Big story out today about Air New Zealand and the rates they are paying their Chinese cabin crew. Shanghai based crew flying on the Shanghai-Auckland route, alongside NZ cabin crew, are being paid less than the NZ minimum wage.

This is nothing short of disgraceful and ANZ will get a deserved roasting in the media. Given that they are majority owned by the Government one can expect a serious review of policy.  But it raises some serious issues: where should the line be drawn?

What about staff working locally on the ground? I would say they are in a local designation and so should be paid local rates but the cabin staff are working in an international space and should be paid the same rates as their NZ based counterparts.

Whilst this issue seems clear cut and a PR fiasco for ANZ, how the international labour market works is not so clear. We send manufacturing offshore, an issue that rankles with many,  in order to take advantage of cheaper labour and other costs. So one could argue that ANZ should be employing as many Chinese cabin staff as possible as their labour is cheaper.

One could also take the argument that working for ANZ is a great opportunity even with the local rates of pay and as the local Chinese airline market expands, as it surely will do, then pay levels will rise as competition kicks in.

The internationalisation of labour is going to bring some interesting issues to the surface as well as unexpected consequences. Previously we have had huge barriers to the movement of labour but with the EU expanding and both China and India developing huge domestic markets, the door will be opened wider to a freer and more efficient labour market.

We’ve had the polish plumber in London so how about the Chinese electrician in New Zealand.

As Ben says “welcome to the global village”.

I read today of Tata’s impending purchase of 2 of Ford’s great brands, Jaguar and Land Rover. Only last year Tata Steel paid $12bln for Anglo-Dutch steelmaker Corus. What’s going on here? What happened to the East India Company and all that? Queen Victoria would be spinning in her grave. It seems the plunder of Asia is over. And now it’s payback.

The Arabs are at it as well having bailed out Citibank not long ago and lets not forget the Chinese pumping in $5bln to keep Morgan Stanley afloat.

Those trade and petro dollars are finally being put to good use. The Arabs in the Emirates are showing their cousins the way foward by buying real assets instead of partying away the cash as they did in the 80s. The Chinese, always astute and long-term, are making obvious in roads into the US whilst continuing to make it hard the other way around.

Reverse colonialisation anyone?

A couple of weeks ago I attended a PM forum in Christchurch. It was a chance to hear Helen Clark and her Ministers talk about the new Emissions Trading Scheme that they had just put out. I’ve tried to wean myself off climate change conferences because in the end they are all pretty boring and generally say the same thing: the world may end in a flood of seawater and we need to get cracking by x% right now.

What always surprises me is that no matter how many calls for action there are very little has been done to really restrain emissions. Why is this? Well quite simply this is a very tricky issue. Economic growth is not going to be sacrificed on the altar of environmentalism or, more to the point, an outcome where there is uncertainty. So it drags on. China continues to expand its economy at a fierce pace and shows little interest in reining in its emissions insisting that it’s full steam ahead.

So in come emissions trading schemes: carry on as normal but buy your way to heaven via a piece of paper saying “1 tonne of carbon”. If it sounds like a papal remission that’s because it’s pretty close.  It’s a piece of paper you get for money which blesses your wins away.

The problem is quantifying and packaging a tonne of carbon or equivalent. How can we be sure that people will get what they pay for. This is where certification comes in. We need an agreed international standard and a single market. After all there’s only one type of carbon just like there is one type of gold. Its not like crude oil where there are different prices for different types.

Another issue is the changing science. For example, if forests are used as credit generators because of their ability to sequestrate carbon, there is a possibility that the amount the sequestrate may change over time either due to ecological reasons or a change in the understanding of how and how much they actually lock up and over what time period.

As a business having to purchase carbon credits on paper I would be crossing my fingers and hoping it all works out otherwise i might be out of business.

There is also a concern about the over issuance of paper credits. As readers will know they fractional reserve money system we have started life in a similar fashion: an underlying quantity of a commodity on which paper bills were issued. We know the outcome of that, a money system with no control.

From what i have seen this issues haven’t been covered in enough detail. I can still envisage a scenario where the carbon credit market takes off but overall emissions are not reduced. The goal of all this is to reduce emissions not create a huge market in carbon. But for now its the easy way out and politically more acceptable. Trees can take the slack for now and maybe technology can takeover at a later date.

