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Era of cheap Oil is over

Forget about cheap gasoline, today’s low oil price masks a looming energy crisis that could dwarf the current economic problems.

If you thought things couldn’t get any worse than a collapse of the global financial markets, think again. The economic meltdown is a good reason to be gloomy, for sure, but an under-reported study by the world’s leading energy agency recently raised the spectre of a collapse in the global energy market too.

The steep fall in oil prices during the last few months of 2008 prompted many people to think that the run-up to $147 a barrel was an aberration – driven by speculators or another artefact of the credit bubble. But some industry analysts say that today’s prices are the real aberration and, in fact, oil production is dangerously close to going into a permanent and unstoppable decline.

Indeed, the collapse in oil prices is accelerating this trend. Non-traditional projects that were profitable when prices were high, such as Canada’s oil sands and fields that are deep underwater, are now being postponed or even scrapped. At the same time, the Organisation of Petroleum Exporting Countries (Opec) cut production targets in December in a desperate bid to reverse the decline. That move seems to have had some effect, but there is now a fear that supply in the oil market will be dangerously out of sync with demand when the economy starts to recover.

“We will work our way through these financial problems, but what would be really unfortunate is that once things bounce back, oil prices will bounce back too,” said Matt Simmons, chairman of Simmons & Company International, at a roundtable held in mid-December. He says that supply shortages could help oil prices soar through $147 as unhindered as a hot knife cuts through butter.

It is no longer just conspiracy theorists that are worrying about a looming energy crisis. Today, even the International Energy Agency (IEA) is sounding the alarm bells. The agency, which has very close ties to the big oil companies, quietly dropped a bombshell in its World Energy Outlook 2008 when it revealed that its first ever real-world survey of existing oil fields shows production falling at a much faster rate than its earlier guesses.

At the current rate of decline, says the IEA, oil production from existing fields will fall to just 30 million barrels a day by 2030 – or roughly 73 million barrels short of the expected level of demand. New sources will make up some of the difference, but to fully meet future demand, the world’s energy companies will need to discover the equivalent of six new Saudi Arabias during the next 20 years. Simply maintaining today’s levels means discovering four new Saudi Arabias.

Not even the IEA expects this to happen. Its 2008 report represents the most optimistic outlook, but is nevertheless dire. Its executive summary starts with a quiet, but very important statement: “Current global trends in energy supply and consumption are patently unsustainable.” And concludes with a similarly potent call to arms: “Time is running out and the time to act is now.”

Put simply, there is no quick fix to meeting the world’s future energy needs. “There is no fix actually,” says Simmons. “The only fix is making a sprinting retreat from our use of oil today. If you get smart people looking at the data it doesn’t take more than a couple of minutes for them to say, ‘This is awful.'”

It may be too late already. Forecasts for production declines are based on the depletion rates of large oilfields, but almost half of the world’s oil supply comes from tiny fields that produce fewer than 400 barrels a day – and these small fields are known to decline much quicker than big fields.

“Oilfields aren’t like emptying a bucket or taking boxes out of inventory,” says Robert Hirsch, a senior energy adviser at Management Information Services, speaking at the same roundtable as Simmons. “You can’t keep pulling oil out of the ground at the rate that you did in the past because of the basic geological processes.”

In the midst of a global recession, much of the explanation for falling prices has focused on the supposed collapse in demand for oil, particularly from Asia’s rising economic powerhouses, but talk of China’s falling oil imports is misleading. It is only growth that is falling – from 28% in October to 17% in November.

According to Simmons, the story of supply destruction is a more immediate problem. “We’re unwinding supply right now just as fast as we’ve ever done and it’s like a bulldog chewing on somebody’s behind,” he says.

As the IEA says in its report, the era of cheap oil is over. And, unless drastic measures are taken to reduce energy consumption and speed up the development of new energy sources, the world could be headed for a serious energy crisis as soon as 2015. If that happens, our current economic woes will hardly merit a mention in tomorrow’s history books.

Source: FinanceAsia.com

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Filed under: Asia, Energy & Environment, Latin America, News, Risk Management, , , , , , , , , , , , , ,

Latin American Outlook, Profit Potential and Risks in 2009

The “right” Latin America will thrive in the New Year, fueled by ts own growth – with an assist from the continued hot growth from China – while the “wrong” Latin America will get left behind.

The second phase of emerging markets expansion is well on its way – a period of self-sustaining growth, driven by consumer growth and infrastructure spending.  And Latin America, following China and other Asian economies, is one of the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. But not all the countries in Latin America will go on to prosper.  There is a wide gulf in the policies that will continue to separate the winners from the losers.

Let me explain.

