[PDI] Chinese Electric Car, etc.

Excerpts from financial columnist Richard Russell:
 
Brutal Competition -- Coming, the BYD electric plug-in car from China -- this as the US falls behind with GM's VOLT not due to appear until 2010.
 
Talk by the experts about the new Chinese plug-in.
Scott Tong: Well, the car doesn't look spectacular around the outside, I have to tell you. They unveiled it and it looks like a Corolla. But the magic is on the inside. This car has a plug-in battery that is said to be two years ahead of the competition, because it's on the mass market here. And it's superior to what the Japanese and to what GM are developing now. It goes longer, farther per charge, and it charges up faster than the competition's.
 
Jagow: OK, so where can I get one?
 
Tong: You can come join me in China, that would be the quickest way. Or you can move to Scandinavia, which is where they're going to export some of them next year. Or if you hang around, this Chinese company called BYD wants to export them within a couple years to these larger markets, like North America or Europe.
 
Jagow: Scott, what evidence do we have that this really will be a mass-market seller?
 
Tong: We have $230 million of evidence in the form of investment from Warren Buffett. So that's good enough for most of us. Earlier this year, he decided to invest this much money, and what it seems like is he believes this company is on the cutting edge of this battery technology. And what's interesting about this Chinese company BYD is it started out as a battery company, making mobile phone rechargeable batteries or making laptop rechargeable batteries. And some executives have actually come out and said, you know, making a mobile phone is really hard, making a car is easier.
On top of everything, China and India are now harnessing their talents -- India is planning to produce a laptop computer for the knockdown price of about $30. Having pioneered last year the Tata Nano, the world's cheapest car, which will sell for $2,050 a vehicle. The laptop is intended to boost distance learning to help India fulfill its overwhelming educational needs.
 
Russell Comment -- China and India, the earth's two most populous nations, realize that their future lies with education, with the help of their enormous population's fierce desire to better themselves and compete with the West. This will not be good news for US employment as it's becoming obvious that the US is losing a large chunk of its manufacturing and creative abilities.
 
However, the cheap laptop may be a boon for democracy. For instance, countries like Iran and Saudi Arabia have huge populations below 25 years of age. These kids love the free US culture, they can't get enough of it. Cheap laptop computers will open the world to US culture, which has always been our most successful export. US pop culture has always been a menace and a danger to any stiff, restricted culture. The battle is on for the minds of the world's youth, but one problem, up to now, has been communications -- enter the new thirty dollar Indian computer!
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Gold Problems -- An interesting article appeared in yesterday's Financial Times. The title of the piece was "I Don't Like the Big Shiny Crowds Around Gold" by John Dizard.

Russell comment: This sudden wide spread interest in gold has bothered me too. Ads for gold are appearing in the newspapers, articles about gold are now commonplace. Writes Dizard, "I don't like crowds, and the one around gold is just too big at the present. Let's say that Western civilization is coming to a bloody end. That won't happen for a few months at least. So why not wait until you don't have to pay an unjustifiable premium for something as common as a Krugerrand."

"Having said all this, I agree with the gold buyers that we are in a multi-year gold bull market that will eventually take the price to an integer multiple of where it is now, not a big integer multiple. But enough to approximate now much inflation must shrink the real burdens of debt to what the developed country taxpayer and consumer can afford."

"Gold is one of, if not the most, treacherous trading markets there is. Ian Shapolsky, a New York investor, who trades for his own account, and whose tactical gold trading strategy I described in his space a couple of years ago, has abandoned the metal after a reasonably successful run."

"As he says, 'The gold market is thinner than it was, and it seems that the larger players can push it around more than they could in the past. The larger traders are aware of the chart points (price targets) followed by the investing public; and there seems to be a lot of effort to push prices above breakout points or moving averages.'"

"So stay out of the deep end, average in. Don't buy in a panic."

"That key signal for the present buying frenzy came from Europe. Since the beginning of the winter, the perception of the euro in the eyes of skittish investors has changed from safe haven to mousetrap. They've become too scared. Wait for a better entry point in the next few months."
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>From the New York Times, Feb. 3. "In a Tidal shift, Chinese are Spending More Money Overseas."

Christie Johnston for The New York Times
Some Chinese are so eager to turn their yuan into other assets that when an online real estate brokerage organized a tour of foreclosure auctions in the United States, it received so many applications that it had to turn away nearly 400 people.
 
In Shanghai, cash-rich Chinese companies are buying high-yield bonds issued by distressed American companies at a time when many Western investors are steering clear of bonds even from solid companies.
 
All over the world, Chinese companies are sending home fewer of the billions of dollars they earn from exports, parking them in overseas bank and brokerage accounts instead.
 
And in Hong Kong, wealthy mainlanders are turning up at jewelry stores in growing numbers seeking diamonds, big ones.
 
"They're looking for five-carat diamond rings and six-carat diamond earrings — three carats for each ear," said Yollanda Lam, the marketing manager for the King Fook jewelry store chain here.
 
Together, these trends represent a potentially tectonic shift. As Chinese citizens are starting to send more money out of the country, foreign investors are pulling money out too, and slowing the pace of new investment.
 
