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The US sees no contradiction to India looking for bargain priced oil from Russia to meet the growing needs of its economy and is actually furthering the goals of the G-7 by lowering the price Russia gets for its oil. It helps the economy of 1.2 billion people that like the rest of the world has struggled to fight the pandemic and has incurred the kind of heath costs that even China is now struggling to pay for. President Biden clearly understands and supports this. Democracies an only succeed if they fulfill the aspirations of their people. On this point Biden made clear in his State of the Union that he will generate what it takes from large corporations that paid no tax, to invest in America. Rather than fuel the profits of large oil companies India has increasingly chosen to use Russian discounted oil to invest in India. The Biden and Modi policies are identical generate savings and invest big time in trillions of dollars over the next few years to put democracies ahead in meeting rising aspirations that have been unfulfilled for far too long, which is where the real battles are being fought and will be won, and rightly so. US Assistant Secretary of State for Energy Resources, Geoffrey Pyatt,  said during a visit to New Delhi on Feb. 16-17- "Our experts now assess that India right now is enjoying a discount of about USD 15 a barrel in the price that it is paying for its imports of Russian crude. So by acting in its own interest, by driving a hard bargain to get the lowest price possible, India is furthering the policy of our G7 coalition, our G7 plus partners in seeking to reduce Russian revenues."  Looking at the bigger picture the problem was created by Germany under Merkel who built Germany's over dependency on Russian oil to power a cheap fuel economy it thought was in Germany's interest. This is now being reversed by the hard work of Mr. Habeck of the Green party in the coalition government of Scholz in securing alternative supplies in record time for the EU to avoid a recession. In this sense the perception created early of India which has suffered itself from invasions in 1962 and incursions in the Himalayas more recently, it is not a problem India can solve by becoming energy short at a time when it has invested so much in fighting the pandemic. A similar problem was created by Republican and Democratic administrations of the past that concentrated the supply chain in one country. India lost much investment in the last 8 years as a result of the policies of Merkel's Germany and past Republican Democratic administrations in concentrating the supply chain in one country. ...

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Evergrande relied on presales to finance itself and keep its activities in real estate. A Chinese government crackdown on speculative behaviours and taking on too much debt by property developers led to Evergrande having to offload properties at large discounts. Evergrande is China's second largest developer with $300 billion in debt. Investors have down payments on around 1.5 million properties and face uncertainty in getting money back if housing projects are not completed.

Hong Kong listed shares have collapsed by more than 80% this year. There are risks to financial stability in China if there is a collapse of Evergrande, says this report in DW.com. About 29% of China's economic output is tied to the real estate sector and Chinese in large cities invest savings in apartments as part of speculative investing.

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Sharply lower consumer spending is hurting Apple sales in China. Apple cut sales and issued a sales warning in January 2019. This follows Apple's sharp slowdown in India with its uncompetitive pricing.

Retail sales growth in China- which bounced back in previous downturns- dropped to the lowest level in 15 years in November 2018. Auto sales are down with the sharpest drop in 7 years- the first annual drop in sales since 1990. Fears of a housing bubble have led to restrictions on home purchases for speculation which have not been lifted. Income tax reduction has not increased spending. GDP growth for the fourth quarter dropped to 6.4%.

Further signs of a sharp pullback are seen in the drop in consumption tax revenue falling by 61% in October and 71% in November 2018. The consumption tax is placed on cars, gasoline and luxury goods, and is paid by the companies making the products.

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Expensive new fuel saving technology investments at BMW to meet new pollution control standards in Europe (130 grams per kilometer) and boost fuel efficiency in the US. This year only 40% of its cars will meet 140 grams per kilometer. With a production total of 1.4 million cars BMW faces sizable investments with smaller car volume than the likes of Toyota and Honda. R&D costs have climbed 22% in first half 2007 to 1.5 billion euros. BMW has agreements to jointly develop some of the new technology with Daimler and GM on hybrid gasoline-electric drive cars. Its developing a new 3 liter diesel engine for the US market that cleaner and fuel efficient. BMW plans also to boost advertising budgets to promote itself as a fuel efficient carmaker conscious of the environment, See related article. It plans to expand in India China and Russia to get a share of the expanding markets there. BMW's second quarter profit fell 23% on a 7% gain in revenues underlying the additional investments BMW faces. CEO Reithofer wants to increase profits to above last years 3.75 billion euros. ...