In a recent article in our affiliated monthly newsletter,  The Money Map Report, Money Morning Investment Director Keith Fitz-Gerald made three important points:

* The emerging markets (of which Latin America is the second-most-important leg) will play a growing role in the continued long-term growth of the world economy.
* The U.S. economy will continue to grow long-term, but its relative importance in the world economy will continue to decline.
* In the near term, the emerging markets could well play a determining role in keeping the overall global economy – and the U.S. financial system – from dropping into a depression-like funk that we won’t be free of for years. Emerging economies in Asia and parts of Latin America have huge cash reserves, much of which will be invested in infrastructure projects over the next 20 years.

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion for the same purpose.
This is important to remember, given that the dramatic sell-off the emerging markets have experienced has many investors doubting the ability of these countries to “decouple” from the global economy.  The reality of the situation is that most investors and pundits are failing to differentiate between economic decoupling and market decoupling.

The Gloomy Present

While growth in emerging economies has dropped slightly, the prices of securities and currencies in emerging markets has fallen drastically.   Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. That, in turn, would squeeze the profits and market valuations of the companies that operate in these economies.

But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.

On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an extremely bullish piece on Brazil. Since that article was published, Brazil went on to rally as much as 47%. As of Friday’s close – even after some subsequent profit-taking – the exchange traded fund (ETF) that represents the Brazilian market (EWZ) is still up 21% (and has risen as much as 42% since my recommendation).

And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”).  With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade.  It has also lowered taxes on investments in capital goods.  And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture.

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers.  This will allow for a massive increase in the scale of production by consolidating companies.  In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities.  This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

* Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
* An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
* Export financing.
* And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

The Breakdown on Brazil

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies.  Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion.  And China, now the second-most-important commercial partner to the region after the United States, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.

However, not all trade with China has been successful, due to China’s notable deficiencies in quality control, especially in health standards.  For example, Latin American imports of medicines manufactured in China had catastrophic results in Panama two years ago, where more than 100 people died and hundreds more became ill from medications containing toxic Chinese glycerine.  Recently, Panama detected toxic chemicals in imported Chinese sweets and crackers and Argentina’s customs recently seized Chinese 20,000 thermos containers for having elevated content of toxic chemicals.

And all of this means that there is a market disconnect between the prices of Brazilian shares and those elsewhere in Latin American equities and the fundamentals of the underlying companies, that we will see played out in the next and subsequent years.  Why?

Just because huge financial losses by banks precipitated a massive de-leveraging cycle, which means they had to sell their holdings, regardless of merit. And that included big sell-offs in preferred investments, including the hugely promising and profitable Petroleo Brasileiro SA (Petrobras) (ADR: PBR), Vale (ADR: RIO), and many others.

And what is worse, their sales hit the stop losses of major hedge funds, who were also leveraged in such favorite plays as commodities, steel, coal, agro, emerging markets and even defensive stocks such as the U.S.-based Pepsico Inc. (PEP).

When you have the proprietary positions of banks and hedge funds all trying to get out of the same door at the same time because of risk management issues, you get the current disconnect between market fundamentals and pricing.

Another impact that we have to understand is that the ongoing dramatic interest rate drops in all major G7 economies and the more than $3 trillion in G7 fiscal programs will have a marked impact on growth next year, containing what would have been a much nastier economic contraction.  But while G7 countries will barely grow between negative 0.5% and a positive 1% in 2009, with the worst contraction front-loaded and recovering in the second half, emerging economies will grow at a minimum of 4%, and in the case of China maybe as high as 10%.

In my October Brazil analysis, I detailed the massive stress that Brazil came under in 1995 because of another exogenous shock: The Mexican devaluation, the so-called “Tequila effect,” which ricocheted around the world, and which caught Brazil in 1995 in a much weaker position than it is in today. Back then, Brazil had a much higher level of debt, much lower reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports.  Brazil dealt with this massive stress effectively and went on to work at each one of its weaknesses in the next 13 years, getting itself into a position of strength today.

While having the temptation and the perfect excuse for a default right at hand, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually affecting strong structural reforms.  Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is paying off strongly today.  The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, has allowed Brazil to move forward and to anticipate GDP growth of 4% to 5% for the New Year.
Hence, Brazil is by far my favorite Latin American play for 2009.

Checking Out Chile

Following closely behind, and hindered only by its small size, is the poster child of fiscal and monetary prudence: Chile.

Chile, which came out of its 1970s default by eliminating its foreign debt and successfully restructuring its banking system, has made every effort to maintain very prudent fiscal and monetary policies and to diversify its exports away from copper, which, being the largest exporter of the metal in the world, still accounted for 38% of its GDP.

