China Imposes “Severe Punishment”

Addison Wiggin – May 10, 2011

  • Untangling the vagaries of China's Price Law: China takes a page from the Nixon playbook, but worse
  • Dan Amoss on the next trigger for "sharp corrections" in U.S. stocks
  • Small business owners feeling glum — and not because of "tight credit" from banks
  • Sign of the times: Nation looks east and chooses to jump the International Date Line
  • "What a helping hand"… Why some readers have a surprisingly easy time refinancing their mortgages

This morning in China, we learned the local trade surplus widened last month to $11.4 billion. That's higher than any of the guesses that came from Wall Street. Exports for the red nation surged to a record high.

"China's unfair currency manipulation has gone on for far too long," commented Sen. Sherrod Brown (D-Ohio) eliciting a groan not of our own making, "and it's clear that legislation is needed to level the playing field."

Sherrod (pronounced 'charade') is sponsoring a bill with Sen. Olympia Snowe (R-Maine) that would slap new trade sanctions on China.

For their part, the Chinese government is mucking with the trade environment by fining the Anglo-Dutch consumer products giant Unilever for an unpardonable crime: alerting the media that it is raising prices.

Unilever, maker of everything from Lux soap to Lipton tea, made the announcement in late March — much to the consternation of the National Development and Reform Commission. The NDRC says the news "disrupted market prices" and resulted in the hoarding of consumer goods in several cities — driving sales to 100 times "normal levels."

It appears Unilever ran afoul of China's Price Law — forbidding business from "fabricating and distributing information about price increases, raising prices collectively and pushing up prices excessively."

As a consequence, "severe punishment was meted out this time to break ugly habits and build new rules," read the NDRC statement. "We accept the decision of NDRC and Shanghai Price Bureau," says a statement from Unilever, displaying the requisite amount of humility.

The fine amounts to $308,000, but the size is "quite significant" in the eyes of Nicholas French, who works in the Beijing office of the global law firm Freshfields Bruckhaus Deringer. "Clearly, it's all to do with inflationary pressures and keeping that under control."

Meanwhile, the Chinese food and beverage maker Tingyi got off with a only a warning for its transgression against the Price Law.

The firm made an announcement in March about its Master Kong brand, which accounts for half of China's instant-noodle market. Tingyi would not raise prices, but rather would postpone a price increase.

Guess that ran afoul of the authorities, too. "We will follow the instructions by the government to make inflation stable," Tingyi's CFO tells Bloomberg, obviously still smarting from whatever knuckle rapping was administered behind closed doors. "Although our gross margin will be squeezed, we've decided to suspend" price increases.

Of course, none of this has to do with inflation. Gulp.

By official statistics, consumer prices in China jumped an annualized 5.4% in March. Unofficially, the figure is probably double that.

Last week, the central bank issued a statement saying, "Stabilizing prices and managing inflation expectations are critical," sounding more or less as benign as Ben Bernanke at the Federal Reserve press conference (and fun camp) last week.

Despite rising oil prices, China's imports of crude rose 3% in April. Refineries ramped up production to keep pace with factory demand.

Here too we see the heavy hand of government at work: Fuel prices are subsidized. The government did raise prices up to 5.8% last month, but obviously, based on today's figures, that wasn't enough to curb demand.

Government interference begets more meddling, apparently: Sinopec, China's biggest refiner, announced yesterday it won't export any gasoline after this month, except for tiny amounts to Hong Kong and Macao.

"Beijing has put pressure on its state-owned companies to halt supplies," reports the Financial Times. "The moves seek to keep local markets as oversupplied as possible, to bring domestic prices down."

We've been here for barely 24 hours and we're still getting our arms around the market here. As we learn more, we'll share it with you. In the meantime, we'll be publishing our findings from Colombia later today in the new issue of Apogee Advisory. You can be on board — and snag a copy of Ron Paul's "lost" gold bible — right here.

Major U.S. stock indexes are adding to yesterday's gains. The Dow is within spitting range of 12,750, juiced by merger-and-acquisition news: Microsoft plans to buy Skype for $8.5 billion.

"The stock market remains the playground of high-frequency trading bots, chart-driven traders and prop trading desks on Wall Street," says Strategic Short Report editor Dan Amoss, assessing the vulnerabilities of stocks one year after the Flash Crash.

"The multidecade run of consistent 401(k) inflows into stocks is no more. Baby boomers nearing retirement remain wary of diving headfirst back into the market, so a large contingent of long-term oriented investors is no longer providing demand for shares. "On the slightest hint of monetary tightening from central banks (in response to inflation fears), corrections will be sharp. Outside of a handful of special situations, the stock market offers little in the way of value.

"In short, the stock market remains overextended and extremely dependent on the drug of super-easy monetary policy from the Federal Reserve." As the saying goes, that which can't last forever, won't. You can prepare accordingly using Dan's strategy, outlined here.

Gold is holding onto yesterday's gains, the spot price currently $1,517. Silver is adding to yesterday's gains and currently fetches $38.46.

Crude has firmed considerably this week from Friday's lows. A barrel of West Texas Intermediate goes for $102.36.

Small business owners are feeling increasingly gloomy about the future. For the second month in a row, the National Federation of Independent Business' "optimism index" has fallen.

At 91.2, the figure is now its lowest since last September, and down significantly from the post-2008 peak of 94.5 in February.

