Chinese Economics Thread

[latenlazy]

I am very sorry to hear the price of oil is effecting you (and everyone else too). But to your dismay, the price movements of oil are not exactly due to the movement of the supply and demand. For example, the demand of oil in the US and EU have been fairly steady since 2008, but why have the price moved up +35% to the current $112 a barrel? Classic economic models simply can not explain the complexity of modern era oil price movement. Mainly because they ignore the middle transactions, modern oil trades are like...

1. Most oil companies don't buy tankers after tankers of oil, they buy oil futures that are contracts, promising a price in a future term; regardless of the price that time. (unless the oil companies drill the oil themselves, that is another story.) This way it cut down on risks, and set a know price regardless of future price.

2. looking at #1, Since oil futures are sold on open financial markets (most of these contracts were underwritten by big financial institutions.) The difference in price of the futures and current price gave the public a chance to speculate on the price of oil since there are always an spread between the future contract price and the "real" price. This trade is called
"oil arbitrage trading."

Ex. A XYZ investment bank's commodity trading desk saw the Libya conflict will shot the price of oil up in the future, due to market fear. So the trader using his firm's own cash of 100 million dollars, leverage that with 250 million more borrowed from another financial institution. (His position is now 1:2.5) Totaling 350 million dollars now, the trader buy 6 super tankers worth of oil contracts, giving him the right to buy them at $100 a barrel in 1 month. (since his massive trade, the price of oil future goes up, oil companies now have to spend more on buying oil contracts.) In one month the price are now $105 a barrel. The trader now sale all his $100 contract at $103 to oil companies (oil companies want those contracts, since $103 is a lot cheaper than the current $105 per barrel.)

Here is where the magic happen

The trader made 3% of 350 million dollars, that is $10,500,000 (he/she will also has to return the 250 million dollars to his lender with interest off course) in one month with a click of the mouse on his Bloomberg terminal. And his managing director will be very happy, since both of them will get bonuses on that trade at end of the year.

This cost get passed down to oil companies, then to people like us (consumers).

That single transaction was done on a DAILY basis by investment banks, mutual funds (believe it or not), hedge funds, private equities (believe it or not), Fixed-income traders, and airline companies (believe it or not, Southwest airline have their own oil future trading desk)...

All those intermediate trades all affect the price of oil, not simply the supply and demand. If supply and demand are the case, price of oil should be very linear, and we know that is not the case.


And it gets more complicated with something called, oil ETF (exchange traded fund)... that affect the price greatly too...

I hope that help answering why they are getting more expensive.

P.S. don't worry, US will not have any serious inflation like the current vietnam one
any time soon.

Please, Log in or Register to view URLs content!

Petty officer1

Excellent analysis.

Middle transactions are definitely part of it, but note that the floor of oil prices has also gone up. It's not the demand of oil in the EU and US, but rather demand around the world (ie China, India). As you pointed out in greater detail, because oil is traded as a commodity, there's probably some feedback mechanism occurring where every price point increase of demand is blustered with future commodities speculation.

And thus the rich rob the poor, legally. Hurray.

On a side note, since the "hedging" users of the futures market for oil buy and hold, would it make sense to impose a tax on transactions, to discourage outside speculators?

I think that would do relatively little. The tax would have to be very high to make speculation unprofitable, and the oil future's trade is somewhat necessary as a resource allocation mechanism. Furthermore, there's always the risk that some of the costs would be put back on consumers.My understanding of commodities trading is rudimentary, but it's probably better to set upper limits to inventory and oil futures than to tax the activity (though taxing could generate considerable revenues).

 

[petty officer1]

And a company like B.P. which has its own oilfields and retail outlets, operates under the same rules?

If the global oil market drop, BP don't have a lot incentives to lower the price at their pump, when everyone else wouldn't. In fact they will have a HIGHER margin of return, since BP is a vertical integrated company (a better word for streamlined monopoly) the cost now is lower, profit margin increase across the board for them. So in BP Chief Operating Officer's head, his company can now have a higher profit, AND lower taxs due to the lowering cost of their inventory.

(something oil company do try to lower their inventory in the winter by lowering their price at the pump themselves. This is for tax, dividend purposes, that is why they are cheaper oil in the winter.)

And thus the rich rob the poor, legally. Hurray.

On a side note, since the "hedging" users of the futures market for oil buy and hold, would it make sense to impose a tax on transactions, to discourage outside speculators?

They do have tax, that is called capital gain tax (short-term capital gain and long-term capital gain), and dividend tax. So your trading gain are grouped into your firm's capital gain at the end of the year. But here is the problem with this tax

1.You can set up a LLC (Limited liability company) in HK and trade there with a proxy desk to skip this tax all together.

Most firm set up multiple LLCs in different part of the world, and most time the ownership is around 25% of the LLC stocks (making them not a major shareholder), and those LLCs owns each other's stock (the ownership will look like a spider web, but it is all one company.)

This way you can effectively dodge up to 60% of revenue tax, simply stating that those small companies are not yours but a small side investment. Investments are only taxed at 15%, far lower than the usual 37%+ corporate tax rate.

