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Volume I, Episode 20
June 15, 2007
Fundamental Misalignment: US-China currency war - stock markets up & IPOs

June 7, 2007

China Stock Pop - Hot News items - climate change, tainted food...

May 31, 2007

Chinese stock markets hiccup - IPOs - USA-China Trade Gap

May 25, 2007

Report on the 2nd USA/China Strategic Economic Dialogue: Win-Win or When-When? - Market numbers - New IPOs

May 18, 2007

New life for Hong Kong? IPO Update - USA/China summit

May 11, 2007

Will Shanghai end up like NASDAQ or Nikkei? - IPOs

April 30, 2007

Tulips to Dotcom - is Sino Mania the next big bubble?

April 20, 2007

The Heat is on! - IPO Report - Air Pollution in China

April 15, 2007

China markets, IPO update, Beijing Ready for Olympics?

March 30, 2007

China markets up, up, up! Sinomania! goes to China

March 23, 2007

Focus on National People's Congress... Hi-Tech, IPOs

March 17, 2007

China's new investment strategy, IPOs, the Wrap...

March 7, 2007

China syndrome or hong bao bounce? New IPOs... more!

February 27, 2007

China Stock Market Yo-Yo, new IPO issues, the wrap

February 17, 2007

Chinese Year edition! Will China buy Chrysler & more!

February 9, 2007

The USA-China WTO trade dispute and New IPOs

February 1, 2007

IPOs: New Red Chip — Bubble Burst? — USA-China

January 26, 2007

BUBBLE TROUBLE? — IPOs on NASDAQ — Renminbi Yuan

January 20, 2007

IPOs in 3 hot sectors — BAOSteel — Macro Report

HKEX Hang Seng Shanghai
SSE Shanghai Hong Kong
SZEX Shenzhen Beijing
MUSIC in China: Listen!

TRANSCRIPT: Fundamental Misalignment: Sinomania! Volume I Episode 20, June 15, 2007

Fundamental Misalignment: The US Congress declares currency war on China;
Chinese markets rebound;
And for you fearless daredevils – more Chinese IPOs!


A major volley in the China blame game was lobbed this week in the U.S. Senate with the introduction of the so-called “Fair Currency Act of 2007.”

The legislation is a bipartisan effort of Senators ranging from Max Baucus of Montana to Lindsey Graham of South Carolina and is the latest attempt to legislate an appreciation of China’s currency, now desired at 40%.

The bill is cleverly crafted to disguise trade protectionism as exchange rate impact on select American imports by determining whether China’s currency is in “fundamental misalignment.” Such a determination would then lead to a WTO decision on slapping import tariffs on the Chinese goods in question.

On the surface this process is anti-free trade and in its definition fantastically subjective. For example, fundamental misalignment is described as -- and I quote -- “a material sustained disparity between the observed levels of an effective exchange rate for a currency and the corresponding levels of an effective exchange rate for that currency that would be consistent with fundamental macroeconomic conditions based on a generally accepted economic rationale.”

This implies that Congress will be well versed in the fundamental macroeconomic conditions of a country that most of its members still refer to as “communist.” Further, who or more likely what pressure groups will determine the “generally accepted economic rationale” used as justification?

Under the so-called Bretton Woods II system that ensures global financial stability today, whatever money the USA pays for Chinese imports is given back the same day as a loan. China is one of the chief financers of America’s trade and government deficits. That means China has a financial claim on the USA. Already the Chinese are accumulating fewer dollars in foreign exchange reserve as a result of removing – under heavy political pressure – the renminbi’s fixed peg to the dollar.

What if China significantly reduced its dollar assets in retaliation to subjective tariffs on its exports? The result is the end game scenario long warned of by many central banks and policy wonks. Many analysts believe that if east Asian central banks stop financing the USA, there will be a sharp drop in the US dollar and bond markets, an increase in interest rates to 1970s levels or higher, and a fall in the prices of risky assets, particularly equities. So a very serious risk factor to take into consideration.

Call it Bretton Woods II or whatever you like, the current arrangement is carefully managed by American, European, and Asian central banks and global investors to direct shifts of capital across the globe. These shifts typically last for at least a generation as one set of nation states replaces another. In modern times, for example, we saw the USA replace the British Empire just as the dollar replaced the pound sterling as the world’s reserve currency.

America is intimately connected to this process because as the most open economy in the world and it has been willing – so far – to restructure its labor market. Speaking plainly, the USA has been willing to lose factory jobs to China as it did to Japan previously because – so the theory goes – the American economy is replacing manufacturing with high-end services.

The Chinese continue to finance the United States even though they may ultimately lose money in a currency appreciation because it is in China’s long-term interest to promote an export economy that slowly but steadily absorbs its massive unemployed rural population and creates an urbanized and industrialized society.

In my view, Congress’s move signals abandonment by America of its willingness to accommodate the rise of China as it accommodated the rise of Europe and Japan before it.

Seen in this light, what Congress calls a fundamental misalignment is actually America’s growing integration with China.


Chinese markets rebounded this week with the Shanghai Composite index passing the 4,000 mark on June 12 and nearly all indicators are getting close to their end May peaks.

Rumours are circulating that the China Securities Regulatory Commission will suspend approvals for overseas listings. I have obtained no confirmation. Word is that IPOs valued at over 1 billion US dollars would go through but reports say only on the Hong Kong exchange or the US and Singapore.

Meanwhile the New York Stock Exchange, the London Stock Exchange, and NASDAQ all report record numbers of Chinese firms listing. London anticipates 100 Chinese companies may list by the end of the year. And so far this year Tokyo, Korea, and Germany have each had a Chinese IPO.

In a related move Hong Kong red chips – the big mainland controlled H share firms – will be allowed to list on domestic markets. Lining up for possible issues are China Mobile, Lenovo, and CNOOC.

Chongqing Lifan Holdings – a major motorcycle exporter – will bypass Hong Kong for a Shanghai IPO to sell 25% to expand its auto production. Lifan began making the 520, a compact hatchback, only a year ago and has already sold 50,000.

Setting the stage for future consolidation in the auto sector, First Automobile Works, is still waiting for approval of its domestic IPO and Guangzhou Auto Industry Group which I reported on earlier is also hoping to list.

A new one in the hot semiconductor industry – Spreadtrum Communications Inc a maker of wireless chipsets out of Shanghai will list on NASDAQ under symbol SPRD to sell American Depository Shares valued between $11 and $13 US dollars per share.

And as I reported previously, China Construction Bank is moving forward with its plan to list on the Shanghai exchange. The bank is listed as a H share on Hong Kong and the Shanghai sale must be approved by shareholders this summer and approved by Chinese regulators. The sale could raise over $5 billion US dollars.

I’ll see you next time!

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