Today, Chile exports many diversified products, including agricultural products, wine, fertilizers and industrial wares.  And because it’s situated on the Pacific Coast, it is geographically well positioned to trade with the fastest-growing markets in the world – China and the other emerging Asian tigers.

But Chile, in order to minimize the cyclical nature of its economy due to the wide fluctuation in the price of copper, decided years ago to start a “rainy-day” fund, which would accumulate wealth in the good years and be used to soften the blow in the bad ones.  Now, Chile boasts a $28 billion sovereign wealth fund, accumulated almost completely from its copper profits.  That’s almost equal to a staggering 14% of the country’s GDP in cash savings!  This will enable Chile to implement counter-cyclical policies to keep growing at 3.5% to 4% next year – or about the current rate of growth, even with the worldwide meltdown.

Chile already has started to deploy this capital, having passed a $1.15 billion government plan on top of last month’s $850 million to stimulate housing and small-business lending, injecting that capital into a government bank that will make available loans for small businesses.

Avoid Argentina

Chile’s fiscal prudence is in direct contrast to Argentina’s lack of discipline.  Argentina’s Peronist government, which squandered the agricultural commodities bonanza in fiscal spending, is now is trying to use its majority in both houses in Congress to pass the nationalization of the privatized pension funds under the excuse of “protecting them from market volatility.”

These funds, which now have successfully grown to more than $30 billion in size, or 73% of the government’s budget and have returned an average of more than 13% a year since inception will allow the government to cover its fiscal gap and debt maturities next year and to financed public works and consumption projects.  The government, at the same time, is suffering from an important loss of confidence, as evidenced by its need to resort to police controls in order to prevent the illegal purchase of U.S. Dollars.  Argentina might end 2009 with growth of negative 2% and unemployment of 10%.  Stay away.

A “Maybe” for Mexico

Mexico, given its strong links to the United States, is receiving a heavy dose of external shocks on many economic and financial fronts – especially where the United States is concerned: It’s being hit by a drop in exports (the United States is the main component), the drop in oil prices, lower tourism (its largest proportion of travelers is from the United States), falling U.S. investments in Mexico, and reduced remittances from Mexicans working in the United States back to their Mexican relatives.

In addition, many companies suffered strong losses in their derivatives hedges, banks have had to reduce lending due to reduced liquidity and the Mexican peso has lost some 22% of its value against the U.S. dollar.  Mexico’s growth in the New Year may fall to about 1% from 2008’s 2.4% pace, and the country is on its way to approving the first budget with a fiscal deficit in four years.  The government’s target will be negative 1.8% of GDP, in order to stimulate the economy.  Mexico, seeing its oil production declining, is seen moving soon towards opening some oil areas for exploration and development, which some estimate could add another 1% to GDP.

Once the U.S. markets have stabilized, Mexico’s stocks will be an incredible buy once more, since they discount a very bad scenario at these prices.

A Case Against Colombia

Colombia, another country that has merited a lot of attention, given its staunch support of U.S. anti-drug and anti-money-laundering efforts, has seen its free trade agreement with the United States inexplicably delayed.

The country foresees a tightening of credit conditions, so it is moving up its peso-based borrowing to this year.  Next year it will issue only $1 billion in foreign bonds and tap $1.4 billion from multi-lateral lenders.  So the refinancing risk for Colombia is muted, given the small amounts involved, and the country’s economy should expand a minimum of 1% in the New Year, even in the worst economic scenario. However, Colombia could grow as much as 4% under a moderate scenario.

That would represent a big drop from the 8% growth recorded this year.

The story in Colombia has been the curbing of inflation, and how far behind the curve the central bank has been, at least as recently as July, when it boosted rates up to 10% and then kept them there.

These ultra-high interest rates, combined with the global slowdown, have blunted demand for consumer products in Colombia. Since the passage of the trade pact is a situation in flux, I want to wait and see right now.

I will not go into the economies of Venezuela, Bolivia and Ecuador, which, with massive intervention by their governments and advances against property rights, are experiencing severe economic and political stress, and which do not offer the guarantees needed for foreign investment.

Source: Money Morning, by Horacio Marquez, 15.12.2008

Filed under: Argentina, Banking, Brazil, Chile, Colombia, Energy & Environment, Exchanges, Mexico, News, Peru, Venezuela, , , , , , , , , , , , , , , , , ,

China: CSRC to oversee Index Futures Market in 2009

The China Securities Regulatory Commission (CSRC) has obtained approval to establish a specialized department to supervise the business operation of and trading by brokerages and traders in futures contracts.
The move is widely seen as an essential step in the introduction of the long-awaited index futures trading.
This new department is expected to focus on overseeing institutional participants in futures markets, including domestic brokers and the Chinese units of foreign institutional investors.
Sources close to the situation said the new department would be given the priority to supervise institutional participants in the trading of index futures when it is introduced.
Some traders and analysts said the establishment of the new department would help shoulder some functions of the existing futures supervising arm under the CSRC, which would then focus on regulatory matters.
Before the start of financial futures trading, the proposed new department is expected to keep a close watch on issues relating to risk control by futures brokerages in offering innovative services to clients.