And in the future you don't "invest" any more in those LLCs, you "lend" them money to do business by buying their bonds, so any revenue that come back are now in fact, interest payment on their "loan" (and interest don't get taxed).

2. Lets say in the future SEC come to check on your "investments", are they taxed correctly? It is almost impossible to do so, since your trading books are full of stuff like warrants, contracts, ETFs, off shore LLCs' bonds. in short=complex Derivatives that SEC have no idea what the hell they are, so they group them all into capital gain or interest payments.

So why not make 200%+ a year, when you only pay 15% or less in taxes? Firms have a lot of incentives to do this trade.

Those two are just simple examples, there are more.

It is very hard to tax a business when they are ahead of you in hundreds of ways.

Excellent analysis.

Middle transactions are definitely part of it, but note that the floor of oil prices has also gone up. It's not the demand of oil in the EU and US, but rather demand around the world (ie China, India). As you pointed out in greater detail, because oil is traded as a commodity, there's probably some feedback mechanism occurring where every price point increase of demand is blustered with future commodities speculation.

I agree fully, the base oil price have always been going up, and it will in the future too, due to lowering supply and increasing need of petroleum in agriculture and material industries. This trend can't be changed

But this trend will be used by speculators through out the world to make revenue for a long time.

 

[Equation]

What are you complaining about ? In the US, your ruler says inflation is under control.
The core CPI without 'unimportant' items like food and energy but includes items like ipads and your wages are indeed falling.
So quit whining and go eat your ipads.

LOL...what ruler? All we have is special interest groups and their spoke persons (politicians). No, I don't own an Ipad, it's pretty useless in my profession as far as designing buildings using AutoCAD software.

 

[bladerunner]

LOL...what ruler? All we have is special interest groups and their spoke persons (politicians). No, I don't own an Ipad, it's pretty useless in my profession as far as designing buildings using AutoCAD software.

You can use your ipad to show off your trend setting designs

 

[Equation]

You can use your ipad to show off your trend setting designs

Yeah, I could treat it like a traveling portfolio and stuff, but that's like a $400-500 business card to show off to people. I still need to use the mouse to move cursors and quick key commands to design in AutoCAD. I can't do that on the Ipad, too small and not practical, not yet at least.

 

[latenlazy]

LOL...what ruler? All we have is special interest groups and their spoke persons (politicians). No, I don't own an Ipad, it's pretty useless in my profession as far as designing buildings using AutoCAD software.

In all honesty, the CPI is a pretty independent measure. Whether it's accurate or not is another debate, and a very contentious one in the field of academia.

 

[delft]

CPI is independent of the real costs of living of nearly everyone. Often fuel and food are left out. The parts that are left in contribute to a greater or lesser extent for everyone but a theoretical average person. Often with a change of the economic situation parts that would rise are taken out, parts that were rising but are now going to decline are added.

 

[latenlazy]

CPI is independent of the real costs of living of nearly everyone. Often fuel and food are left out. The parts that are left in contribute to a greater or lesser extent for everyone but a theoretical average person. Often with a change of the economic situation parts that would rise are taken out, parts that were rising but are now going to decline are added.

Example: The prices of 95,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.

Wikipedia.

It's debatable whether the CPI captures price changes that reflect consumption in every socioeconomic group, but to say that it leaves out food and fuel is a complete misrepresentation. The kind of CPI you're talking about where goods get put back and taken out of the measure due to price changes is called Chained CPI, and is meant to more accurately capture price on buying behavior. If the price of one brand of rice goes up, most people choose to buy the other. If the price of apples go up, most people would choose to buy an orange instead. That arguably can capture inflation relative to consumers better than just a fixed basket could.

In any case, CPI is only one of multiple price indices that economists will look at to determine inflation levels. No one depends on just a single one of these indices.

 

[delft]

It often looks more like rigging the statistics. You know the old saw, there are lies, damn lies and statistics.
But some countries are more guilty than others. The British government seems to have a bad name.

Cited from today's Daily Telegraph:
"Barber claims the Government's decision to link public sector pensions to CPI inflation, from RPI, "took 15pc off people's pensions" and is clearly still fuming about it."

 

[petty officer1]

News of the day

Hugh Simon, chief executive officer of Hamon Investment Group and co-manager of the Dreyfus Greater China Fund, Says China Economy Won't Have `Hard Landing'
[video=youtube;vAaRuxIRzLM]http://www.youtube.com/watch?v=vAaRuxIRzLM&feature=related[/video]

Chinese imports expanding.

Please, Log in or Register to view URLs content!

Chinese imports at record high as trade surplus narrows

China has been trying to rebalance its export dependent economy to sustain growth
Continue reading the main story
Related Stories

Chinese inflation eases in August
Fitch warns over China bad debt
Might China's economy stumble?
China's imports hit a record monthly high in August, indicating a strong domestic demand despite concerns of a global economic slowdown.

Imports surged by 30.2% from a year earlier to $155.6bn (£98bn), government data released over the weekend showed.

