Thursday's Top 10 with NZ Mint: China's asset buying strategy revealed; Why the world needs a new Plaza accord; How QE II won't work; Dilbert

Here are my Top 10 links from around the Internet at 10 to 9pm, brought to you in association with New Zealand Mint for your reading pleasure.

I welcome your additions and comments below, or please send suggestions for Friday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream.

1. China's real motivations - This piece from Stephen Goldsmith and Daniel Wagner at HuffPo about China's motivations when buying assets in other countries is fascinating and relevant when thinking about New Zealand.

The Haier deal to buy into Fisher and Paykel Appliances, the Agria deal to buy into PGG Wrightson, the UBNZ bid for Crafar  and the recent arrival in New Zealand of Sinopec, Huawei, Geely and Great Wall are all signs of China's expanding appetite for New Zealand assets, along with those of food producing and high tech assets internationally.

This is today's Must Read.

Chinese (outward foreign direct investment) OFDI is largely politically driven, aimed at achieving specific nationalistic objectives, such as securing natural resources, acquiring strategic assets in key technologies and service industries, and creating national champion companies. China's approach to OFDI -- which is often aggressive and brusque in nature -- is increasingly coloring its relationship with recipient nations at all levels of development and income. China has tailored its approach to OFDI based on the relative economic and political strength of the recipient country in exchange for specific benefits.The acquisition of strategic natural resources through investment in the primary sector abroad is at the top of the government's agenda.

Such investment is designed to provide supply and price security for China's manufacturing-based economy, whose ravenous appetite for oil, metals, construction materials, and other key commodities makes their supply a national security imperative for the government. Not surprisingly, SOEs conduct OFDI in the primary sector, where investments are dominated by a few giant firms such as Baosteel, the China National Offshore Oil Corporation (CNOOC), the China National Petroleum Corporation, Sinochem, and Sinopec.

A second strategic objective is to spur investment that acquires sophisticated, proprietary technology, technical skills, industry best practices, and established brand names and distribution networks. The government hopes strategic asset acquisition can propel its chosen SOEs into industries at the top of the global value added chain, while obtaining the latest technology potentially for government use. Such investment often takes the form of M&A activity. Lenovo's purchase of IBM's computer unit and Huaneng Group's acquisition of InterGen are representative examples.  

2. 'A new Plaza accord' - Niall Ferguson has called for a new Plaza accord which allows America's currency to fall against the Chinese currency.

“The real currency war is actually between Chimerica -- China plus America -- and the rest of the world,” Ferguson said in an interview at the World Knowledge Forum in Seoul. “It would be much better to have some kind of Plaza-like international agreement and I very much hope that at the G-20 summit in Seoul next month this will be No.1 on the agenda.”

The Plaza Agreement reached in 1985 prompted a decline in the U.S. dollar against its Japanese and German counterparts. Brazilian Finance Minister Guido Mantega said last month that a “currency war” was under way, in which economies are weakening currencies to support exports.

“Currency appreciation is necessary,” Ferguson said in the interview late yesterday. “If you insist on building up a vast horde or dollar-denominated reserves you will create distortions in the world economy that will ultimately come back and bite you.” China doesn’t need a dollar peg, because its workers are making enormous gains in productivity, he said.

Because developed economies have already used “massive” deficit spending and monetary easing to overcome the economic slump, “the idea that there is some additional ammunition in the locker to be fired again is completely misconceived,” he said. The U.S. needs to come up with a plan to deal with its growing debt, Ferguson said.

“The United States is in a fiscal hole of monumental proportions and we have to get real about this,” he said. “At some point the Greek tragedy will happen to the United States if it carries on in this vein.”  

3. British house prices slumping - Britain is now on the second leg of its slump in house prices, the Daily Mail reports.

UK house prices continued their fall in September, new figures by the Royal Institution of Chartered Surveyors (RICS) have shown. The group said that 36 per cent more surveyors reported a decline than those who saw an increase, up from 32 per cent in August, as the market experienced an influx of properties nationally and especially in London.

The balance of surveyors reporting an increase in new instructions almost doubled in the period to 22 per cent, with RICS attributing the increase to homeowners testing the water ahead of the government's spending cut announcement or trying to offload their property before the economy falters even more.

4.Why QE II won't work - Karen Maley at BusinessSpectator cites research from Hoisington Investment Management that US Federal Reserve's imminent new sweaty wodge of freshly minted cash is unlikely to fix the US economy. It may even make it worse. Here's the logic.

As a result of QE1, banks hold close to $1 trillion in reserves. But the banks don’t want to lend these reserves either because they don’t want to put additional capital at risk because their balance sheets are already too shaky, or because they face large write-offs on problem loans, particularly in commercial and residential property.

