From Volume 4, Issue Number 33 of EIR Online, Published Aug. 16, 2005

World Economic News

The Systemic Risk Many Feared in May Through July

"Should we be afraid of the Hedge Funds?" asks a three-quarter-page article in Le Figaro Aug. 11, echoing what EIR has reported about fears of a systemic blowout around the GM credit derivatives crisis in May/June/July of this year. The article, by Armelle Bohineust, on the growth, influence and dangers of the hedge funds, states that they "are one of the hot issues of world finance," and "a preoccupation at the highest levels of political spheres," mentioning German Chancellor Gerhard Schroeder's call for more regulation of the funds at the recent G-8 meeting. After describing their cancerous growth, Bohineust notes the rage provoked in Germany by the funds' operation to kick out Deutsche Boerse president Seifert, leading to the by-now-famous attack by SPD chairman Franz Muentefering on the financial "locusts."

These, however, are not the only problems provoked by these funds, Bohineust says, describing the "turbulence" of May and June. "On the other side of the Atlantic, in particular, the downgrading of General Motors credit rating, and the volatility which resulted in the markets, provoked fears of a chain of bankruptcies. The feared movement didn't take place, but the difficulties met on the credit derivatives generated a lot of losses."

This "fragility," continues the article, "obviously raises again the question of a systemic risk, that is, a chain reaction of bankruptcies, which would propagate to the whole of the financial system." The article further notes how the risk is now extended to banks because they have multiplied their credits to speculative funds in recent years. It mentions particularly Goldman Sachs, which in 2004, raised $1.3 billion from such activities, more than 20% of its revenues. "It is therefore not surprising that the specter of LTCM comes back to haunt the minds."

Soaring Oil Prices Hit the Chinese Economy

Stockpiles of crude oil and refined products are being drawn down to meet the 5.6% increase in actual demand for petroleum so far this year, according to research at the China National Petroleum Corp. "Apparent" petroleum consumption had only risen 0.11%, but that only includes output volume plus net imports or minus net exports, and does not show the depletion of inventories.

In July, output prices of gasoline and diesel rose by 300 yuan ($37) and 250 yuan ($30.9), hitting taxi and other car drivers with costs up to 10% of their monthly income.

China's economic growth, which is hampered by the inefficient use of energy, is driving a high demand for petroleum consumption. Imports of crude oil and refined products will have to decrease, due to skyrocketing oil prices. At the same time, the price gap between China's domestic and international processed oil products, will lead to a drop in the output of oil products, CNPC warned, and these factors will lead to more pressure on the petroleum supply in the second half of this year.

Oil prices have risen seven times in China since July 2003, although the government regulates the prices and has kept gasoline and other prices below international prices. As a result, China's oil processing sector suffered serious losses in the first half of 2005, down from a profit of 16.38 billion yuan ($2 billion) a year ago, to net losses of 4.19 billion yuan ($517 million) this year so far. The volume of growth has dropped by 10%.

China Trade Surplus Could Fall This Year

China's trade surplus could fall to US$30 billion later this year, due to a slowing world economy, less foreign investment in China, and the upvaluation of the renminbi, the State Information Center reported Aug. 8. The trade surplus hit US$39.6 billion in the first six months of 2005, bigger than the surplus for all of 2004. Export growth, which has been soaring at 32.7% in first half of this year, will now grow at 22%, the report said.

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