nuclear issue and to fall in behind the Obama administration regarding Afghanistan, they will soon be faced with growing public dissatisfaction which they are not prepared nor in a good position to face, a guarantee of serious political instability in every member state.
4. If the Europeans are content to refuse independently debating the interests they have in common with the Chinese, Indians, Brazilians and Russians, they willingly deprive themselves of any means to bring forward their perspective on the previous three issues, as no significant move can be accomplished without them (6).


Historical change in China-India share of global GDP (1500-2008) - Sources: Bloomberg / Gluskin Sheff - 2009
According to our researchers, 2010 is certainly a crucial year for the Europeans and their collective future. The relationship of the EU, and particularly of the Euro, with the dollar will be decisive for the Europeans, as much as for the Dollar and the global monetary order altogether. Not that the Europeans chose the year (2010) or the subject (the Dollar) (the leaders of the Euroland would certainly prefer to go on with their « business as usual »), but History is very ironical in calling the US “allies” bluff: sinking now with Washington or swimming without Washington.

In the image of all the developments involved in the ongoing global systemic crisis, time is going through a process of contraction: events are happening a lot faster. On this subject, we are surprised to hear various « experts » describing Robert Fisk’s article entitled « The Demise of the Dollar » (7) - where the author suggests that the Russians, Chinese, French, Japanese and Gulf oil-producing countries would be discussing the idea of pricing oil in a currency other than the US Dollar within nine years - as eccentric. According to LEAP/E2020, the only surprising element in this analysis is in the nine year delay. In fact, this development will occur much earlier, within two years, under the pressure of events.

In order to realize the extraordinary speeding up of History created by the crisis, let’s remember what kind of a place the world was nine years ago. Nine years ago, G. W. Bush had recently been elected; 9/11 would take place in two years from then; the US were neither stuck in Afghanistan nor in Iraq; Katrina had not yet destroyed New-Orleans; one Euro was worth 0.9 USD; Russia was a country adrift the EU was preparing a constitution meant to be popular; China was a poor international player; the US economy was shown to the world as an example and the United Kingdom was preaching ultra-liberalism throughout Europe; Wall Street’s investment banks seemed invincible,… the list could go on and on. What is highlighted is that each of these events seemed unthinkable to most “experts” just a few weeks before they happened. Therefore it is, in fact, very naïve to consider that it will take nine years until oil is priced other than in dollars, a currency utterly dependent on central banks’ will (increasingly a « bad » will, by the way) to buy, buy and buy more just for the sake of its survival.

As early as the second quarter of 2009, central banks from all over the world undertook to stop accumulating US dollars (dollars accounted for 37 percent only of their currency purchases while they account for 63 percent of their reserves) (8). As early as July 2009, close to USD 100 billion worth of net capital fled the US (9), at the precise moment when the US was claiming to be able to attract more than USD 100 billion a month to help finance the federal deficit (not to mention the other deficits).

In this situation, a fundamental question must be asked: who is really buying these USD 100 billion worth in Treasuries each month? Certainly not US citizens, indebted beyond any reason and left without savings or credit. Certainly not foreign private investors, more and more concerned about the economic health of the US. Certainly not the Chinese, Russian or Japanese central banks, more concerned about curbing their purchases of long-term bonds, and even starting to sell their Treasuries or exchange their long-term bonds against short-term ones. Strangely enough, the Bank of England alone seems to still have this appetite (10). Therefore, we are left we the “usual suspects’, i.e. the Fed and its network of « primary dealers ». “Money printing” is taking place on a far greater scale than acknowledged by the Fed under its official policy of « quantitative easing ».


Change in foreign purchases of Long-Term US securities (1979 – 2009) - Source: Market Oracle / Sean Brodick - 09/2009
As the US announced a federal budget deficit of USD 1,000 billion a year over the next decade (11), who can honestly believe that the rest of the world would accept nine more years being paid in funny money? Maybe those who found it impossible that Wall Street could collapse in September 2008? Or those who thought Obama would change America and the world (12)? Or else those who persist in thinking that the American consumer will rise from his ashes and fuel the « impossible recovery » (13)?

Unlike last year, no panic will come to the rescue of the dollar. This time, the US currency is seen more as a sham than as a safe haven. Indeed decoupling of the rest of the world (Asia, South America and Europe in particular) is underway (14) and it is precisely the reason why 2010 is such a crucial year for the Europeans. If they don’t do anything about it, the Euro will become a safe-haven currency and it will rise until it suffocates the European economy. The Eurozone must therefore become more aggressive and discuss with the other big economic and financial players how to avoid the Euro soaring against the Yuan, the Yen and all the other currencies of its trade partners.

On this aspect, the EU doesn’t have a choice: it cannot be lasting policy to purchase billions of USD every day that lose value every day as a result of the increasing pace at which they are printed (15). Moreover, the EU is in the strongest position to negotiate with the IMF for the suppression of the US right of veto and for sharing power with the « re-emerging » powers (16).