As always, we find the "single most important problem" identified by survey respondents to be revealing. The highest number — 25% — say the biggest problem is poor sales. That's down from 29% a year ago.

On the other hand, the number of businesses that say government regulations and red tape is their biggest problem rose from 15% to 17%. And those identifying inflation doubled from 4% to 8%.

One thing that hasn't changed — almost no one identifies the availability of credit as a problem. Banks may not be lending to small business, but small business sees little reason to borrow, either.

Sometimes it's the little stories that speak volumes about the shift in wealth and power around the world. Like how the date Dec. 29, 2011 has been wiped off the calendar in Samoa.

The South Pacific nation, not to be confused with the nearby U.S. territory of American Samoa, sits right next to the International Date Line. Since 1892, it's been on the east side of the line — making it easier to conduct business with its trading partners in the United States and Europe.

On Dec. 29, Samoa will jump to the west side of the line. Poof, it will suddenly be 24 hours later.

You could lose track of the days in a place like this…

"Today we do a lot more business with New Zealand and Australia, China and Pacific Rim countries such as Singapore," explains Prime Minister Tuilaepa Sailele Malielegaoi.

"While it's Friday here," explains the PM of the current system, "it's Saturday in New Zealand and when we're at church on Sunday, they're already conducting business in Sydney and Brisbane." With the move, Samoa will be three hours ahead of Sydney, instead of 21 hours behind.

Makes sense, really.

Then again, maybe the prime minister just likes moving things around: Two years ago, he switched the country from driving on the left side of the road to the right. Who knew an island paradise could be so complicated?

"I have been following the refi soap opera in The 5," a reader writes, "and thought I would toss this in, as it is particularly timely.

"My wife and I have six years remaining on our 6.5% mortgage. About an $85,000 balance on a $450,000 house. Out of the blue two weeks ago, Chase Home Mortgage called. We have never heard from them before (ever).

"The upshot was, You are a good customer, we don't want you to move your mortgage, soooo we would like to offer you a 4.1% refi for FREE (yeah, right, I thought). Nope, no charge. No Fees, no points, no appraisal, no nothing… and we will send a closing agent to you at home. FREE.

"Now, I'm a CPA — not the smartest CPA probably, but I can read. Sure enough, I was e-mailed a Lock-In Agreement, Good Faith Estimate and Truth in Lending Disclosure and the entire refi is free of any and all charges (no, they're not added into the balance).

"Those have been submitted, and I am informed that the closing agent is 'in process.' My wife and I will need to sign THREE (3) pieces of paper. The new loan is for 10 years, vs. the six years remaining on the old, but even at that, it is a savings of about $5,000. There are no prepayment restrictions or penalties. (In this environment, the $500 per month reduction in payment will go to silver purchases.)

"As for income, we had to sign an affidavit that either my wife or myself is gainfully employed — no actual proof has been required. I'm still waiting for the other shoe to drop, but as of now it seems to be legit. Interesting, no?"

"About a month ago, I got a FedEx letter from Chase," writes another, who sheds more light on what's happening, "offering to reduce my mortgage from 5.25 % to 4.25 % — with no closing costs — period. We did the deal, and now my mortgage is 4.25%.

"Now Chase reports to the federal government that they have done another reduction of interest rates for the "Helping Families Save Their Homes Act of 2009." Now isn't that nice — what a helping hand — good for me, but definitely whacked.

"So all these banks are fishing through their files looking for good paying customers that are almost done with their mortgages anyway. I had approximately seven years left, and if I continue with my same payment, I will be done in 5½ — or I can pay $600 less per month, as the new note is a new 15-year."

"Anyone who has applied for a mortgage recently," writes a third, stepping back to examine the bigger picture, "has probably worked harder for that mortgage than people did four-five years ago. My question is where does everyone think mortgage money is going to come from in the future?

"We now have 30-year mortgage money at less than 5%, courtesy of the federal government and Fannie and Freddie, but that is sure to end soon. Fannie and Freddie have both proven they cannot operate a for-profit business, and unless the taxpayers think they should keep subsidizing these agencies, they should be dissolved.

"Outside of the FHA and the VA, this will require all new mortgages to be originated in the private sector. This is the way it should be, but because of all the meddling the government has done lately with mortgages, who is going to step forward and invest in this market?

"Local, state and federal governments have all shown they can and will renegotiate contracts between private parties. They haven't adjusted principal amounts owed yet, but they have altered almost everything else, which has caused huge losses for the owners of those mortgages.

"My own opinion is the banks and Wall Street have accepted these losses as a trade-off to the discount they are getting from the federal reserve, along with a few other goodies, but that can't last forever."

The 5: Americans have lost $10.06 trillion in home equity since the peak of the housing bubble. But only $530 billion in mortgage debt has been defaulted or written off by the banks.

Until this debt is cleared… there's no guessing what mayhem the banks and/or Wall Street or Congress will get up to.


Addison Wiggin

The 5 Min. Forecast

P.S. Missed you here in Beijing tonight. At a small gathering on a veranda overlooking the city at the China World Hotel, we chatted with expats, some notably Canadian, and working in all kinds of professions, including a gentleman who runs big game safaris for wealthy Chinese; an accountant from KPMG who was adamant the bank reporting system in China has improved over the past few years; a specialist in SEO marketing for foreign companies trying to do business in China… and a high school economics professor who has begun writing local columns for Forbes China. Fun was had by all…


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