Source: http://www.sohu.com, CITIC Calyon Futures, Liang Haisan 11.12.2008

Filed under: China, Exchanges, News, , , , , , , , ,

Xinhua News Agency and Shanghai Stock Exchange team on financial information

The Xinhua News Agency (XNA) and the Shanghai Stock Exchange (SSE) further expanded their cooperation as the XNA Financial Information Platform established on the SSE its first Financial Information Collection Station ever on the domestic capital market on November 4.

Before, the Platform had already entered Wall Street, with an information collection station on the New York Stock Exchange (NYSE). XNA Vice President Lu Wei, SSE Governor Geng Liang inaugurated the Station.

It is learned that full-time journalists will be dispatched to the SSE upon the establishment of the Station for collecting and publishing promptly the first-hand financial information on the Shanghai securities market. According to the “XNA, SSE Framework Agreement on All-round Cooperation” signed by the XNA and the SSE this May in Beijing, the two parties will cooperate widely and closely in such fields as financial information services to build a news collection and publication mechanism for deep cooperation in fields of commercial data and information products. Through the channels and platforms including the “Xinhua 08”, a comprehensive financial information service system independently developed by the XNA, efforts will be made to popularize the key information and data on the Shanghai securities market to cultivate the market, educate investors and make deep information research. Besides, they will also work together in information technology and talent exchange.

As a national project in accordance with the “Outline of Cultural Development for the ‘Eleventh Five-Year Plan'”, the XNA Financial Information Platform is a comprehensive financial information service system, serving as a terminal for providing real-time information, market quotations, historical data, research tools and analysis models for economic management departments, financial institutions and large/medium enterprises in their transactions of bonds, foreign exchanges, stocks, gold, futures and property rights both at home and abroad.

On October 20, the Shanghai Headquarters of XNA Financial Information Platform was inaugurated in the Lujiazui Finance & Trade Zone in Pudong District to boost the construction of Shanghai’s international financial center and upgrade the efficiency of financial information collection. It is a vital move for the Headquarters to set up the Station on the SSE. Following its successful move into the Wall Street with a station on the NYSE for timely collection of daily financial information, the XNA is also planning to establish more stations on other key elements markets both at home and abroad.

Source: Xinhua News Agency, 06.11.2008

Filed under: China, Data Vendor, Exchanges, Hong Kong, News, , , , , , , , , , , , , ,

Global funds industry shifting to Asia

More than ever, fund management companies of all stripes need to build distribution into Asia and the Middle East, says Strategic Insight.

New York-based consultancy Strategic Insight says in a new report that the credit crunch has revealed the essential need for fund management companies to have a distribution into Asia – and predicts many more will build it.

Source: AsianInvestors, 27.10.2008 by Jaime DiBiaso

Funds under management in Asia as well as the Middle East and Latin America will grow much more quickly than those in the United States and Europe over the next five years, says Daniel Enskat, managing director and head of global consulting.

Fund companies that lack an Asian reach have suffered the most in the credit crunch, he suggests – not only because they missed out on last year’s asset-gathering bonanza, but because redemptions in Western countries, particularly Europe, have been most severe.

Such companies with only European clients, even if they have great performance, are nonetheless suffering acute redemption pressure, because investors are panicking and dumping anything to move to cash.

Strategic Insight says mutual funds in Asia have enjoyed net inflows of $60 billion from January to August, versus a net outflow of $360 billion in Europe.

Finally, for fund companies around the world, Asia is the most likely source of business to pull them out of the slump, due to its demographics, its economic growth prospects, the low penetration of investment products and the youth of the domestic fund industries.

Enskat cites China as an example. He compares China’s investors today to European ones in the run-up to the 2000 tech bubble collapse. In both cases, many first-time investors got burned. In Europe, investors generally switched to low-risk savings products and capital guarantees. So far, however, Chinese investors don’t seem to be in full retreat.

“Distributors don’t want to make the same mistake in China,” Enskat says. “They want to educate investors about having a longer-term framework.” He notes that regulators have taken a proactive stance against mis-selling and improving products, which is why the industry hasn’t suffered the kind of mass redemptions that have taken place this year in markets such as Germany and Italy.