Relative weight of big players in global wealth - Source: IMF - 2009
As usual, external events will push the Europeans to act in a united and proactive manner. In the present case, according to LEAP/E2020, the issue of the Dollar will be a powerful stimulus for European action in 2010. History, whose only “sense” is the sense of irony as often recalled by our team, is apparently ready to give the Europeans the role everyone thought would be played by the Chinese…

http://www.leap2020.eu/GEAB-N-38-is-available!-Global-Systemic-Crisis-The-European-Union-at-a-crossroads-in-2010-an-accomplice-or-a-victim-of_a3885.html

Fisk starts a fire....

What all this tells you is that the world's markets simply do not believe the denials of the story that have been issued by several countries. Saying so may not suit those countries which have strong political relationships with the US to worry about, but it would be remarkable if talks about repricing oil had not taken place. Indeed, China, the prime mover in these talks, has already openly floated the idea of ending the dollar's reserve currency status, and has never made a secret of its views on the matter.

http://www.independent.co.uk/news/business/comment/david-prosser-chinas-push-for-power-is-irresistible-1798672.html

Gulf Arabs have begun planning – with China, Russia, Japan and France – to move from dollar dealings for oil to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean oil will no longer be priced in dollars. The revelation was met with public denials yesterday. The Saudi central bank governor, Muhammad al-Jasser, said: "The future is in God's hands. Today, the conditions are good for the arrangement we have." The Japanese Finance Minister, Hirohisa Fujii, said he "doesn't know anything about it".

Dennis Gartman, the US investment guru who writes the daily Gartman Letter, said that no one should be surprised to hear denials. "We are certain that spokespeople for every single nation will be brought to the fore to deny that any such meetings have occurred, that no such decisions have been made, that it is not in anyone's interest to have held such meetings or made such decisions," he told clients as The Independent story broke. "The market will care not a whit."

http://www.independent.co.uk/news/business/news/dollar-tumbles-on-report-of-its-demise-1798713.html

Saudi Arabia's denials of any such ambitions were regarded by Arab bankers as a normal part of Gulf politics. The Saudis, of course, managed to deny that Iraq had invaded Kuwait in 1990 – even when Saddam Hussein's legions stood along the Saudi frontier, until the US broadcast the news of Iraq's aggression to the world.

Saudi bankers are well aware that in nine years' time – the current timeframe for a transition away from the dollar in oil trading to Japanese and Chinese currencies, the euro, gold and a possible new Gulf currency – China will have doubled its national income to $10trn (assuming a growth rate of 7 per cent), at which point the US might hold no more than 20 per cent of the world's gross income.

Such massive financial movements, encouraged by the de-dollarisation of oil, will have enormous political effects in the Middle East, especially if economic superpower rivalry between America and China comes to dominate the Arab world. Will American economic support for Israel remain as loyal in nine years' time if China and the Arabs are setting the pace in global financial markets? Indeed – perhaps with this in mind – some Israeli financiers have been expressing interest over the past two years in non-dollar Arab bank investments. Whenever a change of this magnitude takes place over a number of years, it has to be commenced in secrecy.

http://www.independent.co.uk/opinion/commentators/fisk/robert-fisk-a-financial-revolution-with-profound-political-implications-1798712.html

Jim Willie takes up the story....

This is truly incredible news. The US will soon no longer be permitted to sell its indulgences. This is major Paradigm Shift material.

To say the Jackass was jazzed in the last few days would be a gross understatement. This is a lock for gold to hit $1500 within months, and $2000 within a year. This is a lock for silver to hit $30 within months, and some screaming figure within a year that cannot be fathomed right now, like $50. Be sure to see almost zero follow-up for this story in the crumbling US press networks, widely compromised, distrusted, and mocked after years of lapdog behavior to twist story after story in line with syndicate marketing plans designed to maximize their profits, minimize public wealth, and further the march to a police state.

A quick read is required of two articles by Robert Fisk. He touches at the surface on a great many relevant and salient points. This story and its vast consequences will be discussed and analyzed for a full year. This is the biggest story on the USDollar in decades, sure to further develop. This is the biggest financial story since Lehman Brothers was killed, since AIG was hidden under the USGovt roof, and since Fannie Mae fraud was shoved in the USGovt basement, one year ago. To say this is not orchestrated by China is professed ignorance. They warned the US not to monetize the federal debt. We did. They warned the US not to reappoint Bernanke as USFed Chairman. We did. Next is transformation with consequences. A new important alliance has formed, which cuts out the United States and Great Britain. The drift that comes is directed toward the Third World. The great majority cannot comprehend or envision such change. Give them time. The most visible changes will come with the value of Gold & Silver, and the demoted USDollar exchange rate. The other visible changes will be to the landscape of the United States and Great Britain and the arrival of foreigners. They will be called carpetbaggers, when in fact they are creditors in receivership. We welcomed their purchase of our vast rafts of debt.