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Kevin Maurer looks back at 15 years of covering Afghanistan since 2004, and asks was it worth it.  The conflict has cost 145,000 lives for the U.S. period of the war alone. Not counting the war in which the Russians were involved in the decade before the U.S. involvement. In fact the Russian involvement in Afghanistan was costly enough to hasten the collapse of the Soviet Union and bring Gorbachev to power to unwind the war and make the changes that led to the collapse of the Berlin Wall.  2400 U.S. servicemen dead and 20,000 Americans wounded. The cost to the U.S. is $737 billion for this war, according to a report in 2018 from Brown University's Costs of War Project. Just as the Soviet Union showed the damage from this war the U.S. has seen the cost of this war and foreign entanglement in another war that started accidentally with international interventions in the Iran-Iraq region as a cost that was borne with consequences. This includes the neglect of infrastructure and the damage to the middle class prosperity built up in the 1950's and 1960's after the Second World War. The U.S. got into this war with 9/11 attacks on New York City. By 2010 what began as a war fought by a few Special Operations teams turned into a war with troop levels reaching 100,000. Presidents Bush and Obama both failed to end the war by winning it. In 2014 finally combat operations stopped and American troops mainly conducted anti-terrorism operations and trained Afghan forces. In recent years the war has gradually disappeared from the national discussion in the U.S. and is barely talked about. President Trump wants to end the war even if it means talking to the Taliban and negotiations directly with the Taliban are ongoing.  One result of this war is the aversion to costly international entanglements and the highly unpopular nature of the conflicts. There are serious costs of the conflict in terms of neglected domestic priorities including infrastructure, loss of U.S. technological edge in key industries, and the competition from China, an the investments in health, education, services that were not made, the increase in inequalities and the diminishing of the middle class. The global financial crisis of 2008, the result of faulty banking, added an economic dimension through the loss of middle class savings in the U.S., worsening the financial situation of the middle class in the U.S.    ...

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Sternberg points out that China's banking system lacks the experience in consumer credit and consumer finance products that would provide the impetus to a surge in consumer spending in China for imported products from the US or Europe. Outstanding consumer credit in China is only 13% of GDP, according to a 2009 study by McKinsey and Company, compared to 48% in Malaysia and 70% in S. Korea. China has lost a decade or more he says in allowing foreign banks to develop a consumer-finance market, and Chinese banks have little compettitive pressure to serve lower income consumer borowers. The Dutch PPF Group was allowed into this field for the first time in November 2010 to introduce in-store financing for durable goods purchases, something available to consumers in Brazil and other developing countries for many years. Large banks have an entrenched mindset to lend to businesses, and especially to state owned enterprises which have the collateral and government guarantees and support to obtain this lending. Risk averse banks in a financial system that lacks the kind of credit ratings system for consumers that the US and Europe have, prefer to lend to make loans to state owned enterprises where the government guarantees the loans. Interest rates on deposits are low and the government deliberately allows a wide spread for the banks so that they can ensure enough earnings to pay for non-performung bad loans, both from the last decade and from the binge in stimulus lending in 2009-2010. This reduces consumption by reducing the earnings on savings for consumers and households. These problems can only be solved gradually if the government and leadership want to change course, but this oddly enough is not happening. Other problems are that China's export factories are part of a global supply chain in which other countries do the product development, logistics, marketing, and retailing. Chinese firms lack the experience in these areas to shift to domestic consumers. As a result, says Sternberg, to lose a foreign customer can mean going out of business. Without government leadership and new direction through large scale re-allocation of capital and labor to the small scale businesses that serve consumers in the domestic market, all the talk of rebalancing will be just that, talk only and no real rebalancing....

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Like hundreds of thousands of other young migrant workers in China's factories, Yuan Yandong is from a rural area and lived on a farm. Better incomes have brought them to the factories in urban areas. In this case travelling long distance by train from Guangdong province to Shenzhen. As living standards improved across China and the government expressed a keen willingness to encourage workers to exercize their rights to fair wages and working conditons- especially by creating increased awareness of new labor laws in the state run media- migrant workers are becoming restless with conditions they accepted a few years ago. The growing use of cellphones and access to the internet have made news travel faster. A visit to a Foxconn factory shows a young worker, age 24, sitting on a stool 6 nights a week, 12 hours a night, with a quota to assemble 1600 hard drives for American computer storage company EMC, with the pressure to work continuously against the clock for each step in the manufacturing process. Foxconn is known for its highly disciplined nature of work, akin to a military style. Behind the scenes factories like Foxconn employ methods once used in the US at a similiar stage of industrialization, with 500 technical people continuously looking for the most efficient way to organize each step in the production process. Each movement and action of the worker is measured for time taken and process efficiency, according to experts at Tsinghua University in China. This means many factories can use less automation- and so less capital intensive manufacturing- and go to extremes where workers perform like machines. Yuan's ambition is to work only for another 2 years and then use his savings to get into hotel management. His wages are 75 cents an hour, and with the overtime premium about $235 a month. Foxconn announced a 33% raise in wages as a result of worker protests. The mind numbing monotony is becoming less acceptable in a changing China, and worker turnover in such factories is rising. After the initial burst of industrialization in which young migrant workers played a signifcant role in manufacturing, a new chapter in China's development is beginning- one less likely to create the large trade deficits with the US and Europe- which is moving in the direction of a larger domestic market with higher worker wages....

