Tourism, Where China's Trade Deficit Grows

♠ Posted by Emmanuel in ,, at 3/31/2014 09:48:00 AM
I remain surprised that tourism is not very well-studied in IPE considering that it is one of if not the world's largest industry. It's certainly big money on a global basis, providing much employment to people in developed and developing nations alike and reportedly accounting for 9% of global GDP. So, let use consider the fate of China and its particular industry. As it opens up to the world, the exchange of travelers has quickened. There's interesting stuff in the Nikkei Asian Review--fast becoming one of my go-to sites for Asia-related news--on Chinese tourism. To be sure, tourism to China is big business since it the world's third most-visited country in terms of tourism arrivals after France and the United States. That said, there are more and more Chinese journeying out of their country than foreigners coming to visit it. Voila! Tourism is one of the few industries in which the PRC runs a trade deficit relative to the rest of the world. The bad news is exacerbated by the horrific images of pollution in Beijing as well as the gradually strengthening yuan that is making it more expensive to visit:
Fewer foreign tourists are going to China these days, their numbers being dragged down by severe air pollution, a strengthening currency and food safety problems. According to the China National Tourism Administration, the number of overseas visitors who visited and stayed at least one night in mainland China, including tourists from Hong Kong and Macau, totaled 55.69 million in 2013, down 3.5% from the previous year.
Actually, Chinese authorities have been trying to bolster tourism to China by granting transit permits for visitors. To date, however, various tourism-related businesses have not reported a substantial increase in their revenues from the program:
In January 2013, Beijing, Shanghai, Guangzhou, Chengdu and Chongqing introduced a program for transit passengers from 51 countries. The program allows travelers to stay in China visa-free for up to 72 hours provided they restrict themselves to the city they landed in. The system was launched with great fanfare, but the number of first-year users in Beijing was 14,000, far short of the municipal government's goal of 20,000.

Dalian and Shenyang, in Liaoning Province, introduced the same system last month. At the end of 2013, the two cities posted an electronic ad in New York's Times Square, hoping to get New Year's Eve revelers thinking about quick trips to China. Did it work? Not yet, according to a sales manager at a five-star hotel in Dalian. "There has been no sign of our room-utilization rate picking up," the manager said.
Make no mistake: the rest of the world is rolling out the red(s) carpet to attract foreign tourists, too. This industry is very competitive, and unfortunately, it seems the gweilo (foreign devils) have the upper hand so far:
Meanwhile, overseas travel by Chinese has been growing much faster than expected. The China National Tourism Administration stated that the number of overseas travelers rose 18% in 2013, to 98.19 million. Some countries have been redoubling their efforts to attract Chinese tourists. France set up a system so Chinese can obtain tourist visas within 48 hours of applying. The new system was in place before the Chinese New Year holidays, which began Jan. 31. The simplified process beats similar systems in the U.K. and other countries by three days.

China's tourism situation is leading to a deficit in its travel services balance, a component of the current-account balance: the amount of money spent overseas by tourists of a country, China in this case, subtracted from the amount of money spent by foreign tourists in that country. It is calculated based on the costs of lodging, eating and getting around.
I guess the Chinese have quite a lot of things to sort out at home to bring those foreign tourists back. 

IMF Bails Out Ukraine...and Franklin Templeton?

♠ Posted by Emmanuel in ,, at 3/30/2014 11:02:00 AM
With some foreign currency savings in the bank, I have been in the market for a better return than a time deposit. I was thus offered some mutual funds that are becoming quite popular with retail clients looking for a boost in their returns. Being a conservative investor, I am interested more in fixed income than equity funds. As you probably know, Franklin Templeton is one of the United States' largest asset managers, with holdings nearing an astronomical trillion.

For one reason or another, I was offered the Franklin Templeton Global Return Fund co-managed by the fellow above who explains when to invest after an emerging markets selloff, Michael Hasenstab. Just as sports fans talk about star athletes, investors apparently talk about star managers like him. Indeed, on the surface, this fund appears to be attractive: it is rated by Morningstar as a five-star fund. This means that for its risk category, the fund has been in the top tier in terms of returns. Doubtlessly, many investors would have plunked their money down at this point--big-name investor, well-known fund manager and top-rated fund.

However, I practice what I preach in not trusting the ratings, preferring to look for myself what is inside this fund. As it turns out, this fund has holdings in Venezuelan state-owned oil company PDVSA [!], Argentina government bonds [!!], and a boatload of Ukraine government bonds [!!!] Suffice to say, I said "No sale." Franklin Templeton is known for a contrarian style as it looks to invest in oversold and hence undervalued (AKA "distressed") assets it believes have been unwisely shunned by others. Another Franklin Templeton star of Bloomberg and CNBC fame, Mark Mobius, explains the fate of Ukraine:
While global escalation of the current conflict remains a possibility in Ukraine, we think this is unlikely as it is in the interest of all parties to have a unified and stable Ukraine. There are four sources from which financial support for Ukraine could come: the EU, the US, Russia and the International Monetary Fund (IMF).
To me. what's noticeable is just how risky Franklin Templeton's investment is: they were relying on a white knight to come to Ukraine's rescue. If you want some real "masters of capital," consider that Franklin Templeton piled on so much that they recently held over a third of all Ukraine's publicly-held debt:
Franklin Templeton, the global fund management group, has suffered losses on multibillion dollar positions in Ukrainian debt. Ukrainian bond yields, which have an inverse relationship with prices, have risen sharply in response to instability in the country as concerns have mounted that it is heading for civil war.

Overall, Franklin Templeton holds about $6.4bn, more than a third of the country’s international dollar bonds, according to filings. Some of the group’s biggest funds bought Ukrainian bonds at the end of last year, before the violence sparked the strong swings in the market, according to Bloomberg data.
You can thus argue that Franklin Templeton was saved by the IMF. Yes, its portfolio would not have been significantly damaged otherwise given the sheer size of its holdings, but there would have been significant, ah, "impairment" nonetheless. Reputation damage, too. The argument that the IMF serves American interests--still its largest shareholder--is an old one. For what it's worth, the IMF has not yet asked for Ukraine's creditors for changed terms, but they may still be on the cards:
[The IIF's] Mr. Mitov just returned from a trip to Ukraine, where he met with government and fund officials. Maturity extensions would push around $9 billion in debt due through 2016 into the future, without cuts in the face value of the bonds investors hold, he said.

“This is a much bigger cash-flow relief with much less pain and much less damage” to Ukraine’s economy than the type of “haircut” required in the Greek bond haircut, Mr. Mitov said. A bond maturity extension would also allow for a more gradual budget belt-tightening for Ukraine than currently needed.
As for me, I think I'll stick with less "exciting" investments than these, thank you.

IMF Masochism: Another Ukraine Rescue Package

♠ Posted by Emmanuel in , at 3/27/2014 10:56:00 AM
Ho-hum, here we go again: Ukraine has inked yet another deal with the IMF as one of the IFI's most hard-up of repeat customers. In a press release dated 3/27/2014:
The mission has reached a staff-level agreement with the authorities of Ukraine on an economic reform program that can be supported by a two-year Stand-By Arrangement (SBA) with the IMF. The financial support from the broader international community that the program will unlock amounts to US$27 billion over the next two years. Of this, assistance from the IMF will range between US$14-18 billion, with the precise amount to be determined once all bilateral and multilateral support is accounted for.
That the situation there is in the Venezuela/Zimbabwe league is obvious:
Ukraine’s macroeconomic imbalances became unsustainable over the past year. The (until recently) pegged and overvalued exchange rate drove the current account deficit to over 9 percent of GDP, and a lack of competitiveness led to the stagnation of exports and GDP. With significant external payments and limited access to international debt markets, international reserves fell to a critically low level of two months of import in early 2014. The 2013 fiscal deficit was 4½ percent of GDP, and the government accumulated sizeable expenditure arrears. The 2013 deficit of the state-owned gas company Naftogaz reached nearly 2 percent of GDP, driven by the sharp increase in sales at below-cost prices. Without policy action, the combined budget/Naftogaz deficit would widen to over 10 percent of GDP in 2014.
It's the same old, same old the IMF is trying to push through. Given how assiduously the IMF pursues US foreign policy interests [yeah boss, yeah!], it is no surprise that it has been tasked with lending to this perennial deadbeat despite Ukraine not improving in any particular aspect of financial governance. Anyway...
The goal of the authorities’ economic reform program is to restore macroeconomic stability and put the country on the path of sound governance and sustainable economic growth while protecting the vulnerable in the society. The program will focus on reforms in the following key areas: monetary and exchange rate policies; the financial sector; fiscal policies; the energy sector; and governance, transparency, and the business climate.
Yeah, right. The IMF has repeatedly halted disbursements in the past due to Ukraine not following through on promised reforms. All in all, this will be its eighth IMF bailout in its post-Soviet history. Tymoshenko, Yanukovych...whomever they select next will find next-to-insurmountable obstacles to fulfilling these reforms demanded by the IMF. What makes this time different from all the times they went to the IMF before? Each time they come back, the only thing that changes is that the country is even more destitute.