http://www.financialsense.com/fsu/editorials/willie/2009/1008.html

The demise of the dollar ~ By Robert Fisk

The demise of the dollar
By Robert Fisk
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place - although they have not discovered the details - are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil - yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power - along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system - which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq - blocked by the US until this year - and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements - the accords after the Second World War which bequeathed the architecture for the modern international financial system - America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

Systemic Failure Approaches ~ Jim Willie

Debate stirs on whether the financial structure of the USEconomy is broken irreparably. Debate stirs on whether actions taken in the last year or two have put the nation on a path that can even achieve stability, let alone recovery. Debate stirs on whether a harmful syndicate has taken control of the USGovt financial ministries, let alone be removed. Debate stirs on whether lack of US Federal Reserve audits and disclosure of their accounting is integral to sustaining the syndicate control. Debate stirs whether the nationalizations have actually enabled adoption of wrecked assets and concealed executive ransacking. Debate stirs whether the mountainous federal deficits, the nationalizations of essentially Black Holes, and the endless war spending make deficit reduction a distant dream. Debate stirs on whether the gargantuan accumulation of USFed reserves will spill over to produce widespread price inflation. Debate stirs on why after causing the foundation failure of the US financial structure from Wall Street and the USFed offices, these institutions not only remain in power but demand greater power.

It is my contention that the US financial structures broke without any remote potential for repair and revival in the summer of 2007. The symptoms became obvious in the summer of 2008 to the slower observers with visible shock waves bathed in crisis. The reactions from shock waves have come since the autumn months of 2008. The system has broken, but the syndicate in control wishes to keep the music going, keep the machinery turning, keep the money flowing, so that they can continue the racket, bury the bond frauds, process the bad paper into USGovt coffers, continue to corner the printing press operations, and continue to con the USCongress into granting more funds. Nobody seeks justice and prosecution for over $1 trillion in mortgage bond fraud. Nobody seeks to remove key Wall Street firms from their command posts within USGovt finance ministries. Nobody seeks even to locate the missing $50 billion from the Iraq Reconstruction Fund. Foreigners have been very busy since the autumn 2008, as they dismantle the levers, knock down the pillars, block the escape routes, yank the collateral from the paper marketplaces, and otherwise thwart the US-UK structures.

To claim that the system can be put on proper stable footing is lunatic. To expect that the nation can be recalibrated so as to return to the Good Ole Days of US global dominance and leadership is lunatic. To urge that the economic signposts, megaphones, and billboards be once again guided by policies best described as Bubbly Economic Mythology is lunatic. Yet delusional Americans actually believe the dominant ship at sea can lead as flagship, when it has taken on more water than the Titanic. Since the autumn months of 2008, marred by the Lehman Brothers failure, marred by the Fannie Mae adoption, marred by the AIG adoption, punctuated by a shameful 0% interest rate policy (ZIRP) and a green light for limitless money creation (QE), the United States has lost any semblance of leadership. Instead, its leadership has earned scorn, criticism, and disrespect. The last people on the globe to comprehend the American condition of failure, corruption, and military aggression seem to be the Americans themselves, who live within the USDome of Perception. The US press networks do not cover the global Paradigm Shift underway that will change its landscape radically.

The clearest conclusions center on almost nothing put on a sustainable viable course for the nation. Amplification and widened breadth of all that failed cannot serve as the core for revival or recovery, let alone stability. Yet such policies seem the only ones our hapless bank leaders are able to execute. It is a dog returning to gobble his vomit. It is akin to managers urging their worst workers to intensify their efforts, and to join the ranks of management. These Keynesians cannot admit that the central bank franchise model has failed, not to be resurrected. In my view, the debates, the foundations, and the reactions scream two major messages. 1) The system is out of control, with the drivers ramming down the accelerator for even more of everything that failed, for a locomotive within a monetary system based upon illegitimate money. 2) The USGovt finances are heading toward a recognized failure, identified by both a banking system bankrupt seizure and a USTreasury default. The nation cannot come to grips with the bold stark notion that foreigners control our fate, from their revolt against the USDollar as a global reserve currency, from their revolt in supplying additional credit to the USGovt and USEconomy. The reaction so far to crisis has been to rely more heavily upon the Printing Pre$$, to monetize the debts, and to conceal such operations. Things are out of control!

