October 20th, 2010
11:43 AM GMT
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October 20th, 2010
07:52 AM GMT
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(CNN) – Emerging market bonds are telling an interesting story about investing right now.

According to data from ING, EM bonds are in demand. David Spegel, ING’s global head of Emerging Markets Strategy says, “Investors are increasing their risk exposure, first by moving into EM corporate bonds from EM sovereigns … and by buying bonds that are rated further down the credit ratings spectrum.”

The best-performing emerging market bonds are in Belize, up 67 percent; Ukraine, up 32 percent; Argentina, up 24 percent; Uruguay up 22 percent; and Iraq, up 19 percent.

That is not bad compared with the year to date return of the S & P, which is about 4.25 percent.

Emerging market equities, according to ING, have returned 11.94 percent year to date. EM bonds have outperformed EM equities by more than 3 percentage points.

Even the worst performing year-to-date emerging market bonds don't look too bad compared with developed markets: Ecuador is up 2 percent, Serbia is up 5 percent, and China is up 7 percent.

So, what does it mean?  Investors appear to be banking on growth in developing nations like the BRIC countries - Brazil, Russia, India and China - we follow closely on World Business today.

That’s because developing nations don't have the problems that developed markets have, such as heavy debt. Many BRIC nations export commodities and the price of commodities is on the rise. Developing nations also have populations that are young and growing.

In addition, the International Monetary Fund projects developing nations will grow 6.4 percent next year, while developed economies will expand just 2.2 percent.

October 20th, 2010
06:37 AM GMT
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(CNN) – In the race for higher technology, companies in North America, Japan and Europe are leaps ahead of China.But those companies –- and the countries that depend upon them –- are waking up to the fact that China has a lock on rare earth metals required to make advanced  technologies, such as lasers and hybrid car batteries.

Japan found that out in September when China announced plans to reduce the amount of rare earth metals exported to Tokyo during the height of tensions between the Asian powerhouses over sovereignty of islands in the East China Sea. China said the decision was due to environmental reasons.

Now a story in The New York Times suggests that China is also reducing the amount being exported to the U.S. and Europe. China has denied the report.

Regardless, the incidents reveal a strange symbiosis in the global market –- makers of the defense products for the U.S. military rely upon raw materials from China.

“The Americans in their wisdom have strengthened the battle tanks with armor that requires rare earths from China –- nowhere else in the world can it be found,” Chris Hinde, editorial director of Mining Journal, said last week at a conference in Hong Kong.

“All the major metals face long-term problems because there are less discoveries being made. You can expect metal prices to keep going right up. But right now, the real excitement is with rare earths,” he said.

If you recall from high school chemistry, the rare earth metals are the second last line shown on the Periodic Table of Elements that hung on the classroom wall, ranging from Lanthanum to Luteium –- 17 in all.

“A lot of rare earths and other ‘exotics’, as they’re called, display peculiar properties and are used in specialist applications like mobile phones and laser technology,” Hinde said.

Ninety-five percent of all rare earths currently come from China.

“And the non-Chinese deposits of rare earths the Chinese have tended to try to buy up as well,” Hinde said. “China controls the rare earth market.”

That promises interesting days ahead for companies that depend upon rare earth metals, and it gives China a rare bargaining chip.

Will China’s unique position to restrict these minerals constitute unfair trade practices with the World Trade Organization? On the other hand, what nation has the right to dictate what China does with its own natural resources?

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October 20th, 2010
05:11 AM GMT
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(CNN) – There’s an old joke about economics: “If I have a foot in a bucket of hot water and a foot in a bucket of cold water, on average I’m warm!” Well that same economic principal could be applied to China right now.

The government is proud of its continuing rapid growth; it needs a strong economy to continue modernizing, providing employment and evening out social inequality. But it has to be the right kind of growth, growth that distributes the wealth across the society.

The problem right now is that money has been too cheap and too readily available. That’s led to speculation and investment in the property market that has seen rapidly escalating prices; in other words a good old unsustainable bubble.

This may be good for the cashed-up speculators but it also leads to a spike in inflation. That hurts the vast majority of people who have to pay more for essential goods: clothes, food, power and water.

The government has now decided to hike interest rates with the hope of pricking the bubble and reigning in prices.

By boosting both the lending and savings rates it hopes to encourage people to put their money in the bank for a better return rather than chasing the quick riches of real estate. It needs that bucket to cool.

The hot water bucket is GDP. The government doesn’t want growth to cool too rapidly. It wants to calibrate the economy to get the money flowing into the “real economy” where more people get a share.

There’s a leadership change looming in 2012 and the incoming president hardly wants to be the one left standing when the music stops!

Then there’s the ongoing pressure for China to let its currency, the yuan, increase in value. This, say China’s critics, will level the playing field, making China’s exports more expensive.

It would also help China by making imports cheaper, thus reducing that pesky high inflation. Ordinarily, a rise in interest rates would put more upward pressure on the value of the yuan, but China closely regulates its currency rate and doesn’t want any rapid moves.

There are still so many unanswered questions: Will there be more rate rises? Will the currency value increase? If so: then by how much? Will speculators be lured even further by a greater interest rate return on their investment?

Hot and cold; it’s a delicate balancing act. Right now China needs it feet in two warm buckets.

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Filed under: BusinessChinaFinancial markets

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