Westerners IMHO are really asking for it. Had they just given up the country to Russia, that would have been the end of their woes dealing with Ukraine. But alas, Westerners are true masochists when it comes to upholding all that jazz about freedom 'n' democracy. Me? I have no reason to believe that anything good will come out of it as Ukraine's borrowing history indicates.

First! London Offers RMB Clearing Outside Asia

♠ Posted by Emmanuel in ,, at 3/26/2014 04:12:00 PM
Well, the deed is finally done: the UK is the first location outside Asia to offer clearing services denominated (demoninated?) in RMB. First there were Hong Kong and Macau (which don't really count in my book as special administrative regions of China). Then came Taiwan and Singapore. And now here comes a country which is not really part of the main Chinese diaspora in the UK:
Britain and China will sign an agreement next week to set up the first clearing service for renminbi trading outside Asia, putting London in a prime position to offer yuan trade business in Europe. China has been a key focus of finance minister George Osborne's efforts to boost exports of financial services from Britain, which was the first Group of Seven country to agree a renminbi swap line with the People's Bank of China last year.
Britain's finance ministry said on Wednesday that the Bank of England and PBOC would sign an agreement on renminbi clearing and settlement next Monday, setting out how the two central banks will cooperate on setting up a clearing bank.
The UK government has been lobbying hard for this result--to be able to settle yuan transactions between counterparties in RMB without changing into USD as per conventional practice--for some time now. The obvious advantage is in consolidating London's place as Europe's or indeed even the world's financial center as China and its currency internationalize further during coming years:
The deal aims to strengthen London's position, allowing it to attract higher volumes by making it the venue of choice for settling transactions outside the Asian timezone. "Connecting Britain to the fastest growing parts of the world is central to our economic plan," said Osborne in a statement.

"Other Western countries will follow, but London now has the critical mass of infrastructure, helping to put Britain at the front of the global race." [...] Britain's finance ministry said 62 per cent of yuan payments outside of China take place in London, citing data from the SWIFT global financial transactions network. 
In the same way that Germany doesn't bash Russia over the head with democracy and human rights mumbo-jumbo, the UK doesn't do the same with China given how Britain stands to benefit from China's emergence with London consolidating its position as a financial center. Is it really any surprise the Chinese chose London ahead of, say, New York? The burghers of Beijing ain't stupid--or immune to charm offensives.

Meeting the Moneybags: Argentina Faces Paris Club

♠ Posted by Emmanuel in , at 3/26/2014 11:19:00 AM
It won't be easy--you'll think it strange--when Argentina tries to explain how it needs to rejoin international credit markets after all that it's done. You won't believe it; all you will see is a serial defaulter you once knew. However, it is indeed trying to, ah, the sixes and sevens with you. Over the past week or so, Argentinian President Cristina Fernandez has been in Paris trying to arrange a meeting with the group of rich government lenders--the so-called "Paris Club." Her objective has been to pay off its rather substantial remaining debts so it will have more than limited access to international credit markets. From the Buenos Aires Herald:
Crisis-ridden Argentina will start in a couple of months talks on the US$9.5 billion it owes to the Paris Club of creditor nations in an effort to lure back investments ahead of next year’s presidential vote but even the government and its supporters as well as its critics warn that even in the case of an agreement, there is much more to be done before the money starts flowing.

The 19-member informal Club of creditors who hold 60 percent of the International Monetary Fund’s voting power has just invited the country to hold talks as from May 26 and French President François Hollande last week told Argentine President Cristina Fernández de Kirchner in Paris that “France wants Argentina to overcome its financial problems” and that Buenos Aires “is managing to do so.”
Argentina halted payments to the Club in 2002 amid its worst meltdown in history, which led it to declare the world’s largest-ever debt default. Repaying the debts to the Club is part of a wide-encompassing strategy of the Peronist administration to re-insert the nation[...]into the international circuit.
Circuits of capital? Even Argentinian newspapers sound retro-Marxist [!] The country is being pressured by credit downgrades and dwindling reserves. Somewhat counterintuitively, it will have to draw further from its reserves to pay off its debts. Go figure. Rest assured though that ne'er do well Argentina is a warily familiar face opposite the Paris Club:
Last Monday, Moody’s Investors Service further cut Argentina’s government bond rating into junk territory, saying that the drop in Central Bank dollar reserves has raised concern about the country’s ability to pay its debt.

The Paris Club website says that it met for the first time in 1956 at the request of the country, which was concerned about defaulting on its sovereign debt. Buenos Aires attempted repeatedly to resume talks with it. In 2008 the two sides were close to striking a deal but Argentina pulled out at the last minute, concerned about its foreign reserves amid the global crisis. Another attempt was made in 2011.

The Economy Ministry last week issued a statement reading: “The members of the Paris Club have invited us to start formal negotiations toward the end of May. Our proposal seeks to develop investment inflows with the objective of confronting new challenges after a period of 10 years of high and sustained economic growth.”
Paris Club Secretary-General Clotilde L’Angevin was quoted by Reuters as saying: “They discussed this proposal in January and February, asked for clarification and, based on a revised proposal, have invited the government of Argentina to come negotiate an arrears clearance agreement with the Paris Club creditors in May in Paris.”
Comrades and IPE enthusiasts, mark your calendars: Argentina meets its nemeses--Western rentier capitalist bourgeoisie--on May 26. Having ruled out another IMF bailout, debt reduction is not on the cards. For some reason I am not very hopeful about Argentina's prospects.

South-South Trade: LDCs Doin' It for Themselves

♠ Posted by Emmanuel in at 3/25/2014 08:07:00 AM
Dependency theorists will have a more difficult time explaining how poor countries are increasingly trading with each other via South-South trade. How can they "exploit" each other when they are at similar levels of (under)development? About 25% of all trade is now of this form. The chart below comes from the 2014 World Economic Situation and Prospects. What's particularly notable is that the largest declines come from North-North trade, indicating once more how the developing world is largely picking up the slack. What's more, proportions of the classic forms of dependency theory--North South and South-North trade--are little changed.

Indeed, poor countries are doin' it for themselves. There was a time when they used to say: "Behind every rich country was a poor country..."

Belgium, America's Third Largest Creditor [Sort Of]

♠ Posted by Emmanuel in , at 3/23/2014 06:00:00 AM
While researching the previous post, I came across a seemingly astounding finding: Unbeknownst to most, a European country has somehow gained a podium place in the international suckers' competition known as "Major Foreign Holders of [US] Treasury Securities." Topping these hosers was China with a GDP of $8.358 trillion, followed by Japan ($5.96 trillion) and, er, Belgium (483.7 billion)[?!]. $310.3B worth of Treasuries is nothing to sneeze at.

The usual suspicion with high-placing Treasury holders without much reason for being there is that others course their transactions through them to disguise their motives and, consequently, their holdings. In past years, the United Kingdom has served this purpose as a lightly regulated money center. Reports would indicate massive UK holdings, which were eventually heavily revised downwards during following months. At present, Caribbean offshore entities still perform this function, ranking a combined fourth overall among Treasury holders.

So, is Belgium becoming the next major offshore economy? Especially since the European banking crisis, regulations there have certainly tightened, not loosened. What's more, Brussels does not usually count as a financial center--not even for Western Europe. What, then, is going on here? After consulting IPE stalwart Thomas Oatley over at UNC, he points me in the direction of Euroclear,  a massive clearinghouse headquartered in Brussels that was established to facilitate trade in Eurobond markets in the late Sixties. Since then, it has if anything else increased the scale of its operations and now boasts "[e]very 6 days we settle transactions equivalent to the GDP of the EU":
We help you to be more successful by making it easier for you to settle domestic and cross-border securities transactions and safekeep your investments. We also help you manage the risks and exposures arising from your transactions.