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Retail sales in China dropped sharply. Retail sales dropped from double digit increases for most of 2014-2017 to single digits in 2018- sales dropping to 8.1%. Government restrictions to prevent a housing bubble restrained housing sales, and policies to control corporate debt limited growth. Higher inflation for food and housing, have led to asharp pullback in growth of consumer spending.  Trade tensions with the U.S. have hurt consumer sentiment. The feeling that China's growth would stabilize because of its connections to the world economy is fading as consumers see persistent trade tensions with the U.S. including tariffs of upto 60% in tit for tat actions as hurting China's prospects.  The GDP growth is expected to be about 6.5% for 2018 according to government estimates, which experts say is actually much less or even half that as exporters retrench in the face of slack demand in China and lower sales to the U.S.  Rail and other infrastructure projects that were considered unsuitable are now being given approval in efforts to boost the economy. More tax cuts and expanded deficit spending are policies likely to be followed.  At foreign companies no overtime, and job cuts are commonplace especially in the auto industry. ...

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Otis Elevator is moving a plant based in Nogales, Mexico, back to the U.S. This plant was moved to Mexico in 1998 for cost reasons. Now Otis CEO, Didier Michaud-Daniel, says producing at a new South Carolina plant will cost less than Mexico. Logistics and freight costs are 17.3% less in the U.S. than Mexico, and an additional 20% in savings come from "efficiencies" gained by having all its white collar workers associated with elevator design and production. Most companies that manufacture in China and Mexico keep their design and engineering jobs in the the U.S. It is not clear to what extent American companies have considered all the costs of separating design and engineering from manufacturing, including the opportunities for close cooperation possible in one location that are lost when everything is so spread out. At Otis toolmakers in Dallas and engineers and designers located in Indiana and Arizona traveled to the Nogales, Mexico plant. This can be especially important when as in Otis's case the new plant in Florence, South Carolina, plans the launch of a new generation of elevator designs. In this case there is an added benefit by making it easier for customers to visit the plant and look at the product. The new plant will have more automation and use fewer workers on the factory floor. The new factory will employ 360 workers including white collar workers, the same as the Nogales, Mexico, plant with a lower number of factory floor workers. ...

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The Chinese government is concerned that lack of a safety net, fears about a general access to health care, and lack of other assistance for the farmers, elderly, rural poor, lack of unemployment protections and welfare, all are making Chinese to cramp up and spend less. Chinese households save a quarter of their income in normal times, now unless the government steps in a big way, which it has done only in small faltering steps, savings will increase even more in response to fears about the future. Lu Mai, secretary general of the China Development Research Foundation, says China has reached a point where it has to make a big decision, does it spend more on security and the police or on social benefits. He put out a report last week which estimates the government needs to spend 2.6 trillion yuan or 380 billion dollars by 2012 for the first phase of a social safety net. With a further spending of $838 billion dollars by 2020 to complete the improvement of health care, education, pensions for the elderly, low income housing, disability benefits, unemployment protections and welfare for the poorest. And these estimates may be low depending on the assumptions made, as the situation has taken a steep descent from the time these estimates were probably made. In the last few months tens of millions have been added to the jobless, and the severe drought has created a difficult situation on the farms in rural areas, even while millions of migrants return to these rural areas as businesses dependent on exports collapse in cities in coastal areas. What is the government allocation at this time? A target for health care overhaul of $124 billion was set recently. But the actual stimulus package is heavily skewed in favor of infrastructure and investment in construction. About 1% of the big stimulus package that was announced goes to health care and 7% to public housing. Says Zhuang Jian, an economist with the Asian Development Bank, this excessive investment in infrastructure, heavy industry and manufacturing will cause serious problems, if there is not strong consumption to match it. And Eswar Prasad of Cornell University, who was head of the China division at the IMF, says that an ambitious agenda is needed for higher social spending to take away the fears of average Chinese about the future. Chinese premier Wen says the government needs to do more, but the instincts of China's planners, and decades of development with built in incentives for promoting investment in construction, infrastructure and industry, have left China with huge unsustainable underinvestment in basics like education, health care and social benefits....

