JOHANNESBURG (Business Day) -- The Chinese trade surplus soars to a record US$26.9 billion for June 2007, exceeding the estimates of economists - and bringing calls from U.S. lawmakers for sanctions unless the Chinese currency appreciates faster against the weakening dollar. Lindsay Williams talks with Michael Power from Investec Asset Management.
LINDSAY WILLIAMS: The U.S. dollar fell to a 27-year low against the UK pound, and is at a record low against the euro at 1.3715. Michael, why is the U.S. worried about this surplus? It's been a fact of life for years now.
MICHAEL POWER: The size is getting rather large - the number you've just mentioned is the equivalent of our total foreign exchange reserves. The U.S. just can't see the surplus the Chinese are producing is in part - not in total of course - reflected in the deficit the U.S. is generating. It's a bit like lecturing the guy that's selling you alcohol when you're an alcoholic, so I think the U.S. needs to understand that there are two sides to this coin.
LINDSAY WILLIAMS: The Americans of course will have us know that US$26.9 billion is entirely made up of tainted toothpaste, contaminated seafood, defective motor car tyres and crappy plastic toys - but there are also good fundamental reasons.
MICHAEL POWER: It's also Apple iPods, the latest Motorola cell phones and IBM personal computers are now actually owned by Lenovo and made by them in China - so it's not all the low-end business. That's something I think people are going to have to wake up to with Airbus relocating huge parts of their production facilities to China, and very soon their assembly business will be joining that.
LINDSAY WILLIAMS: If the Chinese surplus wasn't so high of course U.S. and worldwide inflation might be a lot higher - because that would imply the goods would be made elsewhere where costs would be higher. Is that a real factor as well?
MICHAEL POWER: Yes, that's a real factor. The only question now is if you were to force the Chinese to revalue their exchange rate say by 25% to make a meaningful number would the assemblers of all these various products maybe relocate to Bangladesh and Indonesia - and still be exporting to the U.S. at the current price? They're currently doing that, so would anything change?
LINDSAY WILLIAMS: Why is this so important, and what can we do about this situation? On a serious note the Chinese yuan is at the wrong level according to U.S. lawmakers - what can they do about it, and why should they do something about it?
MICHAEL POWER: I think they have to be careful on a number of counts before they force the Chinese to revalue - if indeed the Chinese would do so, and there's nothing ultimately the US can do to make them do that - but the fact of the matter is that the Chinese are storing a good portion of their foreign exchange reserves in the U.S. bond market, and if the Chinese for whatever reason become displeased with the U.S. and withdrew their money from the U.S. bond market, that would really put the kaibosh on the U.S. economy in general, and I have to say even as of today there are concerns that particularly the housing market in the U.S. is looking extremely precarious.
LINDSAY WILLIAMS: Yes, there was a set of numbers out of the U.S. economy today from Home Depot.
MICHAEL POWER: Home Depot and Sears both issued profit warnings, as did DR Horton, which is one of the largest U.S. home builders - and Standard & Poor's came out this morning and said they're putting $12billion worth of collateralised debt obligations (CDOs) essentially focusing on sub-prime mortgages on watch, which has spooked as you've probably already seen people into either investing in the bond market, or to get out of the U.S. altogether and abandon the dollar. So it's been a very strange day today. This is a new dimension of what happens in the U.S. when it's a bad day - if you're an American you run for the bond market, and if you're not an American you run for the exit.
LINDSAY WILLIAMS: Sub-prime is something we've covered extensively on Classic Business Day - what's your take on it?
MICHAEL POWER: I think it's festering. I think they are hoping given time and patience and a certain amount of working out that they can see their way through it, but I think it's a lot more serious underneath than the investment banks in the U.S. have been letting on, and that's not least because they themselves are integrally involved in the whole process. So I think we've got to watch it extremely carefully - and Standard & Poor's to their credit might be blowing a whistle that the investment banks can't stop them from blowing, so we need to watch this extremely carefully. I think also with DR Horton as one of the big house builders in the U.S. saying they don't even see a recovery anytime early into 2008 that's something they're going to have to "contain" to use Bernanke's words probably for another 12 months yet.
LINDSAY WILLIAMS: If you'd just taken a one-year sabbatical in the Amazon and you'd just come back and the headlines you saw were "record high oil prices", "record lows on U.S. dollar", "the carry trade at unprecedented levels" with the Japanese yen starting to strengthen significantly, the massive trade surplus between China and the U.S., and the sub-prime market we've just touched on, what would you say? Would you say we were in a bit of trouble here?
MICHAEL POWER: I think that we are in a lot more trouble than the system wants us to believe. The interesting thing though is that one man's misfortune is another man's good fortune, and I think at a time when particularly the U.S. is suffering some issues the emerging world is coming into its own - and that could essentially be explained by the idea that capital to a significant degree is deserting the U.S. to invest in other parts of the world, and for instance parts of the world with a high propensity to import oil hence the higher oil price. I think what we are seeing at the moment is a shifting in the axis of the global economy away from an over concentration in the U.S. - that's only 5% of the world's population, even if they are 25% of the world's GDP - towards the Brick countries and Asia. So we are seeing a shifting of the centre of gravity, and I think it's becoming a lot more fluid in the global economy - and longer-term I think the emerging world is proving to have some really attractive investment opportunities.