The assets we hold for you are valued at €23 trillion. The total value of securities transactions settled for you by the Euroclear group is over €540 trillion per annum. Our multi-lingual, highly trained team of professionals based in Europe, Asia, the Middle East and the Americas are committed to providing personalised support
OK, so this appears to be a plausible hypothesis: someone is using Euroclear to course a large amount of Treasury purchases. If so, then we have two more questions. First, what country or countries are these? Next, what reasons do they have for disguising their purchases by coursing Treasury purchases through Belgium? These are mysteries that will reveal themselves as matters unfold. Obviously, Russia figures large in the minds of some--including Tyler Durden (the Fight Club protagonist?) at Zero Hedge.

So no, a European country populated by folks with anarcho-syndicalist tendencies is prolly not lending China/Japan-like jillions to the US. Go somewhere else for conspiracy theories. Sorry.

As an aside--this being the weekend--I am keen on Belgium going far in the World Cup with a talented young squad. I might've taken a punt (Britspeak for "bet") on Belgium but they're currently the fifth most-favored team to win the event.

Bailout Fatigue: Republicans, Ukraine and IMF Funding

♠ Posted by Emmanuel in ,, at 3/22/2014 01:38:00 PM
During the European financial crisis, the term "bailout fatigue" was coined to mean Germans getting tired of bailing out undisciplined EU members. Now, the term is being bandied about as the Obama administration eyes increasing US contributions to the IMF in light of the events in Ukraine. Unfortunately for Obama, while Republicans have been the more belligerent of the two American political parties, they haven't exactly put their  (peoples') money where their mouths are at.

Republicans generally agree with the John Bolton (remember him?) line that massively increased military spending is  necessary in order to combat the Russian menace and all manner of threats against freedom, justice, mom, apple pie, and the American way of life. It thus seems odd that only when it comes to upping contributions to the IMF--subservient panderer to Western interests that it is in funneling emergency lending to various destitute but geopolitically important countries like Ukraine--that they balk.

In other words, deficits from military spending don't matter, but deficits from the Obama administration asking for increased IMF funding do:
House Speaker John Boehner and other congressional Republicans say the increased IMF money isn’t necessary to help Ukraine. Instead, they say the White House is using the aid measure to persuade Congress to make changes to the IMF that have stalled since Republicans took the House majority in 2011. “At a time of massive deficits, we have a problem with expenditure of these funds -- and increasing them,” Representative Patrick McHenry, a member of the Financial Services panel, said in an interview at the Capitol last week. 
The debate concerns making permanent a temporary boost to IMF resources committed by the US during the global financial crisis:
The U.S. contributed a $100 billion credit line in 2009 to an emergency pool of money intended to boost the IMF war chest during the global recession. The proposal would transfer about $63 billion from that pool into the fund’s permanent resources to boost the U.S. share at the fund, or quota, and implement a 2010 international agreement. The Senate plans to hold a procedural vote on March 24 on Ukraine aid legislation, S. 2124, that includes the IMF funding [my emphasis]. The bill also would authorize $1 billion in loan guarantees and sanctions against Ukrainians and Russians deemed responsible for corruption and violence...

“I strongly oppose having that provision in there,” said Representative John Campbell, chairman of the House Financial Services subcommittee that oversees the IMF. “What the administration is saying about it is absolutely, patently false. This is the problem with this administration, they can’t be straight with you.”  
In essence, the IMF has been subject to political football by the world's most indebted country. Which, in truth, would only be committing more money to IMF resources from funds borrowed from countries like, er, Russia. Anyway...
Republican and Democratic administrations have seen opposition from the other party when trying to pass IMF measures, said Edwin Truman, an assistant Treasury secretary for international affairs in the Clinton administration. “These are always hard swallows, they’re big numbers, it’s not easy for anybody to vote for,” he said. “Then you have layered on top of that the current poisonous atmosphere.”

Misunderstanding of what the IMF does, combined with recent bailouts to rich countries such as Greece or Ireland, have emboldened opponents. IMF supporters have left Congress [...] while Tea Party-backed Republicans are questioning foreign bailouts as U.S. debt rises.
What these Republican doofuses probably don't recognize is that the IMF is a fairly inexpensive way of exercising (financial) hegemony on the cheap. Sure the US has massive debts, but when it comes to emergency lending to strategically important countries, the IMF helps fulfill such purposes.

UPDATE: To no one's real surprise, increased IMF funding has been dropped from the Ukraine aid package the US is readying.

Can Israel's 'Silicon Wadi' Solve California's Drought?

♠ Posted by Emmanuel in , at 3/20/2014 09:23:00 AM
I almost forgot about this one. A few weeks ago, Israeli PM Binyamin Netanyahu was in California promoting his nation's high-technology industries. Those in the know of global high-technology industries should be well aware of the country's burgeoning tech sector known as "Silicon Wadi" [1, 2] as a pun on California's Silicon Valley. Yes, its progress has been hampered by blowback from its nation's political stances, but its younger entrepreneurs are trying to depoliticize their activities by distancing themselves from the industry's military roots.

At any rate, one of the things the "copycat" Israeli effort may outdo the original in is water management. Having declared an emergency this year, California is in dire straits. Is there any way of solving this problem short of depopulating California? Unfortunately, Silicon Valley has been minimally interested in addressing the water shortage plaguing their home state. However, Israelis have long been at the forefront of addressing this issue with, er, less-than-friendly neighbors and desert conditions in about half its territory.

And so it was that grizzled veteran California Governor Jerry Brown struck up a partnership with Netanyahu to utilize Israeli know-how in combating drought:
Israeli Prime Minister Benjamin Netanyahu offered to help California weather its drought with water conservation and desalination techniques pioneered by his country’s scientists. Netanyahu signed a memorandum of understanding for joint technology development yesterday with California Governor Jerry Brown in a tour through Silicon Valley that also took him to Apple Inc. and other computer-related companies.

“California, I hear, has a big water problem,” Netanyahu said in an interview yesterday on Bloomberg Television. “We in Israel don’t have a water problem. We use technology to solve it, in recycling, in desalination, in deep drip irrigation and so on. And these technologies could be used by the state of California to eliminate its chronic drought problem.” 
The popular traffic app Waze has put "Silicon Wadi" on the minds of many others. What if Israeli technology could solve California's water woes? That would put its name recognition over the moon methinks.

Loonie Left: Air Canada Ditches Venezuela

♠ Posted by Emmanuel in , at 3/19/2014 01:33:00 PM
When it comes to idiotic conspiracy theories, Venzuela's President Nicolas Maduro is pretty hard to beat. Almost everything he finds disagreeable is part of an American conspiracy to overthrow him. The latest case in point is Air Canada canceling its three weekly round-trip flights to Caracas. Due to currency controls, Venezuela makes airlines sell tickets domestically in bolivars, after which they will be converted into US dollars. Or so the government's jibba-jabba goes. Actually, it has accumulated over $3 billion in arrears to various carriers who are unable to receive promised foreign exchange. How bad is the situation? Even TAME, the airline of neo-Marxist Ecuador has stopped flying there due to unpaid accounts. So much for socialist solidarity.

So, it was inevitable others would follow suit. On top of long overdue payments, Air Canada cites violence as a reason not to go to Venezuela:
Air Canada has suspended flights to and from Venezuela, citing concerns over security. The airline said it would consider resuming operations once the situation in Venezuela had stabilised. It operated three return flights between Toronto and Caracas per week...."Due to ongoing civil unrest in Venezuela, Air Canada can no longer ensure the safety of its operation and has suspended flights to Caracas until further notice," says the Canadian airline in a statement...

Several international airlines have reduced operations in recent weeks in Venezuela, but their main grievance has been the government's tight currency controls. International airlines say the government of Nicolas Maduro owes them more than $3bn (£1.8bn). Tough foreign currency controls make it difficult for foreign airlines to repatriate money obtained from ticket sales in Venezuela.
My belief is that Air Canada is creating a specious excuse to get out of Venezuela. Like the others reducing flights there, being unpaid and instead holding funny money is not an attractive proposition. At any rate, Venezuela has since banned Air Canada:
The Venezuelan government said Tuesday it is severing commercial relations with Air Canada after it suspended flights to the country for security reasons. "We are putting an end to this commercial relationship with Air Canada until President Nicolas Maduro decides otherwise," Venezuela Transportation Minister Herbert Garcia said...