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Another useful piece giving insights to the way China has approached the economic development tasks and what this means for the future. China's development is very capital intensive because the cost of capital is really low. Inputs like land and energy costs are also kept low by the government. Cost of labor is low and this has resulted in the share of wages as a percentage of GDP to drop from 53% in 1998 to 41% in 2005 and it is dropping further. In America wages to GDP is 56% and includes investment income which in China is lessthan 2% but much larger in the USA. The pool of surplus labor in China does work to depress wages. The percentage of consumption to GDP in China has fallen from 47% in early 1990's to 36% in 2006, the lowest of the large economies. But this does not reflect a higher savings rate. In fact the household savings rate also has fallen as a percentage of GDP. According to World Bank's Beijing office this has fallen from 21% in mid 1990's to 15% in 2006, relative to personal disposable income it has fallen from 30% to 25%. This is lower than India's household savings rate. So what is going on. The Economist points to the lower share of wages as a percentage of GDP because the large pool of surplus labor has depressed wages from where they might otherwise be so that consumption is not where it could or should be for China to move away from manufacturing led export driven economy to one that depends on the domestic market for growth. Higher consumption and a bigger domestic market would make it easier to sustain strengthening of its currency, a key demand of western countries. This would also provide a fair deal to millions of migrant workers and reduce labor unrest. It would also reduce pollution as the economy would not be focussed on production at all costs. It appears that the existing model has worked well for China in bringing millions of people from the villages into cities and growing manufacturing industries, and in urbanizing China. But China is so large that there are millions another 200 million who would migrate from villages and rural areas into cities as migrant labor to 2020 according to what the Government envisions ( see article in this issue of the Economist "Barefoot Doctors"). But this model needs fixing or changing as the pollution costs are already severe and can prove catastrophic if continued, and the western countries are demanding strengthening of the yuan to correct imbalances in the trade deficits as a result of this model of development focussed on manufacturing and export industries and short on consumption in the domestic market enough to drive the economy. ...

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Major decline in oil prices in Oct. 2014 as prices drop to $81 per barrel and are forecast to reach $70. U.S. oil production increased by about 56% or 3.1 million barrels a day since 2004. U.S. demand for gas and fuel declined 8% compared to 2004. Initially instability and wars in the Middle East sustained high oil prices in 2012-2013. Yet with growing output from shale and other sources in N. America and slowing economies of Europe and China, the situation reached a point in 2014 where supply exceeds demand. This shift more than offsets any instability in trouble spots. The situation affects the U.S. consumer favorably with an estimate of $1 billion in savings for American consumers with every one cent drop in price at the gas pump, by one estimate from Deutsche Bank analysts. Typical American families gained an extra $50 a month from the decline June to October 2014, according to analysts at Gasbuddy.com. The declines are a boost for the slowing economies of Europe, Japan, China, S, Korea and India. China's imports for 2015 are estimated at 61% of oil consumption, using official estimates. In the current slowdown the lower prices offer relief. India which imports 75% of its energy benefits signficantly, as this helps lower inflation and reduces cost of fuel subsidies for state run companies. Russia is adversely affected by the declines as it depends on oil and gas exports for 50% of the nation's budget. Estimates by AFK Sistema economists show the Russian economy contracting in 2015 with oil at near $90 per barrel (Brent crude is at about $85, and WTI at $81 in early Oct. 2014). Russia's former Finance Minister Alexei Kudrin reflects opinion among Russian executives and politicians, when he told state television that Saudi Arabia may be pushing prices lower to target Russia's oil resource based economy and Mr. Putin, in an effort to broaden the effect of sanctions. (The Saudis have strongly protested the Putin intervention in Syria.) Venezuela has used $120 per barrel and Angola $98 for its budget, leading to a strong hit for the economy. ...

