Monday, August 2, 2010

Bloomberg: New "Silk Road" Built by China Connects Asia to Latin America

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Quite a comprehensive piece on Bloomberg, tying together some themes we've touched on in various stories over the years.  We tend to get caught on in the day to day micro, but it truly is amazing when you step back and think about how so much has changed in the macro in under 2 decades.

  • The high-speed rail link China Railway Construction Corp. is building in Saudi Arabia doesn’t just connect the holy cities of Mecca and Medina. It shows how Asia, the Middle East, Africa and Latin America are holding the world economy together.   Ties between emerging markets form what economists at HSBC Holdings Plc and Royal Bank of Scotland Group Plc call the “new Silk Road” -- a $2.8-trillion version of the Asian-focused network of trade routes along which commerce prospered starting in about the second century.
  • Today’s world-spanning web is insulating markets such as China from the drag of weak recoveries in the advanced world and providing global growth with a new power source. Stephen King, HSBC’s chief economist, predicts the relationships will strengthen and lists them as a reason for his forecast that emerging markets will grow about three times faster than rich nations this year and next on average.
  • The potential for inter-emerging market trade is ginormous,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, who coined the term BRIC in 2001 to describe the rising role of Brazil, Russia, India and China. “That makes it quite difficult to see how you get a sustained global recession because of what’s going on in the west.”
  • The BRIC economies hold a 13% share of world trade and have been responsible for about half of global growth since the start of the financial crisis in 2007, according to O’Neill.
  • Gene Grossman, who succeeded Federal Reserve Chairman Ben S. Bernanke as head of Princeton University’s economics department, sees a repeating pattern of what he called the “home market effect,” in which countries at similar income levels increasingly trade because their consumers have similar tastes and spending power.
  • Royal Bank of Scotland Chief China Economist Ben Simpfendorfer in Hong Kong says emerging Asian and Middle Eastern economies will account for 75% of every extra barrel of oil consumed or produced in the next decade....

A remarkable statistic; from 1/10th of global end demand to nealry a third in 2 decades:
  • ....growing trade between emerging markets helps explain why they now account for about 30% of global final consumption, about the same as the U.S. and up from 10 percent in 1990.

We've touched on this in the past in a series of posts - China has been especially aggressive in Africa, investing in securing future resources while the U.S. is busy with wars and making sure its oligarchs are taken care of.  Obviously China will have an advantage in southeast Asia but again, the growth in just 2 decades is astounding.
  • Of the foreign direct investment flowing into south, east and southeast Asia alone, China was a source of 13.3% in 2008, compared with the U.S.’s 7.9% and up from 0.4% in 1991.
  • China, the world’s fastest-growing major economy, dominates the push into fellow emerging markets, passing the U.S. as the biggest exporter to the Middle East in 2008.

Examples...
  • Elsewhere in Asia, a group led by Korea Electric Power Corp., South Korea’s largest utility, beat off competition from General Electric Co. and France’s Areva SA to win a $20 billion UAE nuclear contract.
  • The Saudi Railways Organization last month awarded a contract to China South Locomotive and Rolling Stock Corp. to supply 10 cargo locomotives.
  • The Mecca-Medina rail contract went to Beijing-based China Railway as part of a Saudi- Chinese consortium.

And Brazil is getting into the actm behind powerhouse Vale (VALE)
  • In Latin America, Brazil’s Vale SA has been on an international spending spree, helped by booming commodities demand from China and a currency that has doubled against the dollar since 2003. The company estimates that its $1.3-billion coal mine in Mozambique will have a capacity of 11 million tons per year three to four years after it enters production in the first half of 2011.
  • Vale in 2009 acquired stakes in three copper projects, in Zambia, Africa’s largest producer of the metal, and the Democratic Republic of Congo. In April this year, the company agreed to pay $2.5 billion for iron ore deposits in Guinea, including assets the country confiscated from the Rio Tinto Group.
  • In December 2009, 32 percent of the backlog of orders for (Brazil's) Embraer’s (ERJ) medium-range E-Jet airliners was from emerging markets, up from 1 percent in 2005. Over the same period the company’s backlog of orders from North America and Europe fell to 53 percent of the total, down from 91 percent.
  • We saw the same phenomenon with American and European companies 50 to 100 years ago as they went global,” said Shane Oliver, head of investment strategy at AMP Capital Investors, which manages about $95 billion in Sydney. “Emerging-market companies are now big enough and they have the choice of going to developed countries where they may be more constrained or to the emerging world where the growth potential is.”
  • Since taking office in 2003, Brazilian President Luiz Inacio Lula da Silva has visited about 68 developing nations, more than any of his predecessors.

India:
  • India said in May that it will open an economic division at its embassy in China’s capital as the two countries seek to increase bilateral trade to $60 billion this year from $43 billion last year. (these 2 countries were not exactly 'friends' in the past)
  • India’s Tata Group was the second-largest investor in sub- Saharan Africa in the six years through 2009.

Quick history lesson:
  • Royal Bank of Scotland’s Simpfendorfer, whose book “The New Silk Road: How a Rising Arab World is Turning Away from The West and Rediscovering China” was published last year, says the trade ties between China and the Middle East alone make for a modern Silk Road.
  • The original was more than 4,000 miles (10,200 kilometers) of trade routes crossing Asia and into southern Europe and north Africa. Based around China’s silk industry and once traveled by Marco Polo, the commerce it enabled also helped power the growth of civilizations from Egypt to Rome.


[Jun 10, 2010: China's Thirst of Any Commodity that Moves Leads to Thawing of Relations with Russia]
[Apr 13, 2010: China's Quest for Resources Makes Billionaires Out of Some Australians]
[Feb 16, 2010: India Worries as China Builds Ports in Southeast Asia]
[Dec 15, 2009: China's Economic Power Unsettles Neighbors]
[Nov 11, 2009: China Continues Expanding "Infrastructure for Resources" Policy with Agreement in Malaysia]
[Sep 30, 2009: China Attempting to Secure 1/6th of Nigeria's Proven Oil Reserves]
[May 13, 2009: Commodities - It's China's World: We Just Live in It]

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