But the International Air Transport Association says the government has made no dollar payments to the airlines since October, running up a $3.7 billion backlog. Tony Tyler, who heads IATA, said Wednesday: "Airlines certainly cannot sustain operations indefinitely if they can't get paid."

Venezuela's President Nicolas Maduro responded on Saturday, warning airlines of "severe measures" if they reduced their operations. "The company that leaves the country will not return while we hold power," Maduro said.
What are they going to do? Not pay the airlines what they're owed? That's already happening. If Maduro and company remain--and there may be reason to believe his regime is durable despite Zimbabwe-like economic mismanagement--the only question is when North Korea-like isolation will arrive. Nothing--FDI, foreign exchange, goods, services, people--is coming in and everything wants to go out.

Payback Time: Does US Use WTO to Kick Russia?

♠ Posted by Emmanuel in , at 3/17/2014 01:57:00 PM
In the absence of substantial US-Russia trade ties, the question American officials are asking themselves right about now is "How do we 'punish' Russia?" Sure the capital, foreign exchange and stock markets are naturally doing their part in hurting Russia, but how can the US throw its weight around directly? The UN is obviously out since Russia can veto everything from here till kingdom come as a permanent Security Council member.

I almost missed this relatively arcane one: WTO accession involves meeting so-called sanitary and phyto-sanitary standards (SPS). Basically, this involves meeting safety standards for trade in animals and plants--especially food. Yes, Russia finally joined the WTO at the end of 2011--some are now saying that was a mistake to let it in--but it has nonetheless been helping its allies get into the trade club. Witness Kazakhstan which is one of the few non-failed states still outside the organization. To get in, it needs guidance on SPS, for which it is counting on Russian assistance.

However, a recent Russian delegation headed for the United States regarding SPS was turned back. Being ever-so-conspiratorial, the Russians cite unease over Ukraine as the source of American pique:
Russia said on Monday that the United States abruptly withdrew an invitation for Russian veterinary officials to attend talks this week and accused Washington of "sabotage", an apparent sign of tension over Ukraine.
Russia's veterinary oversight agency, Rosselkhoznadzor, was informed less than 24 hours before its delegation was to depart for Washington that the visit was "unacceptable" for the United States, Rosselkhoznadzor said.
In a statement, it accused the United States of "sabotage of Russia's participation" in March 3-6 talks aimed at agreeing veterinary and phytosanitary measures in connection with Kazakhstan's bid to join the World Trade Organisation (WTO).
Poor Kazakhstan being allied with Russia at this point in time. They can't kick Russia out of the WTO so easily, but they surely can make life difficult for its allies. 

Putting Alitalia & Qantas Out of Their Misery

♠ Posted by Emmanuel in at 3/16/2014 11:19:00 AM
Who's next to join Swissair in the Great Hangar in the Sky?
IPE Zone readers of a certain age remember a time when having a flag carrier was a de rigueur symbol of nationhood. In the decades since, we've learned a lot about the management chops of different nations and their favored commercial interests. Even the mighty have fallen: Swissair used to be regarded as the "flying bank" due to its sterling safety record and financial solidity. By 2005 it was sold to Germany's Lufthansa.

Today, let us consider some more cash-hemorrhaging airlines. As a general rule, airlines do not make much if any money in this day and age of skyrocketing fuel prices, but these two are interesting for different reasons. Consider Alitalia. Because of their favorable locations in between Europe and Asia,  Middle Eastern carriers have been among the few profitable carriers--think Emirates, Etihad ans Qatar Airways. As it so happens, the perennially cash-strapped Alitalia and its equally broke nation are considering a sale to Etihad. Despite the logical extension it would make for the Abu Dhabi-based airline's network, there is still said to be only a "50-50" chance the deal will push through in the coming months:
[Etihad] is not hurrying into a deal with Alitalia, which is struggling with its more than 800 million euro ($1.1 billion) debt and growing competition. Asked in an interview how confident he was at this stage of the deal going through, James Hogan said: "It's 50-50...[w]e had also entered into due diligence with other airlines in the past and walked away."
Hogan said the deal could only go ahead if Alitalia met Etihad's criteria on costs, profitability, restructuring, the airline's network and strong management. He did not provide further details. Talks between the airlines intensified last month and sources close to the matter said Etihad might be interested in buying a stake of up to 40 percent in the Italian carrier.

A deal with the Italian airline will allow the Etihad access into Europe's fourth-largest travel market. For Alitalia, this would bring in resources it needs to invest in a new strategy based on long-haul routes. Sources have said Etihad wants heavy restructuring of Alitalia's debt and was also asking for job cuts at the Italian airline. "I have not commented on job cuts," Hogan said when asked if job cuts were needed at Alitalia. 
Spoken like a true businessperson. Etihad itself is profitable even if it is not making money hand over fist. The question is whether the advantages of acquiring Alitalia's Italian routes--supposedly Europe's fourth-largest travel market--will be outweighed by taking on "legacy" costs mostly related to labor: overstaffing, pensions and accumulated debt.

Another once-proud carrier fallen under hard times is Qantas. With losses mounting, it announced 5,000 layoffs earlier this year. Still, it continues to bleed. Unlike Alitalia, though, it cannot simply be sold since there are Aussie laws limiting the possible share of foreign ownership in it to 49%. To its chagrin, its strongest competitor in Oz, Virgin, does not have this limitation and has bolstered its resources by, among other things, selling ownership stakes to Etihad:
Qantas has been making heavy losses on its international business. Now its once lucrative domestic business is under pressure and Qantas is in a loss making war to maintain its 65 per cent market share over Australian skies. Its chief rival, Virgin Australia - which began as a cut price airline in the wake of the Ansett collapse - is now enticing corporate customers to come on board.

Standard & Poor's downgraded its credit rating to "junk" on the day Nelson Mandela died, meaning Qantas can no longer claim to be the only "investment grade" airline left in the world. So how did Qantas get into this mess? The most obvious answer is that "this the free market" and the forces of supply and demand are at work. And after all, Qantas is listed on the share market as one of Australia's top 100 companies by market value - though getting close to the tail end of that list.

But the other more complex part of the story is that Qantas remains shackled by government regulation through the Qantas Sale Act of 1992 which restricts foreign ownership to 49 per cent. Virgin, on the other hand, has been able to attract significant foreign investment and lists three state-owned airlines as its top three investors - Air New Zealand, Etihad and Singapore Airlines. Combined, they own more than 60 per cent of Virgin stock and have signalled interest in maybe buying more. Qantas has been furiously lobbying the Federal Government to have the Qantas Sale Act repealed or amended so it can compete on a level playing field with Virgin.
So, is Qantas all in on letting the free marketing reign? Er, no. It has also sought government protection in terms of guaranteeing its borrowing so the cost of being a junk borrower are lessened:
But the messages became mixed when Qantas also urged the Government to provide a standby debt guarantee - where Qantas would use the government's sovereign credit rating for borrow at a more attractive rate than "junk". The proposal sparked a national debate over whether any flavour of government should risk potentially owning the debt if Qantas ever defaulted.
Can these guys make it in the rough-and-tumble airline industry? I wouldn't bet against at least one going to the way of Swissair. Already, Aussie unionists are claiming (debatable) safety concerns if another 10,000 jobs are shifted abroad to lower costs for Qantas.

The Semi-Unfixables: Cyprus, Tunisia

♠ Posted by Emmanuel in ,,, at 3/14/2014 08:41:00 AM
Oh, the western world's woes: it has now taken on the incredible financial basket case that is Ukraine while not exactly "fixing" the situations of its other chronic deadbeats. Today, consider the plight of Cyprus and Tunisia, Europe's nearby ne'er-do-wells that are, er, not doing well despite Western tutelage and all that jazz.