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It took 75 years for a British prime minister to visit Gandhi Ashram on the banks of the Sabarmati river in Ahmedabad. George Bernard Shaw, the English writer, in a handwritten note at the Nehru museum in Allahabad after meeting Gandhi says "ask somebody 100 years hence" about Gandhi's contribution to the world. Today it is more clearer than ever. Mohandas Gandhi wrote Hind Swaraj on a ship from South Africa to London in 1910 after negotiating with the British government on behalf of Indians in South Africa. In 1915 Gandhi returned to India and used his savings to buy 110 acres of land for the ashram on the banks of the river Sabarmati in Ahmedabad. By 1923 Gandhi was questioning the expenditures of the British government that did little for the development of the country and a budget that was focused on military expenditures, in his magazine Young India, with nothing for developing the country except for railways and transport. Gandhi launched his non cooperation movement for self-rule or Swaraj from the Ashram. By 1937 elections were held and the first provincial assemblies were set up in an experiment for self-rule. In 1930 the Salt March for noncooperation in the British salt monopoly, salt seen as the common man's right, was launched from the Ashram. In 1942 the Quit India movement was launched in the middle of World War II. In 1945 after Labour party's Clement Atlee won the election in a landslide against Winston Churchill the path opened for Britain to start negotiations with Gandhi for independence. In 1947 India was free. Why 75 years for a British prime minister? Much of the period after 1950's was lost in the recovery from partition, wars on Kashmir, China's entry into Tibet and the invasion of India. The non aligned movement under Nehru and Indira Gandhi and successor governments to 2000 appearing more as voicing a grievance for being left out led to an ambivalence of the US and UK towards India, and reflected a period when India was small in economic terms and lacked the opportunity to find its place in the world as a country with the largest population in the world. Which today with with Bangladesh and Indonesia sharing a common history of Hinduism and Buddhism represents 1.6 billion people. In the Nehru home museum in Allahabad there is a hand written note by British writer George Bernard Shaw who visited India and the Nehru home. It says it would take maybe 100 years before the world realized the significance of what Gandhi had done and only at that time would the world truly understand Mr. Gandhi. Mr. Boris Johnson's effort to make up for 75 years that went by without UK prime minister's visit to Gandhi Ashram in Ahmedabad is one such moment that George Bernard Shaw had seen coming.  George Bernard Shaw's handwritten not at the Nehru Museum in Allahabad says- "What is the place of Mahatma Gandhi in political philosophy? I do not know. Ask somebody a century hence. I recollect Gandhi as only a very likeable fellow- Mahatma from India. We did not talk Mahatma shop."       G. Bernard Shaw            28/6/1947     ...

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Delta Airlines has one of the oldest fleet of planes in the U.S. Delta is turning this into a strategic move by having to invest less in new planes and with the ability to get good flight performance from older planes with proper maintenance. Delta says it is saving about $1 billion by acquiring 49 MD-90 planes with age of about 13 years from China Southern and other global airlines, compared to the cost of buying new planes. The estimate is that it is about 10% cheaper per seat to run these planes than new 737's, when the cost of buying planes is figured in. It also took over the leases for 88 Boeing 717's with average age of 11 years from Southwest. The focus at Delta is on profitability and debt reduction by selecting routes carefully, avoiding unprofitable ones, using tight cost management. Delta is on its third year of making profits and is on plan for reducing its debt from $17 billion in 2009 to $10 billion by 2013. The older Delta fleet is also the most punctual of the large airlines in the U.S., with 86.3% of flights on time in the Jan-Sept. 2012 period. Fitch Ratings raised Delta's credit ratings to B-plus and says Delta is "the strongest player in the much improved airline industry in the U.S."...

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This mortgage crisis could last a long time. House prices now down 10% could fall 30%. Losses on these mortgages could total $400 billion or 3% of total economic output. Similar to the losses in the savings and loan crisis of the eighties. The complexity of the crisis cuts two ways in one respect it prolongs the crisis because it makes it very hard to figure out what is inside which kind of package of securtieis and who holds them. Mortgages are dispersed among banks and 11,000 investment pools each with hundreds or thousands of investors. And many of these pools have been further repackaged into specialized funds known as structured investment vehicles and collaterized debt obligations that were created for these mortgages. It requires huge computing power and lots of people to figure out what is inside each package of securties. And the other effect is that because of this opaqueness or lack of transparency no one in the banking system knows who has large exposure and may run into difficulties like a Northern Rock bank in Britain or a Citigroup or UBS so that banks are not keen on lending to each other and raises the bank lending rate to each other. Banks also want to increase their reserve as a cushion against hidden losses and so are afraid to lend and lend at higher rates and after asking for stringent terms from lenders. This will create a prolonged period of credit tightnesss which would affect business expansion in a serious way. On the other hand as said earlier it cuts 2 ways and the positive side to this is that the losses tend to be overestimated in a crisis with lack of transparency or high degree of opaquenesss as Seidman who was a key person in settling the Savings and Loan Crisis told the National Press Club this month. Another negative efect in terms of credit availability for business is that there is less demand for securities in this kind of environment and business cannot get that much money from the capital markets. Cerberus found this out quickly when it found few buyers for the securities it hoped to sell to fund a portion of its buyout of Chrysler. One thing that will help the US as this crisis plays out is the better picture for exports with a falling dollar.The larger companies with international operations will have more business overseas and will export more to other countries especially to the high growth countries like China, India, Russia and Brazil as well as other countries in South America, Asia and Europe. Infrastructure spending will be huge in these countries and companies like General Electric, Caterpillar and others will benefit and companies like GM will expand more overseas. This should help the dollar and the current account deficit in a few years. It would also cushion the blow from this crisis. Overall this crisis could play out for longer than 3 years if consumer spending deteriorates significantly in 2008-2009. ...