In fact, my forecast is for systemic failure. Its primary elements will be a failed US banking system (as in seizure) and a USTreasury Bond default (as in coerced restructure). Again, martial law and declaration of economic emergency will be the final solution. Two years ago, my analysis regularly mentioned martial law and imposed order to handle the chaos from a disintegrated economy and insolvent dysfunctional banking system. Here we are in the present, when such forecasts do not sound so outrageous anymore. The Jackass has featured a string of seemingly outrageous forecasts that have come true. The US system is credit dependent, and credit will soon be cut off, in the next chapter of isolation. The Printing Pre$$ is a temporary solution, en route to a failed state. The US leaders and citizens do not learn from history. They defy history amidst delusions of omnipotent power. See the Weimar Republic, which has gone global! Even the World Bank led by yet another Goldman Sachs pupil warns the Untied States not to assume the USDollar will remain the unchallenged global reserve currency.

GOLD IS RESILIENT

The true sanctuary is gold, in the face of debauchery of paper money. We see some clear first hand evidence of the ‘Beijing Put’ at work. It could provide a banking system foundation, except that the Gold Cartel and Banker Elite would have to forfeit power, maybe face poverty. Notice the quick recovery. With a slightly lower gold price, the off-take delivery of physical gold has been magnificent, much greater than a week or two ago. The Wall Street banksters are shocked to learn that demand is not isolated, but rather comes from diverse global sources. The Powerz threw all they could at gold, mentioned some half-baked story about I.M.F. gold sales (more like closure to decade old short sales), and upped the ante of controversail gold futures contract sales. Notice the moving averages all aligned and rising. Notice the stochastix cyclical index that come down quickly to the 20 low trigger, ready to rise on a quick reload. The response breakout was very typical, seen a million times before. The breakout loses the amateurs and fast traders who miss the big picture. Like a diver off a springboard, the dive commences for a lift upward. The pullback was really miniscule. The recovery was rapid and impressive, in symmetry with the suddenness of the controlled correction. The Chinese are obviously thanking the US gold merchants who offer the Middle Kingdom yet more gold bullion at reasonable prices. The Chinese want to maximize their accumulation of gold from the PaperBoyz, at the best price. They do not want a catapult upward in the gold price. They want a gradual controlled price. Expect continued accommodation.

Continue here

"In 2010, price will benefit from the huge export decrease of Chinese primary silver.'

NEW YORK--(Business Wire)--
Reportlinker.com announces that a new market research report is available in its
catalogue.

Research Report on Chinese Silver Industry, 2009-2010

http://www.reportlinker.com/p0151235/Research-Report-on-Chinese-Silver-Industry-2009-2010.html

In 2008, output of Chinese silver ranked the first all over the world with 9,587
tons, increasing by 5.45% YOY. The growth rate decreased compared with over 20%
in previous five years. Meanwhile, there is no change in distribution of
domestic silver. Most are spin-offs from copper, lead or zinc. Others are from
regeneration or independent silver ores.

In 2008, main provinces for silver production were Hunan, Henan, Yunnan and
Jiangxi. Enterprises ranking top four in output were Yuguang Gold and Lead
Group, Yunnan Copper, Xinda Silver Industry, Chenzhou City Jingui Silver
Industry.

In 2008, export quota of silver was 4,800 tons. On August 1st, 2008, the 5%
export rebate was eliminated. Affected by rebate elimination and price decrease,
export volume was 4,043 tons, 441 tons less than in 2007.

Silver powder import increased to 1,511 tons in 2008, rising by 54.34% YOY.
Import of silver concentrate reached 70,100 tons, declining by 62.84% YOY.

In 2008, there was no great change in Chinese sliver consumption structure
compared with 2007. The consumption reached 4,500 tons. The growth rate of
consumption exceeded 10% for years.

Silver price trend depends on two factors: investment/speculation demand of
silver as a product and demand & supply of silver. Investment demand is closely
related to global financial liquidity (inflation level) and USD trend. It is
predicted that the global investment demand is low in 2009. As to demand &
supply of silver, it is estimated that supply exceeds demand in 2009; in 2010,
price will benefit from the huge export decrease of Chinese primary silver.

In 2007, 51% of silver demand was from industrial fields, including electricity,
electronics, silver based solder, etc. Benefitted from global economy booming,
silver demand from industrial fields was in stable increase in the past six
years. Compound annual growth rate (CAGR) was 5.2%. It is estimated that demand
from industrial fields will decline by 3%-5% affected by global financial crisis
in 2009. In 2007, consumption demand (photography, jewelry, silverwares, silver
coins and medals) took up 43% of the aggregate demand. Due to the decreasing
demand from photography, declining tendency of total silver consumption demand
could not be got rid off in a short period.

70% of silver is the spin-off of copper, lead, zinc and gold. From 2005 to 2007,
substantial price increase of these metals resulted in the release of huge mine
productivity in 2009-2010. It is believed that as long as prices of these metals
are higher than production costs, silver supply will be in stable increase with
the increasing outputs of copper, lead and zinc( though prices of these metals
have declined since 2008).