First, consider Cyprus. Despite all the protestations that this is not your grandfather's IMF with all sorts of harsh conditionalities [1, 2], the truth is that Cyprus has been put under the gun of privatization--or else. Last month, their parliament voted down privatization measures demanded by the EU/IMF, thus endangering its bailout package. This month, it reversed course and supported these privatization demands calling for an immediate sell-off of SOEs:
The Cypriot parliament has approved a roadmap for privatisations, averting a showdown with international lenders insisting on state sell-offs as part of a $13.77bn bailout package. In a show of hands on Tuesday, 30 politicians in the 56-member parliament endorsed a guideline for asset sales, a day before a deadline for approval was set to expire on March 5.

The parliament's rejection of an earlier privatisation motion on February 28 risked derailing the bailout accord that was brokered with the European Union and International Monetary Fund in March 2013. Cyprus must raise $1.93bn from privatisations as a condition of the bailout, or rescue money will not be distributed.  Left-wing parties had thrown out the bill over concerns that workers' rights would not be safeguarded.

Finance Minister Harris Georgiades applauded the vote which he said ensured that the country could stay afloat and on a path towards stability. "Apart from being an obligation, the privatisation programme is also an opportunity to attract investment, bolster efficiency and competitiveness and shed the weight of state control on significant sectors of the economy,'' said Georgiades.
So that's an IMF-Europe sort of deal. However, consider also another Bretton Woods institution here with a World Bank-North Africa deal. Like virtually all Arab Spring countries, the unfortunate truth is that they're worse off now than before those political shenanigans took place. Check out Tunisia via the World Bank press blurb:
World Bank Regional Vice President for the Middle East and North Africa, Inger Andersen announced today a US$1.2 billion program of support for the democratic transition in Tunisia. The announcement came at the end of a three-day visit to Tunisia to consult with government officials, civil society and the private sector on how best to seize upon the momentum established by the adoption of the country’s new constitution...

The financing planned for 2014 would include up to US$750 million in support of government reforms to level the economic playing field and promote growth and job creation, while increasing accountability in the delivery of services to citizens. The level of support will match program performance during this last year of democratic transition. A US$300 million project focused on building up the capacities of local government will support the provisions on decentralization in the new constitution. The remaining funds will supplement ongoing Bank activities. A credit facility aimed at supporting Banks that give small and medium enterprises much needed access to credit will benefit from an added US$100 million investment. An extra US$50 million for a project designed to promote exports will help identify sectors where Tunisia can be particularly competitive. Lastly, as part of a continuing collaboration with the national water authority, a US$20 million project is scheduled for this year that will provide the greater Tunis metropolitan area with another water pumping station.
By the World Bank's own admission, Tunisia is in dire straits. In colloquial terms, it is messed up:
[S]hort-term measures will be needed to contain the budget deficit. The deficit should reach 7.2 percent of GDP against 5.1 percent last year. This increase in public spending combined with high commodity prices and sluggish manufacturing exports have kept the pressure on external accounts. The current account deficit will remain high at an estimated 8.1 percent of GDP (same as 2012). Foreign Direct Investment and other net external financing inflows will not suffice to prevent a run-down in foreign exchange reserves, which should stand close to the equivalent of 3 months of imports by year end. Given the mounting strains on the fiscal and external balances, adjustments will be necessary in 2014.
Does the West really have unlimited funds and patience to deal with these basket cases to take on more such as Ukraine? I guess there's only one way to find out. I have classed these countries as semi-unfixables. Ukraine, on the other hand, is a hardcore unfixable.

Chumpions League: Gazprom, Putin & Schalke 04

♠ Posted by Emmanuel in , at 3/12/2014 01:25:00 PM
They, ah, invade others' territory quite well
When it comes to the worst shirt sponsor of all time in world football, AIG in 2009 comes first. Despite falling into massive disgrace, Manchester United was forced to keep it until the 2009-2010 season to fulfill its contract. You could have hardly done worse if you had Bear Stearns on your shirt. However, the highly interesting world of football on one hand and money and politics on the other will always result in dubious sponsorship. Remember the saying: the best way to make a small fortune in football is to start with a large one.

While watching Bayern Munich host Arsenal at the Allianz Arena yesterday evening, the scrolling Gazprom banners did not escape my attention. A few days ago, I included a picture of Schalke 04 star Julian Draxler while discussing the EU's reluctance to punch Russia in the nose over its shenanigans in the Crimean peninsula. Actually, the story is bigger than that. Much bigger. Reaching the Champions League is no mean feat, and one of the largest bankrollers of Schalke 04 in recent years has been no less than its chairman's buddy--a certain chap who enjoys circulating shirtless photos of himself riding horseback:
[Schalke 04] is also a club whose chairman, Clemens Tönnies, has a close relationship with the Russian president, Vladimir Putin. A club which receives 16 million Euros a year from Gazprom, the energy company owned by the Russian state. It was a relationship which most had seen fit not to make too much of a fuss about. They were happy to "separate sport and politics". As events develop in the Crimea, one wonders for how much longer such an attitude can endure.

Some Schalke fans have acted in recent days. The fan publication "Schalke Unser" sent a letter to the board this week urging them to distance themselves from Putin. "FC Schalke 04 is a club with democratic foundations, that holds freedom of opinion in high esteem," wrote Roman Kolbe, "We should not serve an autocrat".

The letter was a response to reports that Putin had invited the Schalke team to meet him, in a further victory for the separation of sport and politics. Shortly after the invitation was sent, he ordered soldiers to march into the Crimea.
OK, so it's not quite yet on par with being an Englishman chummy with Kaiser Wilhelm II in 1914, but a lot will depend on what Putin does from here on in. The Schalke 04 boys visiting Putin would be up there with Rodman and his troupe of former NBA starts going to North Korea. In this case, though, they know who their paymaster is:
That invitation still stands, even with Putin's hands tied up in the various machinations of the Crimea, the Ukraine and, dare we say it, Estonia. Schalke's general manager Horst Heldt explained at a press conference yesterday, however, that "we haven't yet made any travel plans".

Many Schalke supporters must be relieved. It would be humiliating indeed to see the likes of Julian Draxler, Klaas-Jan Huntelaar and the increasingly politically impressive Kevin-Prince Boateng smirking at Putin's biceps, while Tönnies scurried around looking for feet to kiss. But even without an official visit, Schalke's relationship to Putin, and the various pies in which he has fingers, remains strong.
If worse comes to worse, will Schalke 04 be forced to purge itself of Gazprom money? Methinks matters will not go much further than the EU canceling talks over visa-free Russian visits and stronger trade ties. After all, those agitating the most (hello US and UK) do not really have that much skin in this game. 

Besides, why doesn't anyone complain about equally repressive GCC states bankrolling European football teams--especially in the UK?

PRC Landmark: Interest Rate Liberalization by 2016

♠ Posted by Emmanuel in at 3/11/2014 10:11:00 AM
There is an ugly term economists have for deposit rates being lower than the rate of inflation: financial repression. The other term, negative real interest rates, is marginally better. For a long time, China's extremely investment-heavy growth has been conditioned on giving depositors poor returns on their savings, while lending money to (usually state-affiliated) enterprises at concessional rates.

With many investments not bearing fruit and polluting the Chinese environment besides, there has been a large rethink of this duality. With CCP bigwigs currently setting economic policy in Beijing for the next few years, one of the most notable changes promised is full-liberalization of interest rates in two years' time. That is, banks will be able to offer depositors higher rates, which in turn will mean borrowers will have to grow accustomed to a semblance of risk-based pricing of loans. From China Daily, still our favorite official publication after all these years:
China is set to fully liberalize its interest rate within one or two years, in a bid to further reform the financial sector, the Central Bank governor Zhou Xiaochuan said on Tuesday at a news briefing during the two sessions.

"We will let the market play its due role in interest rate liberalization. That's for sure," Zhou said. "Deposit rate is set to ease within one or two years. It's part of our plan." He added that interest rates will possibly go up, but will eventually level in the longer term due to market forces and competition.
Interest rate liberalization is but one part of an expected set of reforms to make China's economy more market-based:
Financial reforms, including yuan globalization, banking regulations, private equity, debt risks control, will be launched with zeal, although some steps may take three or five years, Zhou said. The country has stepped up its efforts to push for economic reforms in recent years, rolling out a slew of measures and regulations in the process.

"Reforms in other fields, including rural reforms, resource distribution and economic opening-up, will also involve financial reforms," Zhou added. "We will get them done step by step." 
It's about time is all I can say.