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Tata has a couple of things going for it to make a car at a price under $2500- a different vision behind it and a longer term idea of the market and its opportunities for Tata Motors. This is a personal vision of Ratan Tata, the last in the series of Tata family members who have run a company that was at the leading edge of industrialization in India since British times in the closing years of the 19th century. He sees this as a way to bring a car that is affordable to millions of Indians, the average Indian, just as his father and great grand father were pioneers in India's early steps towards industrialization. This also will serve another purpose. It will provide momentum to India's manufacturing base by putting India's auto industry on its way to sell cars by the millions in the next ten years. The cost was a challenge to Indian engineers ingenuity. It would help them develop something from scratch from a clean slate, and as he hoped reinvent the car if possible. The cost also was doable in India because of the wages paid to Indian engineers and workers are different. The entire cost structure with suppliers like Bosch providing the engine also and internet purchases of parts coming under a completely different way of doing business, again a reinvent of things. And the skimping on a lot of basics like a radio is possible in the Indian context where the inital target market is the scooter family of which in India there are millions. People who would simply be waiting for such a bare bones car, not see it as such because it is a great advance over a scooter even in terms of safety. What most people who have never been to India would not be able to grasp is that a whole family of four can be seen riding on a scooter or motorbike in India on weekends in Indian urban areas. Tata's idea of the market potential is the way it can ride the next stages of increasing incomes in India. Once it has come up with this car it can come up with enhanced versions with an airconditioning and radio and so on, and still price it way below competitors with Tata's quality and brand name and innovative design. As long as Tata can sell all the cars it makes it can expand production rapidly. Tata's costs for engineering a top selling model may be only 20% of the $350 million it costs western companies, according to Alix Partners, with savings of $300 to $1000 per car right there. Labor costs are about $1.20 per hour in India, less than what auto workers make in China, this provides more cost savings. Tata plans to supply kits to dealers who will do the final assembly in small workshops. This distribution strategy will save Tata another chunk of costs, as about 20% of the car's cost is in distribution in the USA. ...

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Oil supplies are not expected to go up with Mexicio and Russia's aging fields crimping production, non opec production barely budging with 1% increase this year according to IEA. Indonesia production down by half from its peak. Countries in the middle east like Iran are consuming more and have less available for export. And the Saudis plan to build huge chemical aluminium and other plants as well as cities in the desert, and increase electricity production. This will take up some of the oil production and make less available for export. Militant strikes have shut down over 25% of production of Nigeria's 2.5 million barrels a day of production repeatedly in the last few years. And Saudi Arabia has according to CERA only 2 million barrels a day of spare capacity or 2.3% that it can add, all of the safety cushion in one country according to Daniel Yergin. Yergin sees prices up to $150 barrel based on the supply constraints. The demand side is showing declining consumption in the USA but not by enough to compensate for growing consumption in China by 5% this year, and the increase in consumption in India, Russia, Brazil and other developing countries including Middle East. The reason for continuing consumption increases in the rest of the world is that price impact has been less severe in Europe because of the strong euro and oil priced in US dollars, and in China because Petrochina is required to put price caps so gasoline price increases are not that harsh. And India also cushions the price impact to some extent to protect consumers. And autos are just taking off in large numbers in China, Russia, India, Brazil and other countries. The drop in consumption in the USA has to be large enough to have an impact. And the shift to fuel efficient targets in the new fuel efficiency regulations in the USA are too modest and over a number of years to have any impact in the short term or in the next 1-3 years. In February US oil demand dropped to 19.7 million barrels a day, down 1 million barrels a day from the US average for 2007, but this insufficient conservation to impact price. Even though new cars are shifting to higher fuel efficient small cars the impact on the total fleet is gradual as cars on the road purchased in the last 5-10 years are still on the road. Even as the consumption falls in the US the offset is occurring in the other countries like China, Russia and India. Some of this is due to the euro and some to speculation but the supply constraints are real and demand momentum is still there in China, Middle east, Russia and India to keep offsetting savings elsewhere and keeping supplies tight. The euro increased in value by 2% while oil prices increased by 10% since the 1st week of April so there is more than the weakening dollar and some speculation to this surge, which may be why the normally cautious Yergin says the price rise to $150 is realistic and says, its not just that the genie is out of the bottle, a hundred genies are out of the bottle. That is to say for the immediate future of demand momentum and supply sluggishness which could run 6-24 months, to the Olympics and maybe a year or so from then. This ties in with the thinking behind the Goldman's estimate and CERA's estimate. ...