Enskat reckons there is also a cultural factor. He says Asian societies, lacking a welfare state, have instilled a sense of self-reliance. First-generation entrepreneurs are relatively young and willing to take risks with their money, while Westerners, already wealthy, are more interested in capital preservation. “Asian investors are proactive, not defensive,” Enskat concludes.

He says the credit crunch, and blow-ups such as the Lehman Minibond fiasco in Hong Kong and Singapore, is an opportunity for the mutual-funds industry to argue its case: that funds are the most transparent, liquid and straightforward investment products that investors will find.

“Distributors want a simple story told with conviction for a transparent product,” he says.

The challenges are how to convey this message to investors (and to distributors’ sales teams). High management fees and front-end loads can be a problem during bear markets, although Enskat believes investors are willing to overlook these when times improve; eventually Asia will need to shift to an American model in which asset managers force their brokers to sell on the basis of advice, rather than commission for pushing products.

Today it seems nearly all the big global names in asset management are already on the ground in Asia. But Enskat observes that there are many small- and mid-sized fund managers in Europe and Asia that have yet to set up a presence in the region. Should this matter?

Consider, Enskat suggests, that two-thirds of today’s top 50 global houses would not have been ranked 10 years ago. Names like AllianceBernstein, BGI, Janus, Pimco, SSgA and T. Rowe Price would not have figured.

Now consider the coming regulation of the hedge fund industry. The biggest hedge funds will find themselves going public and competing for assets from sovereign wealth funds and other institutional investors, rather than rely on family offices and endowments. How many of these will be in the top 50 in another decade’s time? And how many of them have distribution networks in Asia now?

And the traditional funds world will also throw up new winners that are relatively unknown today, Enskat argues. He notes that fund companies can become major players on the back of a single product, citing Kokusai’s income bond fund (sub-advised now by Western Asset), Pimco’s total return bond fund, Pictet’s utilities fund, BlackRock’s global allocation fund and some of Schroders’ global balanced funds for UK pension clients.

There are plenty of mid-sized players in America and Europe with similar products, some of which will become the blockbusters of the future – but these companies have no exposure to the world’s new growth markets. Which means they will be looking to set up distribution arrangements. The pain of the credit crisis is going to accelerate this process.

Filed under: News, , , , , , , , , , , , ,

KRX:Korea Exchange finds big opportunities in small markets.

In a region where securities exchanges are nationalistic and wary of consolidation, the Korea Exchange (KRX) has burst past its own borders. Offering expertise, experience and reliable technology to smaller exchanges, KRX is building a global brand. With that it is bringing new opportunities for both international investors and emerging economies.

By Waters 23.10.08 by Laura Hilgers

Countries like Mongolia, Cambodia and Laos are hoping that a relationship with the larger exchange will attract more liquidity, more foreign investment and ultimately help build more robust capital markets. In turn, as the KRX moves into Asia’s smaller economies, experts say investors will begin to see easier access and improved trading platforms on these smaller exchanges, which will offer a new range of investment opportunities.

Korea itself faces challenges on the home front,  where
a decline in the nation’s growth rate could limit investment
opportunities. “It makes a lot of sense to look abroad for growth
opportunities,” Katkov says. “Korea is shaping up to play a very big
role in emerging South East Asia, and not just in the financial
industry.”

BIG OPPORTUNITIES IN NEW MARKETS

In Cambodia and Laos in particular, the KRX is getting into the game
early. The two countries are looking to Korea for assistance in
creating entirely new exchanges, to be launched in 2009 and 2010,
respectively.

The KRX is taking an undisclosed stake in each exchange, through
joint ventures with the Cambodia Ministry of Economy and Finance, and
the Bank of Lao PDR. “The KRX has been searching for the business
opportunities with those emerging economies since its inauguration in
January 2005,” says Pat Gil-Soo Shin, senior vice president of global
business development at the KRX. Investment in Cambodia came first in
May 2006, with the Laos venture close on its heels in early 2007.

In Cambodia, the KRX is also providing a grant of $1.8 million for
the securities market project. In exchange, Cambodia and Laos will
benefit from the KRX’s experience and reputation among foreign
investors. “Smaller economies usually lack ability to build their own
capital market in both human and IT resources,” Shin says. “Even with a
stock exchange, they usually face difficulty in promoting the market to
have enough liquidity and trustworthy infrastructure, including IT and
rules and regulations.”

In the first stages of the joint ventures, the KRX is engaged
primarily in education and advisory programs. Currently, the two
countries are still in the process of designing rules and regulations
and considering what they will need in terms of IT infrastructure, Shin
says. “For the Cambodian and Lao markets, we are discussing the scope
of the IT infrastructure development,” he says. “We will consider both
the market’s need and the economic aspects of the country.”