UPDATE: MarketWatch suggests that the emergence of online banks in China offering higher placement rates is driving this change as state-owned banks have felt the sting of withdrawals:
And for those awaiting marketization, they may owe a big thank you to the Internet companies. Why? Just several days ago, state media quoted Zhou as saying that China would not ban wealth management products from online providers, such as Yu’e Bao (a high-yield online investment product offered by e-commerce giant Alibaba since June, which can be easily accessed via smartphones) despite the recent controversy created by those products.

The rapid rise of Yu’e Bao and other similar products have generated hot debate, as tens of millions of ordinary Chinese savers have withdrawn their bank deposits and flocked to such Internet finance products that offer higher deposits rates.

According to Yu’e Bao’s statistics, it had attracted over 250 billion yuan ($41 billion) in assets and 490 million clients as of mid-January. And as of late-February, the number of clients had grown to above 810 million, while a Xinhua news report out Tuesday said assets had doubled to 500 billion yuan.
 SCMP also agrees that online banking is helping drive this liberalization.

Crappier Than the West's: PRC Credit Rating Agencies

♠ Posted by Emmanuel at 3/10/2014 11:30:00 AM
You have to be pretty bad to outdo Western credit rating agencies in terms of honestly rating securities free from conflicts of interest. However, it is unfortunately possible. In the wake of the first mainland China bond default, investors are beginning to question the assumption that the state will rescue these firms and that their ratings can be relied upon:
“China’s rating system has problems similar to those in the U.S. in 2008,” Guan Jianzhong, the Beijing-based chairman of Dagong, said in a phone interview yesterday. “There’s cut-throat competition and it’s not about who accurately evaluates the risks, but comes down to prices and ratings.”

The U.S. Financial Crisis Inquiry Commission said in 2011 that inflated credit grades were partly to blame for the worst downturn since the Great Depression, as rating companies lowered standards to win business amid a housing boom that fueled issuance of mortgage-backed bonds. China ended in 2012 a four-year ban on sales of asset-backed securities and credit assessments are of growing importance as market forces play a greater role in pricing risk in its $4.2 trillion bond market.
In a manner of speaking, the pressures for Chinese credit rating agencies to inflate ratings is even higher. For, Chinese issuers are not allowed to raise money in capital markets unless they get at least an AA- rating. Talk about high expectations...that are probably not always entirely met through legitimate means:
Dagong, which cut its U.S. sovereign rating to A- from A on Oct. 17, was set up in 1994 and is one of China’s three biggest rating agencies. The other two are China Lianhe Credit Rating Co. and China Chengxin International Credit Rating Co., which is partly owned by Moody’s Investors Service.

Issuers in China must obtain a rating of AA- or above in order to secure authorities’ approval to sell debt, Guan said. He warned in 2010 that grades assigned to bonds issued on behalf of local governments were misleading and failed to reflect the risks faced by investors. “The problem is getting worse,” Guan said. “Ratings on companies have been upgraded rapidly not because their repayment abilities have improved, but for the sake of getting bonds sold at lower rates, for getting the business done.”
Again, note that the person who made those comments is not some bond analyst but the head of one of China's largest credit rating agencies.

The only real advice I can offer is to do due diligence yourselves on these companies. Ultimately, you will have only yourselves to blame and not some credit agency if these issuances go kaput. Caveat emptor!

Are Stolen Passports Really That Common?

♠ Posted by Emmanuel in ,, at 3/09/2014 09:34:00 AM
[On a personal note, dear readers, rest assured that our thoughts and prayers are with those affected by the lost Malaysia Airlines flight. Alike the missing Boeing 777, the airline has a sterling safety record, making things all the more mysterious.]

One of the more notable bits of news in surrounding the mysterious disappearance of MH370 is the absence of two European passengers who were supposed to be on board the flight but were actually not since their passports had been stolen:
[A]fter the airline released a manifest, Austria denied that one of its citizens was aboard the flight. The Austrian citizen was safe and sound, and his passport had been stolen two years ago, Austrian Foreign Ministry spokesman Martin Weiss said.

Similarly, Italy's foreign ministry confirmed none of its citizens were on Flight 370, even though an Italian was listed on the manifest. On Saturday, Italian police visited the home of the parents of Luigi Maraldi, the man whose name appeared on the manifest, to inform them about the missing flight, said a police official in Cesena, in northern Italy. Maraldi's father, Walter, told police he had just spoken to his son, who was fine and not on the missing flight, said the official, who is not authorized to speak to the media. Maraldi was vacationing in Thailand, his father said.

The police official said Maraldi had reported his passport stolen in Malaysia last August and had obtained a new one. But U.S. law enforcement sources told CNN that both the Austrian and Italian passports were stolen in Thailand.
It's all very curious. You would think that it would not be so easy to fly using illicitly obtained documents for obvious reasons: First, security has obviously been tightened post-9/11. Second, new biometric technologies--fingerprint protection and facial images--have come into widespread use to prevent exactly the kind of identity theft we have just observed. Europe has been at the forefront of implementing biometric technologies. What's more, while there is a problem authenticating the passport holder's identity when a passport is lost, this should not be a problem when the passport is stolen since the biometric information is all there:
However, chipbased e-passports have the same problem as conventional passports in authenticating the passport owner in the event the passport is stolen or lost.
Using deductive logic, matters become elementary, my dear. The likely reason why people still steal travel documents is because authorities are one step behind in preventing their use once stolen. That is, actual enforcement has not caught up with the promises of these new biometric technologies. Hence the notion of "crime entrepreneurs":
Most crime entrepreneurs are not the diabolical creative geniuses described by the mass media, but mobile risk takers responding to changing opportunities and law enforcement by trial and (custodial) error. This may imply that individual changes usually take place gradually: smugglers change commodities, e.g. from smuggling hard drugs to smuggling soft drugs on a larger scale; some smugglers enter organized cross-border fraud, mainly fiddling the VAT system or EC regulations or they broaden their trade to neighbouring branches while stil] using the same skills and social networks. Those who had been fencing stolen passports for forgery noticed that these documents were also valuable to those engaged in the smuggling of illegal immigrants.
Otherwise, it is certainly a researchable question what the extent of passport theft is in the face of clear lapses in enforcement.

UPDATE: Authorities now suggest that the two flyers using stolen passports were Iranian, but with no terror ties. 

PRC 'Bear Stearns Moment': 1st Local Bond Default

♠ Posted by Emmanuel in , at 3/07/2014 08:35:00 AM
They built 'em; buyers didn't come
Chinese businesses have acquired a reputation for being protected by the national or local government in the absence of true "market discipline." That is, they may even be chronic money losers, but they are continually fed cash infusions in the hope that they will eventually turn the corner. However, with new PRC policies coming in spelling the end to subsidized credit, energy and so forth, Beijing has decided to make Chinese firms face the rigors of domestic and international competition. Hence its first impending domestic commercial bond default.

It will come as a surprise to no one following international business that the casualty will be a solar panel maker. These manufacturers have been given generous government supports in the expectation that solar energy will be a growth market of the future. Unfortunately, this scenario has yet to pan out. What's more, the Chinese government is under pressure from the EU and US (among others) for allegedly dumping solar panels. To be sure, the Chinese have also made counter-challenges: following the back-and-forth legal wrangling gives me a frickin' headache.

At any rate, the stay of execution has not been forthcoming for Chaori--the first PRC victim in a solar bloodbath as price wars take their toll from Europe to Asia:
China's first domestic bond default looked set to occur as expected on Friday as there was no sign of a last-minute bailout for solar equipment producer Chaori Solar, an event seen as a landmark for market discipline in the world's second-largest economy.

The loss-making Shanghai Chaori Solar Energy Science and Technology Co Ltd (002506.SZ) warned this week it could only pay out less than five percent of the 89 million yuan ($14.5 million) in interest due on 1 billion yuan worth of bonds issued in 2012.

After a series of near misses in recent years, in which local governments stepped in at the last minute to rescue local champions, analysts say the precedent-setting default is likely to force a re-pricing of credit risk in a market that long assumed even high-yielding debt carried an implicit state guarantee.
"The Chaori default goes to show the government will begin to let the market decide the fate of weak borrowers. This test case indicates the government is addressing the moral hazard issue," said Christopher Lee, managing director of corporate ratings for Greater China at Standard & Poor's in Hong Kong.
So, the implicit bailout has been rolled back. Chaori may be the first demonstration, but don't be surprised if others follow:
Such an adjustment appears well-justified, as analysts expect more defaults on loans, bonds and shadow-bank credit this year. Local governments and firms in industries suffering from overcapacity are the focus of concern.