It is predicted that global industrial demand for silver will rise in the second
half of 2009 though demand of the whole year may be lower than in 2008. Output
of associated minerals of silver is reduced while new applications of silver are
emerging. In the long run, the prospect of silver is optimistic. Rapid
development of Chinese economy pushes silver consumption. Chinese silver
manufacture will enter increasing period. Silver output is estimated a stable
increase in 2009 but growth rate will decline. Chinese silver industry is
heading to large scale, brand and internationalization. International
cooperation opportunities are increased. There is great potential in Chinese
silver consumption market. Consumption growth rate will be higher than output
growth rate in the future.

Investment in further processing of silver will be hot in China. Major
investment objects are E-silver paste, nanometer silver powder, nanometer silver
antimicrobial material, high-performance silver based alloy and electric shock,
etc.

Cheap dollars are sowing the seeds of the next world crisis

In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.

More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.

In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.

American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.

Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".

This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.

The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.

Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.

The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.

Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.

These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.

Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.

The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.

"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.

This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.

This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.

So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.

http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html
Liam Halligan is chief economist at Prosperity Capital Management

China's immense, and growing, impact on the global gold market

GOLD BUG'S DREAM?
China's immense, and growing, impact on the global gold market

There seems little doubt that China's economic strength can lead to it dominating gold price movement for the foreseeable future.
Author: Lawrence Williams
Posted: Friday , 11 Sep 2009

LONDON -

There is little doubt that China nowadays has the financial muscle to effectively control the global gold price. The mere sniff of a report that it is taking gold into its official reserves to counteract dollar decline is sufficient to, at the least, stabilise the gold price - and there seems to be little doubt that it is so doing, but at the moment in a manner that is not designed to de-stabilise the dollar or, on the other hand, not to contribute to a quantum leap in the yellow metal's valuation - yet.

But - should China wish to de-stabilise the dollar by announcing big gold purchases into its reserves to replace a good proportion of its trillions of dollars, there is also little doubt that it could do so. It is an economic weapon which perhaps has more power than a nuclear one if it wished to bring America, and the West, to its collective economic knees through currency war. But again that is not seen as an option - or at least not until the country's domestic market is big enough to soak up all the manufactured goods China can still sell to the West.

Thus China is still very dependent on export markets, so revaluation of the renminbi is not seen as helpful and dollar decline has to be worrying. So the country has to move cautiously to retain some kind of global economic equilibrium.

But noticeably, China is already exerting its financial dominance. It has said its mostly state-owned financial organisations will have the right to default on some of the more dubious commodity and financial related derivative trades that they may have entered into. This has only raised a muted response from those financial institutions which could be affected because it is China's financial muscle which is beginning to call the tune in world financial circles - not the mighty U.S.A. any longer. But it could lead to more grief in western financial circles and the already stressed banking system.

Its state-owned enterprises are on a massive buying spree of western assets, both as an investment and, in the case of the mining sector, to tie down future strategic resource supplies. In perhaps a conscious effort to allay suspicions of Chinese motives in many countries, much of this is via significant minority stakes in western companies tied to long term supply deals.

But back to gold. We reported here that a top Chinese official virtually admitted China was buying gold, but in a way which was designed to maintain at least a reasonable degree of stability in the markets and not rock the gold boat. If this is true, and there is little reason why it should not be so then this will effectively mean there is little or no serious downside risk in buying gold. But China can also control the upside, as it may not wish to precipitate a big dollar collapse which would be the likely outcome of a big gold price rise.

We reported also, in an article which virtually went viral on the internet and has been picked up by many other commentators (China pushes silver and gold investment to the masses), that Chinese state organisations are selling, like soap powder, the advice to buy gold and silver to the general populace - which already has a gold purchasing psyche. As a result China is likely to surpass India as the world's biggest precious metals purchaser this year or next. It also lends support to the country's domestic gold mining industry - China is currently the world's largest gold producer and is a country where output is continuing to rise.

This too provides a massive underpinning of the gold price at, at least, around current levels. It is apparent that buying has been coming in every time gold dips and the suspicion is that this is by the Chinese, but it is well enough hidden that it is difficult, if not impossible, to clearly define the source.

At the moment gold seems to be holding up well close to the $1,000 level despite the huge degree of profit taking which comes in at psychological levels like this. The suspicion is that China may wish to see $1,000 gold, or thereabouts, as a new floor, but there is unlikely to be any official recognition of this and we will have to wait and see whether the supposed Chinese underpinning of the market is reality - or yet another gold bug's dream.

http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=89018&sn=Detail

Chinese to cut and run on derivative losses ~ Official comment

Seems related to the issue we have been following. Thx to Ray.