While it is still unclear what these trading platforms will look
like, Katkov says that simply inviting Korea’s involvement indicates
the exchanges have the ambition to attract international investment. “I
think it’s a very good move for the local exchanges, and a way of
putting in technology for the first time in a world-class manner,” he
says.

BUILDING UP MONGOLIA

Unlike Cambodia and Laos, Mongolia has been running its exchange for
17 years.
In a country better known for its grasslands and ponies than
its financial markets, the Mongolian Stock Exchange (MSE) still ranks
among the world’s smallest. The MSE remains, at least for now, far from
the minds of most international brokerages as they move into Asia. The
exchange, however, is looking to do better. That is where Korea enters
the picture.

“The Mongolian government and the Mongolian stock exchange asked the
KRX to support them to modernize the stock market via educational and
advisory programs,” Shin says. “We are now discussing revising the
rules and regulations to help revitalize the securities market and pull
liquidity.”

At the MSE, revising the regulatory structure updating the
exchange’s trading platform will be the first of many steps in
attracting international investment. “The current system that is
running is way too old,” says Temuulel Lkhegza, international relations
officer at the MSE, of the exchange’s trading platform. “The main aims
of this project are to get everything automatically done and get
everything online.”

The MSE was originally started to enable the privatization of the
Mongolia’s state-owned businesses. In theory, every Mongolian citizen
was to get shares in the newly tradeable Mongolian companies. Over the
years, however, stock ownership has sifted down to only a select few.
Partly due to its unusual history, Lkhegza says, many of the 380
companies listed on the exchange are not actively traded.

“Most of the stocks in these companies are concentrated in a few
hands,” Lkhegza says. “That is why the stock market is not very
active.” As part of reforms, the MSE is looking at de-listing some of
the companies that don’t match its standards.

By the end of 2009, Lkhegza hopes to see an exchange on which
investors can participate and trade remotely through the Internet, and
where liquidity is building. The MSE is currently putting together the
financing for the project, which is expected to cost $7 million. “The
training phase of the project has been completed,” Lkhegza says. “We
have negotiated the system overview and the structure of the system; we
are waiting on the next stage.”

THE TECHNOLOGY EDGE

While Shin says the advisory role that the KRX is playing in these
tie-ups is important, it is the exchange’s technology, he says, that
seals the deal.

“The IT investment in those developing markets enables the KRX to
secure stakes of those markets,” Shin says. “It helps the KRX to own
interest in the regional stock exchanges.”

It accomplishes most of this through the Korea Securities Computing
Corp. (Koscom),
which was established in 1977 by the KRX and Korea’s
Ministry of Finance. Koscom was originally created to serve securities
firms, and also sells back-office systems and market information
systems. “That’s 40 percent of the market for securities firms in
Korea,” Katkov points out. In addition, Koscom has been operating the
KRX trading system since 1988.

More recently, Koscom inaugurated a bond-trading platform developed
for Bursa Malaysia in February. “Bursa Malaysia put an international
auction to build an electronic trading platform for the bond market in
2006,” Shin explains. “The KRX won the auction.”

From the perspective of Bursa Malaysia, it makes sense for the two
exchanges to collaborate, says K. Sree Kumar, head of market and
product development at the Bursa Malaysia. “Bursa Malaysia does not see
KRX as a competitor,” he says. “In fact, it is in the best interest for
both Bursa Malaysia and KRX to exchange information and experiences for
the further development of the capital markets.”

There are advantages to choosing a technology partner from another
Asian exchange, Kumar says, including a minimal level of currency risk,
effective cost and similarities in working culture. “Each exchange
plays a different role in the global markets,” he says. “As such,
linkages like Bursa Malaysia and KRX can capitalize on each other’s
strengths.”

The KRX is claiming space in Asia before competition heats up from
international IT vendors, particularly those connected to other
exchanges worldwide. “They’re there first,” says Katkov. While the New
York Stock Exchange (NYSE) has sold technology in Tokyo, it has not
pressed further into Asia. By moving in early, the KRX can get toeholds
in the security exchanges as well as with the brokerages that trade on
those exchanges.

In Malaysia, Katkov says, “the number of securities firms is growing
and it is growing quickly.” Whereas there are local vendors already
selling back-office technology, the expansion of the industry is
providing opportunities for other vendors to step in.

And the more opportunity, the better, says Shin. From Mongolia in
the North to Malaysia in the South, Korea’s investments will secure the
country’s place as a global player, he says. Through technology sales
and strategic tie-ups, he says that the KRX is moving to become “a
financial hub in the Asian capital market.”