Last month, a high-yield investment product issued by Jilin Province Trust Co Ltd and backed by high-interest loans to a struggling coal producer failed to repay investors on maturity. Ratings agency Standard & Poor's estimates overall debt in China reached 213 percent of GDP last year, up sharply from 140 percent in 2007. Corporate debt comprises the bulk of this total.
There is nothing wrong with borrowing per se--unless there is significant overcapacity in the borrowers' industries and (unwarranted) expectations that Uncle Mao will bail you out each time you get into trouble. For a lot of Chinese companies nowadays, both unfortunately hold. With some exaggeration, Bloomberg suggests this may be the "Bear Stearns moment" for Chinese credit, after which lenders become far warier:
This could be China’s “Bear Stearns moment,” strategists at Bank of America Corp. said earlier this week, and may prompt investors to reassess credit risks as they did after the troubled U.S. lender was sold to JPMorgan Chase & Co. in March of 2008. Six months later, Lehman Brothers Holdings Inc. collapsed in the biggest bankruptcy in U.S. history.

“This will likely be the first of many defaults, although I don’t think it’s going to cause a cascading effect in the bond market,” said Brian Coulton, a global emerging-market strategist in London at Legal & General Investment Management, which manages some 450 billion pounds ($753 billion) globally. “Short term, we’re likely to see higher bond yields but in the long term, this will create a better market for pricing credit risk.”

The yield on five-year AA- notes rose eight basis points to 7.77 percent on March 5, the most in almost four months. Yields rose a further five basis points to 7.82 percent yesterday. Ratings of AA- or below in China are equivalent to non-investment grades globally, according to Haitong Securities Co.
Welcome to the (somewhat) rougher and tougher China. 

UPDATE 1: Marginal borrowers are canceling bond issuances in the wake of Chaori.

UPDATE 2: PRC yield spreads are (surprise!) widening.

If Chinese Cars Can't Sell at Home...

♠ Posted by Emmanuel in , at 3/05/2014 09:36:00 AM
The Qoros 3 looks quite handsome, but...
...what more abroad? There has been a certain fear factor--especially from less competitive European mass manufacturers alike Citroen/Peugeot, Fiat, Ford, Opel and Renault--that Chinese would be the next to undercut their already-dwindling sales with cheap products after the Japanese and South Koreans of the not-so-distant past. Moreover, it has been widely assumed that they would be at the forefront of China's forthcoming march into PRC-branded goods.

Actually, no. Or at least not yet. In reality, Chinese cars are taking a beating at home from foreign automakers viewed as having more desirable nameplates. The current bone of contention concerns requiring foreign automakers to partner up with Chinese ones in selling vehicles in the PRC. The Chinese automakers are adamant that they will be wiped out if the foreign automakers are allowed to go it alone in China:
Chinese brands will be “killed in the cradle” if the government allows foreign automakers to become more independent from their domestic partners in the world’s biggest car market, the country’s main auto group said.

The China Association of Automobile Manufacturers voiced its warning yesterday as it reported that Chinese brands in January extended market-share losses, falling 4.9 percentage points from a year earlier to 38.4 percent, while foreign companies such as General Motors Co. (GM) benefited from record industry sales. Geely Automobile Holdings Ltd. (175) alone saw deliveries tumble 47 percent.

“Relaxing the current foreign ownership restrictions will wipe out Chinese brands,” the state-based auto association said in a statement in Beijing. “Foreign companies can totally use the competitive advantage of their global supply chains to support a price strategy to kill Chinese brands in the cradle.” 
What's prompted the fear factor?
The comments escalate concerns that the auto group has voiced since a Chinese commerce ministry official said at a forum in October that automakers should prepare for the day when the foreign stake limit is relaxed. Since China opened up its factory floors to foreigners decades ago, companies from GM to Volkswagen AG (VOW) have poured billions of dollars to build cars in the country, as long as they set up joint ventures and kept their ownership capped at 50 percent. 
"Killed in the cradle" is precisely the infant-industry argument.  What's more, even if the 50-50 rule is not followed, Chinese automakers are already feeling the heat as generous subsidies of the past are being rolled back in line with official policy to reduce manufacturing subsidies and ensure that fitter enterprises survive:
Chinese carmaker BYD Co. (1211) may be getting some bad news as it prepares to start selling in the U.S. next year. A planned reduction in government subsidies and a phase-out of interest-rate controls threaten to raise costs for it and thousands of companies across China. 
Chinese manufacturers are going to lose a lot of subsidies they used to have. As labor costs rise, the yuan is also appreciating, while cheap credit and energy is increasingly a thing of the past. Sure it's not easy, but what does it say about Chinese automakers if they have been at the losing end in their home market having all of these advantages in place over the an extended period? After these advantages are removed or greatly reduced by government fiat, what more of a chance do they have in overseas markets?

In automobiles at least, the fears about China wiping everyone else out seem misplaced. Being emotive, big-ticket purchases, automobiles are more emotive buys than most other things. As it so happens, it is precisely in branding and marketing that the Chinese are weak.

What's Worse, Russian Ruble or Ukranian Hryvnia?

♠ Posted by Emmanuel in ,, at 3/04/2014 11:04:00 AM
As you can see, it's Ukraine by a country mile which is worse off, but that's not saying much for Russia's economic prospects.

In Latin America, the two junk currencies and economies du jour are the Venezuelan bolivar and the Argentinian peso. In Eastern Europe, the two notably horrible performers are of course the Russian ruble and Ukranian hryvnia. Almost everyday we read about how these currencies have hit all-time lows. Ukraine's currency recently fell 30-plus percent y-o-y before recovering to "only" a 20% depreciation. With its economy already in dire straits, Ukraine is headed for a default unless someone to stupid enough to (temporarily) prop it up does so. Can it dupe the IMF again?
Ukraine's interim government said Monday it wants a $15 billion rescue from the International Monetary Fund as officials from the emergency lender kicked off a 10-day visit to shape a bailout of the struggling economy. Ukraine's newly appointed economy minister, Pavlo Sheremeta, said the government is aiming for a two-year IMF loan modeled on Ukraine's previous bailout program...

Many of the conditions the IMF has previously required for emergency financing for Ukraine will most likely remain. The IMF halted loan payments in 2011 after Kiev failed to meet key terms, which included phasing out gas-price subsidies and slashing government spending...

Ukrainian Prime Minister Arseniy Yatseyuk on Monday called the IMF's prior financing requirements "harsh demands." But he said his government is ready to take politically unpopular steps the emergency lender is likely to require to open up its war chest.
What does Yatsenuk mean? Harsh demands = "we'll renege again when the natives get restless" (and probably try to reinstall another pro-Russian government).

How about Russia? It's economy is being buffeted by Putin's adventurism, "market discipline" in action. As the ruble too plunges, monetary authorities have begun intervening in FX markets:
Bank Rossii [the Russian central bank], which ING Groep NV estimates sold as much as $12 billion yesterday, said it will start setting ruble intervention parameters daily, a move that will give the central bank more room to ease swings. Goldman Sachs analysts anticipated a change in tack, writing in a note to clients before the move that Bank Rossii may favor a policy that allows for “discretionary interventions” while predicting the ruble has limited “downside” after sinking to a record low. 
Still, I wouldn't worry too much about them since they've saved a lot of FX reserves over the last few bountiful years of elevated energy prices. How does half a trillion--give or take--sound?
Russia’s foreign reserves have fallen $40 billion since May to $493 billion, according to data through Feb. 21. ING said the country’s “net” war chest, excluding its sovereign wealth fund, gold and International Monetary Fund reserves, is about $270 billion. Allowing for funds to cover three months of imports, it shrinks to $150 billion, he said.  
Is simple terms, Russia will set a daily trading band, outside of which it will intervene to move its currency's value back within the band. Russia has a lot of reserves, so it's probably betting that it can insulate itself from Western pressure for a while. We'll just have to wait and see the rate it burns money to determine how long it can hold out.

Double or Nothing: Can Malaysians Revive Las Vegas?