The G7 communiques are out (i can’t find a link at the moment as i have it direct from a trading platform) and there is one clear story and several cloudy ones. The main thrust is that they would like to see the Yuan quicken its appreciation. Well looking at China’s trade surplus that’s pretty obvious. One only has to remember the famous Yen “endaka” from 1971 to 1995 when the $ fell from 360 to just below 80 Yen.

How far will the Yuan rise is anyone’s guess. The day it floats and becomes fully convertible will see a huge increase in volatility and speculative financial flows. However a floating Yuan would actually be beneficial in regulating global imbalances in trade and economic growth.

The Chinese are well aware of it and are probably not minded to open the doors to the Magic Kingdom just yet. They hold the balance of power at the moment and wont be pushed until they are ready. Still continued pressure will eventually tell.

However, it’s not just the Chinese getting a telling off. Some mention has been made of Asia as a whole and of course this refers to Japan. Whilst there was no specific mention of the Yen this will certainly not be lost on those with substantial short yen positions. There was mention of an improving economic situation in Japan and that exchange rates should reflect fundamentals.

The risk inherent in global carry trades was mentioned specifically by Juncker (Luxembourgs PM) saying they wanted the market to be aware of the risks of one way bets, specifically in the foreign exchange markets.

Paulson (US Treasury Sec) mentioned clearly and loudly that the US believed in a strong dollar. Added to that were moans from the ECB crew about the strength of the Euro and how they were bearing the brunt of $ weakness.

The Canadians jumped in on this wagon too noting the Loony is now 3% stronger than the Greenback. Strange times indeed.

So what does all this mean. Well for me it could means the $ depreciation is nearing an end or at least getting into the red zone. From a market perspective i would say NZ/Yen is due for more pounding (back below 80 again) given this is regarded as the major one way bet in the fx markets. The Euro may reverse back to 1.35, the C$ back above parity and the A$ probably could do with a small dusting (maybe down to 85cts).

Stocks could also get pounded this week. Who knows? It’s not a week to be hugely long and comfortable.

FX rates are elastic things and when they get stretched the bounceback (as we saw in August) can be pretty fierce.

P.S. Others may interpret the communique differently so feel free to give me some of your views.

The ongoing spat between the US and China over the rate of yuan appreciation has boiled over into something more interesting.

Last night Chinese officials threatened the possibility of selling down their US treasury holdings and thereby consigning the US$ to the trashcan. The Chinese are experts at promoting the maxim “don’t throw stones in glasshouses”. They are very astute at pointing out inconsistencies in arguments no doubt employing age old Confucian wisdom.

How the relationship between China and the US will pan out is anyone’s guess but we can be clear about one thing and that is the balance of power has shifted ever so slightly. The phenomenal success of the Chinese economy, based mostly on a large manufacturing base, has given the Chinese are strong foothold in global affairs. Whereas once it was a sleeping dragon content to rule its own domain now it is a major player.

At the same time it has built a strong domestic economy and plays host to the Olympics next year. It seems the US may need China more than China needs the US.

The situation doesn’t look too good for the US. Collapsing credit markets need a steady government security base to hold it all together. Any sell of in the US Treasury market would be a real disaster sending stocks down as well as the dollar.

To some extent we’ve been through this before with the Japanese. In the mid 90s Fred Bergsten hit the headlines calling for a stronger yen. This caused the $ to fall to a record low of 79.65. He was still making this call back in 2002 when he outlined strong reasons for abandoning the Clinton “strong dollar” policy.

This delicate game was fictionalised by Tom Clancy in his book “Debt of Honour” which told of a plot to destabilise the US economy by crashing the Treasury markets and the $. Of course the US won in the end but in real life who knows what would happen. The US authorities run some major interference in the markets when required and i am sure that any severe destabilisation of financial markets would see national security considerations apply (well if they haven’t got that sorted they should!). Sadly many of Clancys’ novels end up happening in real life.

The Chinese are very tactical and astute in their political strategy and very protective of their sovereignty. It will be interesting to see how this plays out but more weakening of global markets cannot be ruled out and with the end of the credit fuelled asset price boom added into the mix cash will be king.