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HKEx And Shanghai Stock Exchange Subsidiaries Sign Market Data Collaboration Agreement

HKEx Information Services Limited (HKEx-IS) and SSE Infonet Limited, the information business subsidiaries of HKEx and Shanghai Stock Exchange (SSE), today (Monday) signed an agreement for a market data collaboration programme.

The agreement was signed by SSE Infonet Chief Executive Officer Wang Yong and HKEx-IS Director Bryan Chan in the presence of SSE General Manager Zhang Yujun, HKEx Chairman Ronald Arculli and Chief Executive Paul Chow. Other senior officials from both parties also attended the signing ceremony.

The objective of the collaboration programme is to assist investors who have interest in shares of issuers that have listed in both Hong Kong and Shanghai by raising the transparency of the securities trading in the two markets.

Under the programme, both parties are entitled to redistribute the other party’s basic real-time market data for the companies with listings in the two markets to their own authorised information vendors (IVs) for onward transmission to the IVs’ subscribers for internal display purposes.

The collaboration programme will come into effect on 1 January 2009 and will be subject to a review in two years. The usual exchange fees for market data are waived for the two parties, their IVs and their IVs’ market data subscribers under the collaboration programme.

The programme is expected to benefit investors in both markets and help increase the transparency of the securities trading in the two markets. At the end of September this year, there were 48 companies listed in both Hong Kong and Shanghai, and the group’s Hong Kong-listed shares collectively represented 29 per cent of the Stock Exchange’s turnover and 23 per cent of its market capitalisation.

“The agreement will increase the transparency of the Mainland and Hong Kong markets further, enhance the market data service quality of the two exchanges, provide more complete market information and better service to investors and also further promote the cooperation between the two exchanges,” said SSE General Manager Zhang Yujun.

“The market data collaboration agreement that we entered into today with SSE marks another step towards the closer integration and cooperation of the Mainland and Hong Kong markets. We believe the collaboration programme will benefit investors of the two markets and will be welcomed by them,” said HKEx Chief Executive Paul Chow.

Programme information is posted in the Investor section of the HKEx website under Real-time Data.

Source: HKEx 20.10.2008

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China Allows Short Sales, Margin Loans to Help Market

China’s cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn’t authorized to speak on the issue.

China’s action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China’s government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.

“It’s quite positive for the market and will help attract fresh capital into equities,” said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co., which oversees the equivalent of $285 million. “Given the current level the index is standing at now, I do think some investors will buy low through margin trading so as not to miss the boat.”

Index Futures
Short selling may accelerate the introduction of stock- index futures that will allow investors to short contracts on the CSI 300 to hedge risk. The China Financial Futures Exchange published rules in June 2007 that said investors would be required to put up 10 percent of a contract’s value to buy, sell or short sell CSI 300-based futures. No date was given at the time for when the products will start trading.

Key Task
Short selling and margin lending “will attract inflow of some capital into the stock market, but won’t help reverse the market trend unless expectations about corporate earnings growth improve,” said Wu Youhui, a strategist at GF Securities Co. in Guangzhou. “Brokerages will benefit most as they’ll have a new source of income.”

It will take several days for the paperwork to go through, and the plan will be announced before the week-long National Day holiday next week or right after it, said the official.

Brokerages
According to the rules, only selected brokerages are allowed to handle margin trades as part of a pilot program. They must have three years trading history and net assets of no less than 1.2 billion yuan for the past six months.

The regulator stated that only companies with market values greater than 800 million yuan and with stable share prices are eligible to be sold short.

Source: Bloomberg 26.09.2008 : Zhao Yidi in Beijing at at yzhao7@bloomberg.net; Zhang Shidong in Shanghai at szhang5@bloomberg.net

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Chinese regulator says US lending was ‘ridiculous’

TIANJIN, China – U.S. lending standards before the global credit crisis were “ridiculous” and the world can learn from China’s more cautious system as it considers financial reforms, the top Chinese bank regulator said Saturday.

Beijing curbed mortgage lending in 2003 and 2006 to keep debt manageable amid a real estate boom, while American regulators responded to a similar situation by letting credit grow, said Liu Mingkang, chairman of the Chinese Banking Regulatory Commission.

“When U.S. regulators were reducing the down payment to zero, or they created so-called ‘reverse mortgages,’ we thought that was ridiculous,” Liu said at a World Economic Forum conference in the eastern Chinese city of Tianjin.

He said debt in the United States and elsewhere rose to “dangerous and indefensible” levels.