Exports rose by 24.5% resulting in a trade surplus of $17.8bn, down from $31.5bn in the previous month.

The data comes at a time when China has been trying to boost domestic demand in a bid to rebalance its economy.

"August's export and import data showed China's economic growth is driven by domestic demand, not external demand and its growth is still very strong," said Li-Gang Liu of ANZ.

Growing demand
China's economic expansion in recent years has seen the rise of a more affluent middle class, with higher disposable incomes.

“I expect Chinese export growth to be below 10% in the fourth quarter”

Shen Jianguang
Mizuho Securities Asia
That has led to a growth in domestic demand, which has translated into higher import numbers.

"Growth of the Chinese middle class is well documented and it is something that will continue to drive growth," Kelvin Tay of UBS told the BBC.

Analysts said the recent appreciation in the Chinese currency had also played its part as the purchasing power of consumers had gone up.

The yuan has gained more than 5% against the US dollar in the last 12 months.

"If you had 100 yuan a year ago, you could buy X amount of things, today it is X-plus," he explained.

Global concerns
China's push to boost domestic demand has been driven not only by efforts to rebalance its economy but also by fears that demand from its key markets may dip in the wake of a global slowdown.

While its exports registered robust growth in August, analysts said that things are likely to get tougher.

"The European debt crisis and slowing US growth will be reflected in China's export data in the next few months," said Shen Jianguang of Mizuho Securities Asia.


China has said that keeping consumer price growth in check is its top priority
"I expect Chinese export growth to be below 10% in the fourth quarter," he added.

However, some analysts argued that a slowdown in the global economy may fuel a jump in Chinese exports.

They said China's biggest strength in manufacturing has been its low prices and in times of a slowdown, consumers are looking for more affordable goods which could prompt a surge in demand.

"Not many countries can make it as cheap as the Chinese," said UBS' Mr Tay.

Increased lending
Along with a rise in imports and exports, bank lending in China also quickened in August.

Chinese banks lent out 548.5bn yuan ($86bn; £54bn) during the month, more than forecast, despite government efforts to curb credit growth in the country.

China's central bank has raised interest rates five times since October last year and also increased the bank's reserve ratio requirement nine times during the same period in a bid to quell prices.

Data out last week showed the rate of inflation in China eased to 6.2% in August from 6.5% in the previous month.

Analysts said the latest numbers showed that not only were the government's efforts to control inflation working, they were not having the negative impact on growth that many people had worried about.

"All the talk of demand being dented due to credit tightening is far-fetched," Mr Tay said.

However, Mr Tay warned the combination of an increase in lending and a rise in domestic demand may see the central bank raise the cost of borrowing again in a bid to keep price growth in check.

"Based on the numbers that we are seeing, it will be premature to rule out a rate hike," Mr Tay told the BBC.

Tight monetary policy and increasing domestic demand stabilize Chinese growth.

US stocks reverse losses after Possible China-Italy debt deal.
[video=youtube;HYDF3yGlaAg]http://www.youtube.com/watch?v=HYDF3yGlaAg&feature=feedu[/video]

Please, Log in or Register to view URLs content!

Italian officials have held talks with their Chinese counterparts about potential investments in the euro region’s third-largest economy, an Italian government official said.

The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity, without specifying which assets may be involved. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment. News of the Chinese interest comes on the eve of a 7 billion-euro ($9.6 billion) bond sale.

Signs of contagion from the region’s sovereign debt crisis threatened to engulf Italy and pushed the country’s bond-yields to a euro-era record last month. Prime Minister Silvio Berlusconi’s government rushed through a 54 billion-euro austerity package to convince the European Central Bank to buy its debt. More than 60 billion euros of European bond purchases in the past five weeks has done little to shore up Italian debt.

The yield on the country’s 10-year bond rose 16 basis points to a five-week high 5.57 percent today, almost 4 percentage points more than the yield on comparable German debt.

A report in the Financial Times today that China would buy “significant” amounts of Italian government bonds helped U.S. stocks reverse losses in the last 90 minutes, as concern about Europe’s debt crisis eased. The Standard & Poor’s 500 Index rose 0.7 percent to 1,162.27 at the 4 p.m. close in New York.

Treasuries Fall
Treasuries fell after the 10-year note yield reached a record low. The euro trimmed its decline and was little changed at $1.3645 and was down 0.5 percent versus Japan’s currency after slumping as much as 2 percent to a 10-year low of 103.9 yen.
With a debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- Italy remains vulnerable to any rise in borrowing costs as it refinances maturing debt. The country still needs to sell about 70 billion euros of debt this year to cover its deficit and finance redemptions.

The report on China came on the eve of an auction of as much as 7 billion euros of bonds maturing between 2016 and 2021. The treasury is selling the debt to help pay for 14.5 billion euros of bonds maturing on Sept. 15.

Italy sold 11.5 billion euros of Treasury bills today and priced its one-year notes to yield 4.153 percent, up from 2.959 percent at the previous auction last month, as demand for the securities dipped.