GDP, Chinese buyouts, and spiking metal prices - CVRD, Vale, BHP

China and The US Systematic Spiral

With devaluing dollar and lowered interest rates - increased purchases of imported goods with US dollars (hello cheap labor costs) from China can only add to the volume of of US dollars that can potentially be unleashed onto the market - crashing the value of it.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Now would be a great time for some solid valuation of your dollars - whether it is real estate, commodities, or gold.

Base metals is starting to show up more in headlines around the world - as hungry industrial expansions from China and India devours up supply for its growing middle class.

In the booming eastern cities there is a confidence and energy in the air - thick as it is with the dust from countless building sites - that suggests plans for a further quadrupling over the next two decades are well on course.

By then - or somewhat later, depending on whose methods of measurement you trust - China will have overtaken the United States to become the world's largest economy, thus regaining a position it held for much of human history.

"Everything is possible these days," said student David Zhang, who has just returned to the mainland after a visit to Hong Kong.

"I used to want to move to the US and have a beautiful house with green grass in front of it. But now I think this kind of thing can be achieved in China, in my own culture."

To give you a sense of the growth rate of China and India, let's consider a basic economic measurement of a country. One would imagine ideally there would be a measure of all the country's productions, expenditures into its own development, physical labour output (manifested in physical goods and service hours), would be exported to the world.

Now - if a country imported goods and services into the country and didn't produce any of it by themselves - you are using your country's currency to buy from the other producing countries. Think about what we talked about a few entries back (Supply and Demand) - As supply of your currency increases in the market, it is worth less (demand drops).

Gross Domestic Product

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.

The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X-M)

US GDP was 2.0% in 2007 whereas China's GDP was 11.4%.

BEIJING, Jan. 24 (Xinhua) -- China's gross domestic product (GDP) grew 11.4 percent year-on-year to 24.6619 trillion yuan (3.43 trillion U.S. dollars) in 2007, but the risks of spiraling inflation and economic overheating were also rising.

The growth rate was 0.3 percentage points higher than the 2006 level revised at 11.1 percent, the National Bureau of Statistics (NBS) said on Thursday.

NBS head Xie Fuzhan told reporters here that 2007 was the fifth year in a row in which GDP had expanded by more than 10 percent. Analysts said the 2007 figure was also the highest of the past 13 years.

Breaking economic growth down by quarter, GDP expanded 11.1 percent in the first quarter, 11.9 percent in the second, 11.5 percent in the third and 11.2 percent in the fourth.

Xie said that the United States and China had been powerful engines for the current cycle of global growth. However, the mounting possibility of the U.S. economy moving into a recession was bound to have a negative effect on the world economy.

However, Xie was confident of China's economic prospects, saying a "steady" growth was likely this year.

Feeding off this explosive growth of 11%+ GDP in the last 2 years and 2008 looks no different, consumers are demanding more higher quality products - and factories are running out of natural resources.

A simple question is presented. You have a nation wealthy in terms of US Dollars (which is devaluing both due to higher volume, dilution, and world prominence) - but it doesn't produce too much precious metals and base metals.

Answer? Should be obvious - it needs to look elsewhere.

Picture above shows the amount of cranes in Shanghai now building high rises, condos, and office towers for the booming economy. Back in 2005 they already employed 25% of the world's cranes - just in one city. Last I checked - towers require large amount of iron, copper, other base metals, and gold

In the past decade alone, a forest of space-age skyscrapers — nearly 3,000 over 18 stories tall — has sprouted along the banks of the Huangpu River in a scene straight out of The Jetsons. They pierce the sky with their globes, rockets, spires, crowns, ziggurats and crescent peaks in a jaw-dropping showcase by the world's top architects. With a staggering 2,000 more in planning or under construction (at one time, the city had one-quarter of all the world's cranes), residents struggle with an ongoing sense of disorientation.

Financial Times tells us that China has been issued warnings from large base metal producers like Vale CVRD, and BHP Billiton, which produces and explores in major production sites (including Argentina) and invests heavily in promising juniors.

Rio Tintoand BHP Billiton (NYSE:BHP) have asked their Chinese steelmaker customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia.

Traders and industry officials said the mining companies have demanded price increases for their annual iron ore contracts in excess of the record 71.5 per cent rise of 2005 and were fighting for increases of 85-95 per cent.

Rio and BHP have warned their Chinese clients some annual contracts will expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher.

85-95%? Yup you are reading that right. No amount of paper cash will convert to physical goods when money is able to be freely created. Can you build a car with pictures of Benjamin Franklin?