Liu’s comments were unusually pointed criticism of U.S. financial regulation for a Chinese official. They added to suggestions by countries that are under U.S. pressure to liberalize their financial markets that Washington’s model might not be ideal.

China has based its reforms on the U.S. system but has moved gradually. It has kept its financial markets isolated from global capital flows, prompting complaints by its trading partners.

As China made changes, “a lot of the time, we learned that what we had learned from our teacher the day before was wrong,” Liu said, referring to the U.S.

China’s state-owned banks have avoided the turmoil roiling Western markets. Chinese banks hold bonds from failed Wall Street house Lehman Brothers, but they are a tiny fraction of their vast assets.

Liu compared Washington’s proposed US$700 billion plan to revive credit markets to fast food and said the world needed to look at longer-term solutions.

“Fast food is convenient. This US$700 billion package must ease the concerns and build up confidence. But if you only take this, it doesn’t agree with your stomach. You should think about Chinese slow cooking and slow food,” he said.

Liu called for governments to create international standards and regulatory systems for globalized financial markets. He said Beijing has signed information-exchange agreements on financial regulation with 32 other countries since the turmoil began.

Liu pointed to China’s experience with real estate and the collapse of a stock market boom.

As stock prices in China soared, banks were ordered to make sure customers were not using loans or credit cards to finance speculation. As a result, Liu said banks have suffered no rise in loan defaults even though stock prices have plummeted 63 percent since the October 2007 peak.

“We Chinese can share our own experiences with all the market practitioners,” Liu said. “Maybe our experience cannot be applicable to developed markets fully. But still, I think it might be useful and helpful to those in emerging markets.”

Chinese and foreign businesspeople at the World Economic Forum, the Chinese leg of the forum based in Davos, Switzerland, said the credit crisis is likely to increase the influence of China and other emerging economies in the world financial system, though Wall Street will retain its leading role.

“I believe this kind of regional financial strength will play a bigger and more important role,” said Jiang Jianqing, chairman of state-owned Industrial & Commercial Bank of China Ltd., the world’s biggest commercial lender by market capitalization.

“Right now the market is very unitary,” with U.S. bonds dominating global holdings, Jiang said. “This kind of a unitary, overcentralized market is something we need to change.”

Still, he said, Wall Street’s “dominance will continue.”

The European Union trade commissioner, Peter Mandelson, defended the global capital markets structure, warning that drastic change might hurt prosperity.

“The capital market system, fundamentally, is not flawed,” Mandelson said. “We are not looking for some alternative, and I hope that people in the emerging markets, in China for example, are not looking for an alternative to properly functioning capital markets.”

The crisis is likely to reduce resistance in the West to investments by government funds as companies urgently seek capital, said Thomas Enders, CEO of the European aircraft producer Airbus Industrie.

Critics have questioned the possible political motives of state-run funds and an EU official warned last year they might face restrictions if they fail to disclose more information about their goals and tactics.

“I would dare to predict that, yes, one of the big changes we will see is greater acceptance of sovereign wealth funds,” Enders said.

Source: AP 26.09.2008 JOE McDONALD,AP Business Writer

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China Regulators: Careful preparations ahead of Index Futures

The long-awaited stock index futures in the mainland market still need careful preparation due to changing situations, a senior official with the China Securities Regulatory Commission (CSRC) said, dampening market hopes that the product will kick off year.

At the half-yearly work meeting of the CSRC this week, a senior official said the regulator will continue preparatory work for the stock index futures under the principle of pursuing high standards and a smooth start, China Business News reported Thursday, quoting a source who attended the meeting as well.
While fortifying operations for existing futures products, the regulator will introduce new trading products steadily, the official said.

Currently, the nation’s fuel oil and metal futures contracts are traded in the Shanghai Futures Exchange, while farm produce futures deals are made in Zhengzhou and Dalian.

Established in 2006, the China Financial Futures Exchange will cover trading of Financial derivatives, including the stock index futures. Its virtual transaction is already under way.
Previously, there were market rumors that preparations for the index futures were close to an end and the launch was just around the corner.

Although the regulator has expressed similar expectations on different occasions, the situation has changed beyond the original plan so far, the CSRC official said. He vowed that financial authorities will review the market performance and make relevant preparations.
The official noted that the regulators will carefully consider individual investors’degrees of acceptance in the design of index futures. They will also draw lessons from warrants issued to prevent excessive speculation.

Last week, a source from China International Capital Co said the stock index futures trading is likely to be launched in January of next year rather than sometime this year after the Beijing Olympics.
The source stressed that the authorities deemed it prudent to launch index futures trading in a stable stock market environment with limited daily price fluctuations.

Source: SINA.com, CITIC Futures, Mr. Liang Haisan, 01. August 2008

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