China's State-owned Assets Supervision and Administration Commission said on Monday it would support government-run firms that take legal action over heavy losses suffered due to bad derivatives deals. The regulatory watchdog said some firms had already notified foreign banks that they were considering legal action over contracts for oil-related structured options. The remarks came about a week after a report said Chinese state-owned enterprises may default on commodities contracts they have signed with foreign banks to cut massive losses from derivatives deals. "The move is a justified action to safeguard one's rights and interests in the commercial context," the agency said in a statement sent to AFP, without naming the firms or foreign banks involved. "SASAC is giving great attention and support (to this) and the relevant trade counterparties should cooperate," it said in the statement. The agency added it was conducting an internal investigation into oil-related structured option deals. "(We) support companies' efforts to cut their losses as much as possible... through negotiation and managing their positions through legal means and reserving the right to take legal action," it said. The agency ordered state firms in March to reconsider their derivative investments overseas and back out of high-risk contracts after several Chinese firms reported huge losses. State-owned carriers Air China, China Eastern and Shanghai Airlines have reported losses of almost two billion dollars since last year on aviation fuel hedging contracts. Late last month, Caijing magazine reported, citing an unnamed state enterprise executive, that only 31 state-owned firms were licensed to enter into such deals, while many more were apparently doing so.

Who's short the silver?

hat tip Duncan. More on this story from Ted Butler.




Warnings Ignored
Trouble with you is the trouble with me,
Got two good eyes but you still don’t see.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.
Casey Jones
Grateful Dead

A remarkable story recently appeared in a leading Chinese business publication that threatens to upend the world of commodities. It seems that the government of China may be preparing the way for state-owned investment funds to walk away or default on OTC commodity derivatives contracts held with foreign banks if those contracts cause loss to the funds. A good discussion of this issue can be found here, along with links to the original story and a related Reuters article Click Here

Even more amazing is that the obligatory follow-up story, in which the threat of default is invariably denied, actually confirms that China is seriously considering defaulting on selected OTC commodity derivatives contracts. Click Here l If there is going to be a default by China in select OTC commodity derivatives, silver is a prime candidate.

What makes the China story so remarkable to me is that it ties together and confirms much of the silver analyses I have published over the years. In addition, it points to the extraordinary situation that presently exists in silver, not just from an investment and regulatory perspective, but also from a view that impacts the strategic interests of nations, including, but not limited to, the US and China. As always, I ask you to decide for yourself based upon the facts and my speculation.

Here are the facts. There is an unusually large concentrated net short position in COMEX silver futures held by 4 or fewer traders, documented by CFTC data. There is no unusually large concentrated position on the long side. Other CFTC data indicate the concentrated silver short position is largely held by one or two US banks, at times reaching 25% of world production. This degree of concentration is unprecedented and not seen in any other commodity. Correspondence from the CFTC to elected officials identifies JPMorgan as the prime holder of the short position, with Morgan having inherited the position in its takeover of Bear Stearns. Requests to the CEO of JPMorgan to deny it holds the large silver short position on the COMEX have gone unanswered.

For years, the CFTC has investigated my allegations of manipulation in silver, and in 2004 and 2008, they denied such a manipulation exists. It is thought they will comment soon on the third investigation, begun a year ago. In none of the three investigations have they contacted me, although I was the impetus behind each investigation. Over the past five years, the silver short position has grown more concentrated. About six years ago, based upon input from my friend and mentor, Izzy Friedman, I first speculated that China was the big short behind the COMEX silver short position. Other articles followed on China and this theme.Click Here

More recently, in December 2007, I publicly and privately warned the CFTC and Commissioner Bart Chilton of what a disaster it would be if the foreign backers to the short position in COMEX silver decided to walk away from their obligations. Click Here In that letter, I wrote;

”…these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.
In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.
If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this.”

I don’t know how I could have been clearer in my warning. I don’t know how the stories coming from China could highlight those dangers any clearer. Not only is the concentrated short position clearly manipulative to the price of silver, the danger of a default has never loomed larger. Perhaps the recent price action is reflecting that growing awareness. In spite of this clear warning, the CFTC concluded, in May 2008, that there was nothing wrong in silver.

It is important to put the current situation into proper perspective. Here’s my take. Sometime around ten years ago, the now-disgraced derivatives powerhouse AIG, through their China connections, convinced certain state-owned companies of that country to enter into massive OTC short contracts on silver. China’s growing share of silver refining production was the cover story. The real purpose, however, was to give AIG backing for selling short silver contracts on the COMEX for the purpose of hoodwinking the technical funds into and out of paper positions on the COMEX. This worked like clockwork for years. Pressure from me and many readers, through then-New York Attorney General Eliot Spitzer quietly forced AIG to abandon and transfer their COMEX silver (and probably gold) short position to Bear Stearns, another large clearing firm, like AIG. The Chinese OTC silver short position was assumed by Bear Stearns as a counter-party and Bear Stearns then continued the COMEX manipulation and fleecing of the technical funds and other speculative traders.

The frequent complaints to the CFTC about the outsized short position and obvious manipulative trading activities on the COMEX were rebuffed by the Commission because Bear Stearns, like AIG before them, could show on paper that they had existing OTC offsets with China that “backed” the COMEX short positions. As has been shown in other financial scandals, like the Madoff swindle, bureaucrat regulators are often no match for well-connected and persuasive Wall Street power brokers.

