Neue Zürcher Zeitung sums it up quite nicely – Provided – of course – you don’t throw your brain into gear! But then again: Very few do! Quote: The Americans consider the RMB/USD to be undervalued, while Peking blames Washington to have too loose a monetary policy. This makes the RMB/USD weaker and drives speculative capital into new economies like China.

Comment: Splendid! They start out agreeing on something!

The relationship RMB/USD Is Wrong

The relationship RMB/USD is wrong! They even agree upon the direction: RMB/USD is too low.

Quote: The Chinese relationship to EU is somewhat tense at the moment because the EU-Commission has slapped anti-dumping customs on Chinese solar panels. As a countermove the Chinese have started investigations against import from European of seamless steel pipes and wine. ”That is what trade-wars are made of”, warns Huo. Regions in recession like Europe tend to act protectionist – something that can get out of hand quickly.

Comment: This is just the other way round! The RMB is overvalued in relation to the EUR – the Chinese have to drop prices to get their stuff sold. This naturally also means that European wine and steel pipes are cheap in China – because the EUR is undervalued!

This is simply impossibel! Of course it is impossible!

As both the EUR and the USD are traded the Europeans will exchange EUR for RMB – and then exchange EUR to USD – then the USD will be exchanged to RMB. Then you exchange RMB to EUR etc. etc. – untill the Chinese come to their senses – which has been overdue for a very long time.

Let us take an example where everybody in primary-school has a fair chance RMB/USD:

a)      RMB/USD = ½

b)       RMB/EUR = 2

c)        USD/EUR = 1

Ergo:  RMB/EUR = ½  AND  RMB/EUR = 2

Try that with cookies and any preschool toddler will sense something is terribly wrong! But not in Chinese trade politics!

Quote:  Huo points to that the USA has passed Europe as the most important Chinese export market.

Comment: Of course! Not only predictably; but also predicted!

When you sell too expensively in Europe the export will recede and increase where the price is too low, both due to half-brained currency manipulation.

When the RMB/USD is undervalued in relation to the USD it does mean the commodities from the USA get more expensive – measured in USD as China insists on using an exchange rate that is wrong – price will compensate! Look at the grain prices RMB/USD:

RMB/USD grain prices

When you sell your own stuff too cheaply in the USA due to currency manipulation – well, then you have to buy the things you need from the USA too expensively. It really isn’t that complicated!

Same thing with other raw materials:

Metal prices USD

Quote: Letters of intent to questions of energy, mining for minerals and infrastructure have been signed [with some South American country] according to sources. “We are really happy for this generosity”, head of government is quoted. According to sources Xi extends over 250 mio. USD in credits for the building of a children’s hospital.

Comment: Now the Chinese are tired of being bled white on their oil bill! They are VERY slow on the uptake in China! They have succeeded in getting underpaid for their export and overcharged on their imports – because they keep the RMB/USD undervalued with respect to the USD and overvalued to the EUR. In which currency we settle the account does not matter – as long as it is to the disadvantage of the Chinese!

Quote: Peking has nursed good relations to Latin America to improve their raw materials supply, to get new export markets and to get votes in the international organisations. According to the UN South America imports more goods from China than from the EU. Besides China is one of the largest investors in developing countries.

Comment: Of course they do – as Europeans are used to at profits from export to China, they are easy to underbid in Latin America. This can continue as long as China’s export prices are under the price of the imports used in their manufacture.

Metal prices Average

That is where the point with the German steel pipes is!

The Chinese buy their iron ore way too expensively (and coal too). Use much too much coal to make steel which is abundantly present in the form of scrap – to an extend that defies description – and I mean that literally, as for the past year there has not been a market price for cold-rolled steel – and other types of steel.

What are they thinking?

Europe has unlimited amounts of steel in the shape of old tanks waiting in the knackers yard (the Russians have several generations of them) and ships only needing to be melted down – and then the Chinese are surprised that the Germans can sell steel pipes – with a fat profit – cheaper than the Chinese can make them themselves?

The real fun starts now as the AUD is dropping – hard:

valutakurser DKK

Don’t you think that the Aussies just might consider cutting the price of iron ore and coal?

For a nice healthy laugh: Imagine the speculators that have bought coal and iron ore at gigantic prices. You almost feel sorry for the banks that has lend these geniuses the funds invested….. njaarhh …. Not really!

Conclusion:

The real problem is that China has omitted no error of judgement – and they are very unlikely to admit to any. The result will be that they will keep their banks afloat jacking up bad debts – and running down steel production (among other things) as they can buy the stuff tailor made cheaper than they can produce it themselves – no matter how cheap Chinese labour might be.

Neither will China start buying food on the world market, because that would immediately increase the prices on – primarily grain – and their hoard of US bonds will fall in value – thus ruining themselves of more than their undeserved self esteem. The rest of the world wouldn’t really care, as food production can be increased considerably. Immediately from the USA and longer term from Russia, though that will take considerable investment in infrastructure to give the vast fields transportation.

History tells us, that any sensible solution is very unlikely to happen – especially in China.