♠ Posted by Emmanuel in ,, at 3/03/2014 10:58:00 AM
Can Malaysians complete Echelon, Las Vegas' boulevard of broken dreams?
A few days ago, Bloomberg TV aired "The Player: Secrets of a Vegas Whale" on how Don Johnson--the gambler, not the Armani-wearing, Ferrari-driving 80s Miami Vice star--magnified the US casino industry's losses post-subprime crisis by "beating the house" through honing his blackjack strategy with the help of math PhDs. Along the way, the documentary recounts the fate of the American casino industry overall. Suffice to say, it has not been particularly lucrative in recent times.

After besting Las Vegas in 2006, Macau has long since left the US gaming destination in the dust. Today, Macau's betting revenues are some seven time greater than those of Las Vegas. Asian high rollers have largely deserted Las Vegas for Macau and other nearby Asian destinations. In the wake of the US subprime crisis, there were consequently many stalled developments in Sin City. While Las Vegas gambling revenues are not falling precipitously alike, say, Atlantic City, they are not growing either.

Hence the deal: why not make the cash-laden Asians "fix" Las Vegas? Actually, it's already happening. A year ago, the Boyd family of Stardust fame sold its stalled mega-development Echelon (pictured above) to Genting, a Malaysian firm that has the sole gaming license in that Asian country. Thinking big, Genting is betting that it can bring the Asian clientele back to Las Vegas with an Asian casino operator. Far fetched? Genting is upping the ante to the billions of dollars...or is saying so at least:
Genting Bhd, Southeast Asia's biggest gaming group, will spend an initial $3 billion to $4 billion to develop an unfinished resort on the Las Vegas strip, as it seeks to build a U.S. empire of casino and leisure assets. The Malaysian company is seeking to expand in the United States as the world's largest economy starts to recover, and as various states relax restrictions ranging from casino licenses to online gambling. Genting, which has held Malaysia's sole casino licence since the 1960s, has focused its international expansion drive on the United States. It opened a casino in New York City in 2011 and has since bought upmarket waterfront properties in Miami.

Genting bought the Las Vegas resort this year from Boyd Gaming Corp for $350 million, in its first push into the U.S. gambling mecca dominated by the likes of Las Vegas Sands. Construction of the resort was suspended in 2008 after the onset of the global financial crisis. "We are looking at $3-4 billion in total if we get approval for a casino licence (in Las Vegas)," Chief Executive Officer Lim Kok Thay, who was widely credited with Genting's global expansion, told reporters.
Let's just say Genting has doubters aplenty. It had something planned for Miami, but it has not yet borne fruit. Still, there may be enough money to be made in Vegas to swing the deal there:
There are also painful memories of Genting’s first foray into Miami in 2011, when it announced the development of a $3.8bn resort on 30 acres of land downtown. While the Resorts World Omni hotel that was to form the core of that resort still exists, the wider project never materialised, partly due to opposition from rival existing hotel businesses, analysts say...

While gaming revenues in Asia are expected to grow by almost a fifth each year to 2015, according to PwC, against 5 per cent growth in the US, he argued that a US push made sense as long as rates of return were above Genting’s cost of capital. “This year stands to be a very exciting year for them because a number of things might come good. In two or three years’ time people are going to realise these guys are formidable competitors,” Mr Pinge said.
We'll see. Genting seems ready to shuffle up and deal.

If I Were the West, I'd Let Russia 'Have' Ukraine

♠ Posted by Emmanuel in , at 3/02/2014 08:57:00 AM
Gazprom-sponsored German star offers opinion on an EU rescue of Ukraine?
Ukraine is a poisoned chalice insofar as it resembles Russia: corrupt and inefficient. Yes, there are geopolitical advantages in being Ukraine's ally. Yet, the list of advantages Russia retains from keeping it within its sphere far exceed those of the West taking it. For Russia:
Russia, which straddles Europe and Asia, has sought a role in the rest of Europe since the reign of Peter the Great in the early 18th century. An alliance with Ukraine preserves that. “Without Ukraine, Russia ceases to be a Eurasian empire,” the American political scientist Zbigniew Brzezinski wrote in 1998. Russian President Vladimir Putin wants Ukraine to join his Eurasian Union trade bloc, not the European Union. Russia’s Black Sea naval fleet is headquartered in Sevastopol, a formerly Russian city that now belongs to Ukraine. Last year Russia’s state-controlled Gazprom (OGZPY) sold about 160 billion cubic meters of natural gas to Europe—a quarter of European demand—and half of that traveled through a maze of Ukrainian pipelines. Those pipelines also supply Ukrainian factories that produce steel, petrochemicals, and other industrial goods for sale to Mother Russia. “Ukraine is probably more integrated than any other former Soviet republic with the Russian economy,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington.
For the EU--the US largely delegates the matter to it--all the article offers is a one-liner:
Western nations want to keep Ukraine from becoming a failed state and to discourage Putin from retaking the nation by force.  
Nobody doubts Ukraine is hemorrhaging cash at a prodigious rate--even more so during this prolonged political crisis. At first I thought its claim of needing $35B was ridiculous. Then, less biased sources actually said that was not far off the mark:
On Feb. 26, Secretary of State John Kerry said the U.S. was organizing a stopgap $1 billion loan guarantee—far short of the $35 billion in aid Ukraine is seeking. The Institute of International Finance, which represents big banks, estimates that with no change in policy Ukraine would need $30 billion in foreign assistance this year alone. The IIF predicts that the International Monetary Fund will insist as a condition for aid that Ukraine cut natural gas subsidies to consumers and industry, and allow its currency, the hryvnia, to fall further, shrinking the trade deficit. The problem: Those measures will be so unpopular that they will jeopardize any new government.
Speaking of which, the IMF has been futile in attempting to structurally adjust Ukraine from unsustainable deficits:
As IMF Managing Director Christine Lagarde announced a team would travel to Kiev in coming days to assess the economic needs, fund spokesman Gerry Rice told reporters yesterday that Ukraine’s leadership is pledging “wide-ranging reforms.” Rice said he didn’t wish to “make comparisons between different governments.”

“I will be probably the most unpopular prime minister in the whole history,” Yatsenyuk told Parliament before being approved yesterday, heralding decisions on cuts in subsidies and welfare payments and later calling his job a “political kamikaze” mission. “But we will do everything possible to avoid default.”

The IMF has heard such promises before. In loans dating back to 1994, “usually the IMF had made two quarterly disbursements and then stopped because the Ukrainian government has refused to comply with the IMF conditions,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington...

Under a $16.4 billion loan in November 2008, when Yulia Timoshenko was prime minister, Ukraine pledged to let its currency float and to balance its budget, in part by raising energy prices. The fund froze the loan after a year, ultimately canceling and replacing it with a $15.2 billion package in July 2010 with similar prescriptions under Yanukovych, who defeated Timoshenko in presidential elections. Disbursements on that program stopped the following year as the country again failed to meet conditions. 
Some takeaways:
  1. Regardless of leader, "pro-Western" or "pro-Russian," Ukraine ultimately shies away from unpopular, leadership-threatening reform and continues on its way towards inevitable balance-of-payments crisis;
  2. Russia has much more to lose than the West has to gain in keeping Ukraine in its corner;
  3. In the sense that reforming Ukraine has proven near-impossible and even more hugely expensive at the current time due to business-as-usual, rescuing the country will be an immense money drain;
  4. What's more, IMF reforms--if implemented--will only make the West massively vilified and cause another round of massive discontent;
  5. Russia is not going to shut down pipelines supplying natural gas to Western Europe anyway, so there is no real economic threat on the energy front. 
All in all, I'd advise the West to let Russia try and get Ukraine out of its sorry situation. In all honesty Russia can't because its shortcomings are nearly identical. Good governance? Getouttahere! For a realist, making others throw away good money after bad on futile endeavors is welcome in making them financially worse off. The EU looks foolhardy enough to believe it can turn around Ukraine. Well, good luck with that. Me? I'd hang a big "TAKE ME" sign at the border with Russia to show the would-be invaders and be done with it. This isn't Russian "irredentism"; it's a Russian gift. Unlike with Cyprus, Greece, Italy, Portugal and Spain, there is no obligation here for self-inflicted masochism.

Ukraine, pardon the language, is FUBAR.