When Bear Stearns collapsed in March 2008 (incidentally at the then-highest price for silver in decades - $21), there was no one willing to take over their giant COMEX silver short position and the offsetting Chinese OTC contracts. Enter JPMorgan Chase. Remember, this was a time of great stress to the financial system and all efforts were directed to quickly fixing problems that arose. The giant silver short position at Bear Stearns was one such problem. With federal government guarantees against loss and criminal prosecution, JPMorgan did assume the role of master of the silver market. All this was revealed in subsequent Bank Participation Reports and in correspondence from the CFTC to various lawmakers. Since that time, JPMorgan has managed the giant silver short position. My speculation includes that Morgan has quietly offset its COMEX short position over the past year and a half with other unsuspecting parties in the OTC market.

What does this all mean and where do we go from here? Get ready for great and growing price volatility. I’ll have specific market comments for subscribers over the next couple of days, once the new COT and Bank Participation Reports are released. But this much is clear – the long anticipated default of the massive OTC silver derivatives position by China appears to be at hand. It’s hard to imagine a more profound event. All at once, the backing and excuse for the concentrated short position on the COMEX is exposed for the fraud it has always been. No longer can the CFTC pretend that the COMEX silver short position is backed by anything legitimate. Not when China, itself, is saying it may default. So many game changes have emerged in silver over the past few months that it is hard to appreciate them all. These recent announcements by China concerning its future intentions on select OTC commodity derivatives could be the most important of all.

I still have great faith that the new chairman of the CFTC, Gary Gensler, has every intention of doing the right thing and will adjust and enforce legitimate speculative position limits in COMEX silver. The new reports out of China make it more imperative that he do so quickly. The threat from China that it may default on contracts that back the concentrated COMEX short position raises the stakes immensely. Unlike his predecessors, and for the good of the country and market integrity, Chairman Gensler must not ignore these warnings.

Note to subscribers – because of the potential regulatory significance of this issue, I am putting this article out in the public domain. I’ll have specific market comments available over the weekend.

A trickle of humililations begins ~ CHINA AND THE BUZZ OF A PENDING BANK DEFAULT

More on this story... hat tip to Thomas.

CHINA AND THE BUZZ OF A PENDING BANK DEFAULT

Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.

This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.

The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.

A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.

Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.

Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.

They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.

Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)

An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.

Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.

This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?

The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.

• State-owned firms may default on commodity hedges - report

• Bankers dismayed, confused by report; seek more details

• Lawyers question legality of the move

• Traders suspect lurking losses may have prompted warning (Adds analysts comments)

Analysts are fearing that if these three big companies came out and spelled out their losses and dismay at these products then this might prompt other large Chinese corporations to do the same.

Let’s take a closer look at the companies that have been mentioned in these news articles out of China. They are Air China, China Eastern and Cosco. If you ask me, this conundrum might have to do with oil. I deduce from this that if there is a problem brewing it has everything to do with their Oil Derivatives business.

Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.

Reuters stated:

Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.

We have yet to hear their commentary. A Chinese statesperson was quoted as saying “"If we were among the banks receiving that letter, we would be very angry.” You bet your bottom dollar. You don’t think the firms listed above are angry, or, are they frightened that if the Chinese State Owned entities start taking affirmative action it could theoretically bring down some of the biggest remaining names on Wall Street?

Remember Reuters initial story was titled Beijing's derivative default stance rattles market. Read it thoroughly for more information.

Then, read the story that broke last Saturday to get a clearer perspective before the political and corporate spin started to enter the story. China warns banks on OTC hedge defaults –report.

“BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.




China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.”

On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through.

Yes, legal battles would ensue should this happen and we can also expect to have Chinese political figures downplay the story in an effort to avert panic. However, if they can prove that these derivatives or the underlying asset was manipulated in a manner to profit the bank that issued the product then that may even do more damage than the default themselves.

Perhaps the “buzz” on the floor is indeed true. Perhaps we are going to see action that could annihilate one of the biggest Wall Street firms ever.

If there is one thing I have learned of late is that when the Chinese speak, we must listen. Their list of allies is ever growing and they are simply fed up of having to swallow the US garbage that has turned out to be toxic and dangerous to their highly controlled and coveted state owned enterprises.

I leave you with these thoughts that I alluded to above. The Chinese market has corrected 25%. This news broke this past weekend. New York saw a sharp sell-off on Monday. Buzz of a bank default hit the floor. The rumor did not abate and the selling intensified. The selling carried over into Tuesday. Gold, a classic hedge against troubled times has broken out to the upside, China has purchased 50 billion in IMF bonds and has been questioning the US dollar now for upwards of a year. China was up 5% overnight and Gold has continued to climb this morning.

Where there is smoke there is often fire.