Another reason may be that the banks don't believe their customers have the capacity to take on additional debt. Similarly, non-bank corporations are sitting on massive cash reserves. For the past six months, liquid assets have accounted for 7 per cent of total assets, the highest level since 1963. But, the authors note, companies have clearly decided there aren’t too many compelling uses for these funds, and they may also be using the case to hedge against risks.

“The fact that substantial bank and corporate funds remain idle is a strong signal that US economic problems exist outside the monetary sphere.” So what will be the impact of QE2?

The authors point out that the most likely outcome is that it fails to boost economic activity: “It should be clear that QE2 and the purchases of additional assets by the Fed will, like previous purchases in QE1, serve only to bloat excess reserves without advancing income, spending, or jobs.”

They argue that the only way that QE2 will work is if succeeds in triggering a new cycle of borrowing and lending, which would result in even more Ponzi-style debt being piled onto an already overleveraged economy. A further increase in debt levels will ultimately lead to economic deterioration, an increase in systemic risk, as well as possible deflation. “Therefore, at best QE2 can be nothing more than a short-term panacea, exacerbating the serious structural problems facing the United States.”  

5. How countries circle their wagons in a world of currency wars - Frank Aquila argues at Bloomberg that America should offer a tax holiday for US companies with money stashed overseas.

He reckons this would unleash a rush of cash into the US economy, boosting growth and jobs. Countries are now looking at how to preserve and corral their own cash behind their own borders.

A tax holiday on returning overseas cash isn’t without precedent. In 2004, the Homeland Investment Act reduced the tax rate on these profits to 5.25 percent from 35 percent. Granted a lower tax rate, U.S. corporations responded by shipping back an estimated $315 billion in 2004.

Critics of any reduction in taxes on repatriated overseas profits, even a temporary one, argue that to do so would be rewarding companies for outsourcing U.S. jobs. Not surprisingly, labor unions and their allies are the leading opponents of a tax holiday. In their view, overseas profits should be subject to U.S. tax even if those profits are never repatriated.

6. This could get ugly - First we had Bretton Woods, the 1944 agreement that made the US dollar the world's reserve currency. Then we had Bretton Woods 2, the informal deal where China and oil producing nations produced export surpluses and lent the resulting capital reserves back to America, who then used the money to buy the oil and Chinese-made stuff.

That was all fine until the Americans had built up such a debt that they couldn't service it any more.

So what happens now? What will replace Bretton Woods 2 when it collapses?

Here's Tim Duy, a renowned Fed Watcher.

The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly.

If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly.

7. And then what? - David Llewellyn-Smith writes about what the end of Bretton Woods 2 might mean for this part of the world and the Australian banks in particular.

1. Gold is going to the moon. Perhaps far more quickly than even this blogger imagined. Even if the Fed is, in effect, going to break all currency pegs to the dollar, all of those surpluses aren't going to disappear overnight. The reserves are going to have to go somewhere. And gold looks the likely winner.

2. There is a danger for developed markets outside of the US that the great global rebalancing will begin to raise interest rates. If emerging markets are forced to rebalance then in time ipso facto there will be less capital to export. This could prove a major danger to the Australian banks and, if they don't handle it well, the housing market.

3. That may be offset to a degree by the Michael Pettis scenario outlined in Unpleasant Scenarios a few days ago, which is looking increasingly likely. That is, if the Fed is going to break the currency pegs and destabilise emerging markets export-driven growth, they will face a choice: Growing job losses, or stimulate by easing monetary policy. The latter looks far more likely so we're going to have a world awash with fiat money. Inflation and asset bubbles look a good bet for emerging markets with commodities the likely winner.

8. Rent is v.cheap in Dubai - What happens after a bubble? Rents fall. Here's Bloomberg on what's happening in Dubai, where office property vacancy rates are around 40%.

Some Dubai office buildings are so ill-conceived and poorly located that they will never be occupied, while others may command no more than the cost of maintenance, according to CB Richard Ellis Group Inc. “Some buildings will be permanently vacant and will never be let because they are wrongly located, they are of poor quality or have the wrong legal structure in place,” Nicholas Maclean, Middle East managing director for the U.S. property broker said in an interview.  

9. Totally relevant video - The boys at South Park look at the problems with banking in the United States. Now you see it. Now you don't.

10. Totally relevant video - This video is slightly disturbing, moving and funny all at the same time. It's a video of a homeless man in the United States lip-synching to the song 'Under Pressure' with a couple of Kermit the Frog puppets.