Can China’s biggest companies become true global players?

The next six months will test the power—and the limits of that power—of China’s global champions.

First, sometime in early 2011 California will decide what company will build the high-speed rail link between Los Angeles and San Francisco. The Japanese companies that built that country’s pioneering Shinkansen bullet trains and France’s Alstom (ALSMY), which built Amtrak’s disappointing high-speed Acela, will go head to head with Chinese rivals that nobody in this market ever heard of ten years ago.

The ability of Japanese and European companies to beat Chinese upstarts on the relatively neutral ground of California will speak volumes about China’s ability to win dominant positions in new global markets.

Second, the success—or lack of success—of Huawei, China’s champion in the telecommunications gear market, in breaking into the U.S. market will tell investors exactly how big a handicap the ties between China’s biggest companies and the Chinese government in general and the People’s Liberation Army in specific will be as these companies try to break out onto the global stage.

Between them, what happens with California’s bullet trains and Huawei’s attempts to break into the U.S. market will show investors the lay of the competitive terrain as the next generation of corporate and government spending speeds up as the global economy returns to whatever “normal” is after the Great Recession.

China now the world’s biggest consumer of energy

(I’m on vacation until August 24. During that period Jubak Picks will operate on a reduced schedule of one or two posts a day. It will return to a full schedule once I’ve returned.)

Who is now the biggest energy user on the planet?

Not the United States anymore. The U.S. economy is now No. 2, according to the International Energy Agency.

In 2009 China took over the No. 1 spot consuming 2.25 billion metric tons of oil equivalent. The U.S. consumed just 2.17 billion metric tons. (The actual energy consumed was in the form of oil coal, natural gas, nuclear, and alternatives such as wind and solar.)

Chinese officials have disputed the International Energy Agency numbers. The IEA’s data are “not very credible,” Zhou Xi’an, head of the National Energy Administration’s general office, told a press briefing in Beijing on July 20. “We think that’s because of a lack of knowledge about China, especially about China’s latest developments of energy conservation and renewable energy.” China plans to spend $740 billion in the next ten years developing cleaner sources of energy to reduce emissions from burning oil and coal.

Of course, using alternative rather than conventional sources has nothing to do with how much energy China consumes—just with its sources (and how much carbon the country emits in producing the energy it needs.)

The case for believing the International Energy Agency numbers are pointed in the right direction are China’s runaway economic growth (compared to the United States) and the relative inefficient use of energy by China’s economy (even in comparison to the notoriously energy inefficient U.S. economy.)

Update Petrobras (PBR)

(I’m on vacation until August 24. Until then JubakPicks.com will operate on a reduced schedule of one or two posts a day. I’ll resume the full schedule when I return.)

Forget about news that Petrobras (PBR)–one of the stocks in my long-term Jubak Picks 50 portfolio– has made a new oil discovery off Angola with at least 500 million barrels of oil. Or that it is beginning production from the Urugua off-shore oil field this week.

The only discovery that counts for Petrobras shares is what price the Brazilian government will charge the company for as much as 5 billion barrels of deepwater reserves in the deep, deep water pre-salt deposits off Brazil’s South Atlantic coast.

As part of a complex plan to finance the development of the offshore fields such as the apparently giant Tupi field that Petrobras has discovered but now needs to put into production, the government plans to sell Petrobras 5 billion barrels of reserves. The company will raise the purchase price for the reserves through a stock offering. The new reserves would then give the company assets that it could use to back the debt or equity financing it needs to develop these new fields. The cost of that has been put at $224 billion by Petrobras.

So, in essence, the price that the administration of Brazilian President Luiz Inacio Lula da Silva charges partially state-owned oil company will determine how much Petrobras has to pay to finance this development. Estimates in the last week or so range from $5 to $6 a barrel—or about $30 billion—to $8 a barrel—or about $40 billion.

A higher price for the reserves would make it harder for Petrobras to sell stock to cover the purchase price—since investors would be getting fewer barrels of oil for their money. That would increase the number of shares Petrobras would have to issue to raise the purchase price. And that would, in turn, increase the dilution suffered by existing shareholders as a result of the sale of new shares.

The government has had difficulty settling on a price and the share sale has been repeatedly delayed. On June 22 Petrobras delayed the sale of shares until September. That pushes the offering dangerously close to the October presidential election.

That increases the risk of more political intervention—which makes already nervous investors even more nervous.

China’s currency moves a little closer to challenging the dollar

(Jim Jubak is on vacation until August 24. During that period I’ll post just once or twice a day on JubakPicks.com. I will resume a full schedule for JubakPicks after August 24.)

The renminbi is coming. The renminbi is coming. At this pace it may take a decade or more, but slow changes in China’s currency policy are paving the way for a challenge to the U.S. dollar.

 Eventually.

 On July 28, Chinese regulators lifted restrictions on the flow of the renminbi in Hong Kong. (For the record, the name of China’s currency is “renminbi” and the name for the units of that currency is “yuan.”)

 Any company in the world can now open a renminbi bank account in Hong Kong and exchange the currency freely. Any kind of company can now receive a renminbi loan. Banks in Hong Kong can now create investment products denominated in the currency.

 This step follows two other moves in June, the first cutting the currency’s peg to the U.S. dollar and the second expanding the program that lets Chinese companies use the renminbi to settle cross-border trades. (All this is playing out against a backdrop of a bad-loan crisis in China’s banking system. For more on that see my post http://jubakpicks.com/2010/07/23/if-china-were-to-have-a-real-estate-bust-what-would-it-look-like/ )

 Of the most recent moves, allowing companies to open renminbi bank accounts is the most important in the short-run. Under the old rules foreign companies that made a renminbi profit in China often found themselves unable to either take the profit home or invest it in China. Now companies will be able to invest their renminbi holdings through accounts in Hong Kong.

 In the long run, though it’s the direction that matters. All the moves in July and June inch the renminbi a little closer to a global currency. As long as holders of yuan can’t move them freely across borders or exchange them for other currencies when and where they please, or settle trades in renminbi, then China’s currency isn’t ready for a global role.

 Beijing hasn’t removed all restrictions on the movement of its currency. Hong Kong banks, for example, can only clear their open renminbi positions with the Bank of China if the transactions are related to trade. The volume of cross-border trade in renminbi up about 20 times in the first half of 2010 over the same period of 2009, but that still amounts to just 70.6 billion yuan (or about $10.4 billion.)

 That’s not enough to make the renminbi a serious global currency now but the momentum points in that direction.

(This post first ran on Jubak Asset Management (Jubakam.com) on July 29.) 

Could reforming Fannie and Freddie wreck the Fed?

And now, fresh off passing the 2300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress promises to address the “problem” of Fannie Mae and Freddie Mac.

Be afraid. Be very afraid.

Oh, not because Fannie Mae and Freddie Mac don’t need to be reformed. They sure do. They were at the heart of the U.S. housing bubble and the mortgage debacle that mutated into the global financial crisis.

And not because Congress can be counted on to compromise its way into a hash that combines the worst of private market gestures with the worst of bureaucratic rule-splitting.

No, the real danger is that a mistake in fixing Fannie and Freddie could take down the U.S. Federal Reserve. Or at least take down the Fed to the degree that any central bank, with a central bank’s ability to create money, can be taken down.

All hyperbole aside, a mistake in fixing Fannie Mae and Freddie Mac could throw the U.S. financial system into crisis again by destroying the balance sheet of the Federal Reserve.