Satyajit Das - China Syndrome ~ LNL audio

LNL's financial crisis analyst explains how the Chinese economic growth model developed under Deng Xiaoping, and the way China used its export income to invest in US dollars and US Treasury bonds. This meant that by the beginning of the 21st century China was effectively providing the funds for Americans to purchase Chinese products.

http://mpegmedia.abc.net.au/rn/podcast/2009/08/lnl_20090826_2205.mp3

The New Silk Road ~ China-Arab Trade

Title: The New Silk Road: How a Rising Arab World is Turning away from the West and Rediscovering China
Author: Ben Simpfendorfer
Publisher: Palgrave Macmillan

The old dichotomy between East and West has shaped the strategic balance of the world for years: it's the relationship between China and the US, or the US and the Middle East that grabs headlines. But we rarely hear about the relationship between the East and the East. Economist Ben Simpendorfer argues that the Arab world is turning away from the West and embracing China.

Chinese exports to the 22 members of the Arab League jumped to $62.3 billion last year from just $7.2 billion in 2001, the year China joined the World Trade Organization. The share in total Chinese exports rose to 4.4 percent from 2.7 percent.

Imports from the Arab world over the same period grew to $70.3 billion from $7.5 billion, doubling the share in total imports to 6.2 percent, according to official Chinese data.

With markets and the media riveted by China’s hunt for natural resources in Australia, Africa and Latin America, the Middle East story has perhaps been underplayed.

That’s the view of Ben Simpfendorfer, an economist in Hong Kong for Royal Bank of Scotland, who seeks to redress the balance in his new book, “The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China.”

For Mr. Simpfendorfer, who speaks Arabic and Chinese, the world is witnessing nothing less than two historical powers simultaneously reclaiming their economic and cultural primacy in the world. “The stories often appear unrelated, but they are in fact part of a larger global rebalancing that represents the rise of the East after centuries of Western dominance,” he writes.

These are grand claims. Do they stack up? Xu Changwen, a researcher at the Chinese Ministry of Commerce, said a complementary trade structure had fueled the boom: China needs oil from the Middle East, which is an avid buyer of Chinese clothes and other consumer goods. Talks on a free-trade deal with the Gulf Cooperation Council underlined the scope to develop ties, but one should keep a sense of proportion, Mr. Xu said.

“Market demand from the United States and Europe is huge and will recover when the financial crisis is over, so it’s still too early to say anything like ‘The Middle East will replace the U.S. and Europe,”’ he said.

Trade will ebb and flow with the price of crude oil, Mr. Simpfendorfer acknowledges. Oil makes up 40 percent of their two-way trade. China imported more than a fifth of its crude last year from Saudi Arabia; Oman, Kuwait, the United Arab Emirates and Yemen were also among its 10 biggest suppliers. Yet even if oil traded at just $30 a barrel, Mr. Simpfendorfer believes Chinese-Arab relations would continue to flourish because of three deep currents.

The appeal to the Arab world of China’s economic model, with its emphasis on rapid growth and political stability. You will not hear Beijing demanding regime change.

The clout of Arab sovereign wealth funds, which have been diversifying their investments away from the United States since the terror attacks of Sept. 11, 2001.

The revival of a string of historic trade routes stretching from Africa through the Middle East and into Asia. Embracing the majority of the world’s Islamic population, this corridor is comfortable territory for Arab investors, Mr. Simpfendorfer argues.

Trade along the original Silk Road collapsed in the 1600s with the decline of China. New European sea powers switched most of their Asian trade to the African Cape route, delivering a knockout blow to the Arab economies.

In Damascus, one of the terminuses of the old Silk Road, there are plenty of Chinese shoes and such on sale in the souks, and inexpensive Chinese cars are making inroads into the Syrian market.

In Syria, Haier, the appliance maker, has captured 20 percent of the market for washing machines and microwave ovens; Huawei has grabbed a big chunk of the local telecommunications market; and Chinese construction companies are building hydroelectric plants and other infrastructure.

A survey by Global Sources, which matches buyers and sellers of Chinese goods, found that 52 percent of Middle Eastern buyers plan to increase their purchases from China in 2009, according to Bill Janeri, general manager of the company’s Dubai office.

Chinese exports to the United States and European Union slumped in the first quarter, but shipments to Saudi Arabia slipped a bit more than 1 percent, while those to Jordan shot up 32 percent.

Despite his optimism, Mr. Simpfendorfer injects a few notes of caution: politically, other parts of Asia have stronger Islamic ties with the Arab world than China does. And Beijing must ensure that its “Go Global” policy of encouraging local companies to venture abroad does not swamp Arab markets with imported goods, destroying jobs and goodwill.

He also acknowledges that ties are flourishing but have yet to be seriously tested. “It is still too early to judge the outcome,” he writes. “Tensions between the China growth model and Go Global are a useful reminder that relations between the Arab world and China are still delicately poised.”

AUDIO