The use of coal for energy will continue, but soon power plants will be completed to use LNG, liquefied natural gas. The demand for oil remains very high and the level of usage won't moderate until 2006-07. In the meantime, remember, China has not as yet filled its strategic oil reserve. Thus, over the next two years it is easy to see oil prices of $60-$80 a barrel.

This is what America is giving China in market share, technology and jobs ... import/export volume reached $1.1 trillion in 2004, double 2001's volume. It is now the third largest trading nation. China has replaced Japan and Mexico as the largest single source of US imports of consumer electronic products.

China accounted for one-third of the growth in world oil consumption and 90% of the increase in world steel demand. China now accounts for 13% of the world's GDP.

• In 2001 the Chinese bought 2.2 million cars. By 2004, it was five million. In the next 15 years they will buy 20 million autos.

Oil consumption rose by 40% to 6.5 m/b/d in 2004. US domestic demand is 20 m/b/d. US demand is rising 500,000 barrels per day, per year. China's is increasing by about 1.5 million barrels per day, per year.

Just to show you how arrogant and stupid US foreign policy is we've spent $300 billion to invade Iraq to steal their oil, have tried to overthrow the Chavez government in Venezuela and now threaten Iran. China has quietly entered into long-term contracts with many of these countries. It has invested $15 billion in foreign oil fields and expects to invest 10 times more over the next decade. Virtually all Canadian oil pipelines go south to satisfy the US Midwest. That will soon change. Chinese and Canadian companies are negotiating to build a pipeline from northern Alberta west to British Columbia.

China signed a deal with Venezuela and neighboring Colombia to construct a pipeline linking Venezuelan oil fields to ports along Colombia's Pacific Coast. This will allow China to bypass the US-dominated Panama Canal.

China recently signed a 25-year oil and gas deal with Iran. It is investigating the construction of a canal across the Isthmus of Kram, southern Thailand, which would allow it to bypass the Straights of Malacca, which is under US Navy control.

The US government Export-Import Bank has given preliminary approval to $5 billion indirect loans or loan guarantees to the China National Nuclear Corp, a Chinese agency with a history of proliferating nuclear-weapons technology to Iran and Pakistan. Why are we building and paying for nuclear technology in communist China?

Any country that pegs its currency to the US dollar has abdicated control over its financial system to the American Federal Reserve. As the FED now moves into the serious stage of its tightening cycle, that could pose a serious problem for an unbalanced Chinese economy. Due to the fact that Sir Alan Greenspan has dragged his feet in updating monetary policy, we in the US have mounting inflation, a runaway current account deficit, a real estate bubble, and a profusion of speculative carry trades in fixed income markets. We believe the FED funds' rate will move from 2.75% to 3-1/2% this year and next year move to 5-3/4%. That would put the 10-year US Treasury at 8-1/4% and the 30-year fixed mortgage at 9-1/4%. As rates move higher assets will be sold and safety and income will be pursued.

Unlike America, which is consumer driven at 71% of GDP, China's personal consumption is 42% of GDP. Chinese imports have grown from 20% of GDP in 1999 to 35% in 2004, while fixed investment share is now approaching 50%. One-third of exports go to the US. Thus, when the American consumer slows spending, Chinese exports will be affected. The currency peg constrains Chinese planners from controlling the price of credit. They can only control the quality of credit. In fact, recently, the down payment on new homes was raised from 20% to 30%. As exports fall over the next few years 10 to 15 million jobs a year could be lost. Then there is the matter of revaluation of the yuan. If that does not happen, then there will be trade sanctions. At the same time exports are slowing down rapidly, there has to be revaluation or trade barriers. As a result, China will eventually get hit with a double whammy. As that happens, the Chinese will be selling US Treasuries and agencies, which will drive US interest rates higher. China, as a result, will have a difficult time ahead. The economy will probably grow 8.8% y-o-y- in the first quarter.

THE INTERNATIONAL FORECASTER
P. O. Box 510518, Punta Gorda, FL 33951, USA
Bob Chapman international_forecaster@yahoo.com

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