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Country Garden is turning into a worse problem than Evergrande. Both housing developer companies are in serious financial problems in China affecting the larger economy. Consider that Country Garden has $286 billion in liabilities and $7 billion in first half losses for 2023. Two years earlier Evergrande went into insolvency over extravagant projects and spending. Country Garden's problems come from a shift away from housing in the country a retreat by investors and buyers. Yet 25% of the economy and the savings of ordinary Chinese are tied up in housing. Local government finances are also strained adding to the debt burden. In the boom years housing created hyper growth, now it is in reverse acting as a drag on the economy.

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The consumer price index in China was 4.9% year to year in January 2011. The one year deposit rate was 3%. This means a negative interest rate of 1.9%. The real interest rate for China was an average of negative 1.1% in 2010.

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China's shadow banking system of trust companies and insurance companies with trust company units and other informal lenders are the fastest growing part of its banking system. Between 2010 and 2012 trust companies and other shadow banks doubled outstanding loans to 36 trillon yuan ($5.8 trillion) or about 69% of China's GDP, according to J.P. Morgan Chase & Co. Hidden debt that is likely to default in this poorly regulated sector is seen as a large risk in the banking system by the central bank and China's government planners. Tightening of credit by the central bank, the People's Bank of China, sent interbank lending rates from 3% to as high as 25% in late June 2013, finally settling on June 24 at 6.64%. China's state owned banks lend to trust companies in this market. Trust companies get additional financing by selling wealth management products promising investors returns of 8-10%. Even with China's high savings rate and large government reserves, the hidden debt and large unknowns about the loans in default, are seen by the central bank as posing risks to the target rate of economic growth of 7.5% if the government has to bailout a significant number of troubled banks. Much of the money funnelled through the trust companies since 2008 has been poorly invested. The trust companies such as Citic and Ping An Trust channel lending to borrowers for projects ranging from steel mills to infrastructure projects, such as highways and property developments that cannot obtain the financing through the large state owned banks. Fitch Ratings estimate is that since the financial crisis of 2009 these loans generated only one third of the economic growth per yuan as they did before 2009. ...

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Some economists expect growth in China's GDP to slow down to 5.8% for the 4th quarter. China's export driven growth model based on factories with plentiful hardworking young labor including young women, and plentiful foreign investment, Chinese investment from HongKong and Taiwan, and plentiful capital generated from China's high savings rate, and supply of land from local government officials eager to participate in the boom, is finally slowing down, after 3 decades since Deng launched China on this path. However this slowdown is happening drastically, and the whole model is coming apart. The first signs came earlier this year as the government initated a shift in policies after seeing the costs of runaway growth on the environment and in pollution of air and water, and in the wages of labor. Laws protecting labor rights and wages, and stricter pollution laws and enforcement for the first time in years that suggested the government was serious, pulled the bottom off of marginal export industries and companies. Only the larger better run companies were able to operate in this environment. About 67,000 factories closed in coastal regions in the first half of this year. See the link to this. Now that process is hit by the global credit crisis and the demand decline in 2008, and possible demand collapse in 2009 in US export markets if some things like the auto industry take a bad turn and unemployment jumps, all are hitting hard at China's export sector. This is in turn hitting investment as in Germany as companies pull back, and nervous consumers with losses in the stock market and seeing a decline in housing prices pull back on purchases resulting in inventories building up for different industries including the important auto industry. ...

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The government controlled Securities Association of China says a fund of 120 billion renminbi ($19.4) billion is set up July 3, 2015 to buy shares in the larger more stable companies and reduce selling of shares from brokerage firms portfolios. This is not likely to have much impact because of its small size, and because the volatility is concentrated in small and medium size firms stocks which had doubled since June 2014, and were hit by the sharp decline in June 2015. The stock exchanges in Shanghai and Shenzen also suspended initial public offerings. Share prices have dropped by about 30% since June 12 on the Shanghai and Shenzen stock exchages. With the surge in the Chinese stock market prices till June 12, 2015, share prices of many small and medium sized companies doubled or even quadrupled in value. The overall index on the 2 exchanges doubled because as the smaller stocks quadrupled the large blue chips went up by about a fourth in value. The overall Shanghai market went up 149% to June 12, 2015, over the prior year. It is down 28.6% as of July 5, 2015 since June 12, 2015. A stock index of 100 large mainland Chinese companies traded both in Shanghai and Hong Kong were up about 24% by contrast. A major problem is the margin trading with loans to investors from stock purchases up nine times in 2 years and informal financial companies charging annual interest rates of over 20%. Small investors focussed on small and medium sized firms because they were going up the fastest, and many risked their life savings. Younger workers were also part of the group caught up in the frenzy of stock buying. Shares in the larger companies are only about 30% of the overall value of companies on the Shanghai Stock Exchange....