"There is a recognition for sure that China is slowing down, so why keep your money there?" said Henry Lee, a Hong Kong fund manager.
 
Nobody knows how long this trend will last. If China's series of economic stimulus measures are successful, then the Chinese economy could rebound later this year and start drawing back money on the same scale that it did over the last decade.
 
Total outflows in the fourth quarter were as much as $240 billion, but this is using the broadest possible definition and includes everything from capital flight to a slowdown in repatriation of overseas profits by Chinese companies. There is no good data assessing the motives of those moving money out of China.
 
Most troubling for China would be if a sizable portion of these disparate streams represented capital flight — people taking their money out because they worry about the stability of the country.
 
Though there are myriad reasons to move capital around, there is also cause for concern: Chinese authorities announced Monday that 20 million migrant workers had lost their jobs. If they do not find new work, these workers could form a volatile class of unemployed.
 
Even more crucial, Chinese individuals and companies placing more of their money outside China could affect one of the constants of international finance over the last five years: China's central role in bankrolling American trade and budget deficits.
 
To prevent China's currency, the yuan, from rising, the government has been buying up the dollars pouring into the country from trade and foreign investment, accumulating more foreign exchange reserves than Japan, Saudi Arabia and Russia put together. It has paid for the dollars by printing more yuan, and has invested at least two-thirds of the dollars in American securities, particularly Treasury securities.
 
If considerably fewer dollars come in, China will not have the yuan to continue buying vast amounts of Treasuries, assuming it wants to keep buying them.
Over the weekend, China's prime minister, Wen Jiabao, said, "Whether China will continue to buy, and how much to buy, should be in accordance with China's needs, and depend on the safety and protection of value of foreign exchange." The statement, reported by the semi-official China News Service, was taken by some analysts as official ambivalence.
 
Right now, the challenge for economists is figuring out why money is leaving China — and how long the trend will last. Torrents of cash are still pouring in from trade surpluses, as imports shrank faster than exports in the final months of last year. But that inflow has been nearly balanced in recent months by an outflow of private cash from the mainland and a slowing of investment.
 
The quarterly pace of accumulation in China's foreign exchange reserves plunged 74 percent over the course of last year. In the fourth quarter, it reached $40.45 billion, the lowest point since the spring of 2004.
 
Most economists say that actual capital flight seems the exception rather than the rule, and anecdotal evidence appears to bear that out.

Jewelry stores in Hong Kong are a barometer of trends on the mainland, because Hong Kong stores do not charge the luxury consumption taxes imposed on the mainland and have a reputation for not selling counterfeits. Daniel Chun, the manager of Gaily Jewelry here, said he had seen an influx since December, with mainland Chinese mainly buying diamonds, either set in jewelry or as loose stones.
 
Sales to mainlanders were 50 percent higher at Chinese New Year this year compared to a year ago, he said, but cautioned that it was impossible to determine how much of the increase represented worries about China's future.
 
Yet the Hong Kong government said on Monday that retail sales of jewelry, clocks and watches fell 9.8 percent in December. While this may reflect plunging demand from local residents as Hong Kong's economy slowed suddenly, it also indicates that demand from visitors, a big part of the market, could not have increased very quickly.
 
Hong Kong residents have been snapping up gold bars at a brisk pace in another sign of anxiety. Few mainlanders have been willing to take the risk of flouting the mainland's stringent gold import regulations, said Lin Tat Yin, a manager at Chow Tai Fook, a jewelry store chain.
 
Another motive for money coming out of China may be simply a perception, among individuals and companies, that better bargains are available elsewhere.
 
Soufin.com, an online real estate brokerage, is offering a tour for at least 40 people to San Francisco, Los Angeles, Las Vegas and New York City, starting on Feb. 24, and found that demand outstripped the spaces available. "The people in the group are obviously interested in diversifying their investments, and the United States certainly is a very attractive location since real estate prices there have dropped drastically," said Zhao Xingyu, a manager organizing the tour.
 
Chinese real estate industry executives say that there was considerable speculation here in recent years by overseas investors, especially overseas Chinese. Those purchases contributed to a bubble that peaked last spring and has gradually deflated since, removing the incentive for further real estate investments here.
 
"Beijing's slowing accumulations of Treasuries may be partly offset by Hong Kong's increased purchases of Treasuries, he said.
 
The Hong Kong dollar is pegged to the American dollar, and the Hong Kong Monetary Authority typically buys more Treasuries to offset strong inflows of money.
 
Another reason less money could be flowing into China is the government's decision to halt the rise of the yuan against the dollar last July, and even to allow a short-lived decline against the dollar in late November. This removed the incentive for investors to put money into China in pursuit of currency gains.
 
Russell Comment -- This is an important article, showing that the Chinese are very concerned with finding safe asset classes. Gold, diamonds and foreclosed US real estate seem to be the choices.
A few sites ago, I wondered where the big diamonds are going and why the ads for diamonds on page 2 of almost every issue of the NY Times. The big diamonds, it seems, are being bought and "put away" by wealthy Chinese and Russians.

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