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A couple of things can be noted about the burgeoning Chinese market for cars. Most car buyers are first time buyers. But that is to be expected as China started with a small bases of cars to begin with. What is interesting about these first time car buyers is that they ask a lot of questions do their research and are looking for the best car for the money in terms of features, safety, reliability. So its also a sophisticated first time buyer that carmakers are dealing with. This car buyer is also looking at waiting to save enough to buy a better car as far up the ladder as the car buyer can go in terms of features and value in safety, reliability, design, even if this means waiting longer and saving for longer periods.In this sense the Asian car buyer may be different and less bent on instant gratification to get into a 4 wheeled vehicle. What this is doing is putting the domestic manufacturers under a lot of pressure to match the overseas manufacturers. Geely and Cherry the larger domestic makers have to come up with just as good or better a product to get new customers. At this time the overseas makers of cars like the Buick Excelle, the Toyota Camry and the Volkswagen Jetta have the advantage as they are established brnads. Its interesting to compare this with the experience of japan the other large Asian carmarket. In Japan Toyota, Nissan and Honda were the only carmakes available because of trade barriers in the Japanese market in postwar Japan. China is a relatively open market and China's approach seems to be to get the Chinese carmakers to do better in an intensely competitive market as opposed to giving them favorable treatment. Another aspect of this first time car buying in a country where car sales have increased eight fold since 2000 and now exceed sales in the Japanese market, is that this market is abit precarious as the example of the Li family shows. Li Rifu purchased a Geely for $9000 but later after he contracted cancer and had $40,000 in medical bills had to sell the car. China has no social safety net so that if there is a medical or other emergency or crisis in the family there is nothing to fall back on and the family ends up selling the car to pay for expenses....

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Even if a automobile part for assembly is manufactured in the U.S., the subparts may be sourced overseas. This makes it extremely difficult to pinpoint the country of manufacture. Toyota Siena is 90% sourced with US and Canadian parts according to the U.S. National Highway and Traffic Safety Administration. The Ford Mustang 2005 by contrast uses 65 %US and Canadian parts according to NHTSA. There is a publicity war between the US makers and the Japanese with commercials arguing about who is more American. According to the Japanese Automobile Manufacturers Association $28 billion is the amount of cumulative investment in N. America and $45 billion is the amount of annual purchases of parts, so that 67% of the Japanese brand cars sold in N. America are made there. A graph from National HighwayTraffic Safety Association shows the Average percentage of auto parts made in the US and Canada for cars sold in N. America. It shows 2 interesting things. 1. That the US makers GM and Ford are closer to 80% and the Japanese makers Toyota and Honda are about 70%. So American makers still have more American content. Note though that Nissan is only around 54 % domestic content, significantly lower. Its always been a much weaker competitor than Toyota, and its sales recently have been sluggish in the US. The Koreans are not shown here but its quite possible that their content is closer to Nissans than to Toyota or lower than Nissans. So all foreign plants may not be the same. Notice the change in Toyota from 52% domestic content to 70% domestic content, from 2000 to 2005,an 18% jump which could only result from a deliberate strategy anticipating the controversy of who is truly American and who isn't. 2. In contrast GM has definitely shifted from 92% to 80% and rapidly moving in the opposite direction than Toyota. The sea change currently underway in the American auto parts industry is in the background, with Delphi looking to increasing manufacture and sourcing overseas particularly Asia (China, India etc), to bring down costs and be competitive in a globalizing auto parts industry. In the future as Delphi shifts overseas and GM procures from China and India one could see a continuing rapid shift to higher overseas content to add the cost savings directly to GM and Ford's bottom line. ...

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Research firm Dragonomics says real estate prices fell 4.9% in April from the prior year for nine cities in China. In 2010 prices in these nine cities went up by 21.5%, the increase in 2009 was 10%. Standard Chartered estimates China's second tier cities, such as Dalian and Tianjin, could have 20 months of housing inventory by the end of 2011. Standard Chartered says price declines of 10-20% can be expected. Government data understates the extent of the bubble and the drop in prices say analysts. Beijing real estate consultant, Soufun, confirms the slowdown in price increases, saying its data show average property prices went up by 5.1% in May over the prior year, compared to the jump in prices in 2009 and 2010. Prices of copper and steel are coming down after rapid increases. The price increases in the Chinese real estate market have put housing out of the reach of ordinary couples. In 2006 an average price of a new apartment in Beijing cost $100,000, by 2011 this had gone up to $250,000. It woud take 57 years of saving for an average person to buy the apartment at todays cost. The government's response has been to boost down payments on mortgages for second homes to 60% from 40%, prohibiting state owned enterprises outside the real estate sector from investing in real estate, and raising the reserve requirements of banks....