FiNETIK – Asia and Latin America – Market News Network

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Mexico replaces China as U.S. Supplier with no Wage Gains.

Bloomberg 15.06.2012 – Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.

In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.

The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.

“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”

Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.

Sounder Footing

This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.

President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.

“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”

Trade Agreements

Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.

Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.

Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.

The latest company to expand operations is Plantronics Inc. (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.

Human Capital

Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.

Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.

“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.

Low Inflation

Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.

A press official from the Mexican finance ministry didn’t respond to a request for comment.

Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.

Time Lost

The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.

“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”

Poor Performance

Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.

The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.

Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.

Skill Shortages

Delphi Automotive Plc (DLPH), the former parts unit of General Motors Co. (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.

While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.

“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.

That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.

“I supervise 15 workers,” Chavero said. “I should be making more money.”

Source: Bloomberg, 15.06.2012   Nacha Cattan in Mexico City at; Eric Martin in Mexico City at

Filed under: Brazil, China, Mexico, News, , , , , , , ,

FT Special Report: Investing in Mexico

Read the FT Special Report at Investing in Mexico FT Special Report June 2011


Boom times despite safety fears

There has been a rise in violent crime in some areas, but the country is still a good place for business, says John Paul Rathbone

Better government and smarter leadership, combined with strategic vision, could change Mexico very swiftly, writes Luis Rubio

Regulation: Media wars give hope of more choice

Competition, once an infrequent and timid visitor, is making a loud return, says Adam Thomson

Politics: Reform on hold as all eyes turn to elections

The PRI is tipped to regain the presidency but it is not all plain sailing, writes Adam Thomson

Industry: Aerospace sector helps high-tech economy fly

Advanced manufacturing skills are boosting exports, writes Adam Thomson

US relationship: Bumps on road to better links

Differences persist on guns, drugs and illegal migrants, says Anna Fifield

Still everything to play for in face-off with BrazilJohn Authers considers the nation’s rivalry with Brazil and asks whether there is all still to play

Stock market: Changes give vigour to once-somnolent bourse

Technical and other alterations facilitate business, reports Adam Thomson

Tourism: Aggressive push to promote country’s multifaceted allure

The nation’s tourism industry is working hard to persuade visitors there is more to discover, writes Adam Thomson

Mexico City: Conditions improve for business

A string of liberal social reforms during the past few years has led some observers to rename Mexico’s capital ‘Marcelona’, writes Adam Thomson

FT Special Report, 13.07.2011

Filed under: BMV - Mexico, Brazil, Library, Mexico, News, Risk Management, , , , , , , , , , , , , , , , , , , , , ,

BlackRock Bob Dolls: 10 prediction for the next 10 years

“10 Predictions for the Next 10 Years” by BlackRock’s Bob Doll and what it means to investors:

  1. U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s.
  2. Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years.
  3. Healthcare, information technology and energy alternatives are leading growth areas for the U.S.
  4. The U.S. dollar continues to be less dominant as the decade progresses.
  5. Interest rates move irregularly higher in the developing world.
  6. Country self-interest leads to more trade and political conflicts.
  7. An aging and declining population gives Europe some of Japan’s problems.
  8. World growth is led by emerging market consumers.
  9. Emerging markets weighting in global indices rises significantly.
  10. China’s economic and political ascent continues.

Read Bob Doll’s full report  10 Predictions for the next Decade

Source:BlackRock / Carral Sierra, 02.08.2010

Filed under: Banking, Brazil, China, Energy & Environment, Japan, Korea, Mexico, News, Risk Management, Wealth Management, , , , , , , , , , , , , , , , , , , , , , ,

China and India – Himalayas, Water and growing conflicts

The brewing disputes and growing concerns of the Himalayan Region by worlds two most populus nations, is a further indication of increasing dangers of latent resource wars, particularly on water. The continuing desertification in China and migration to coastal region increase pressure. While planned deviation of water ways to Chinese low lands could severely affect South- and South East Asia, see also

Political Hands across the Himalayas, FT, 15.11.2009

Excerpt: India and China are touted as white knights coming to the rescue of the world economy. Considerable hope rests on these two countries, with fast-paced growth, developing domestic markets and high savings rates, reviving demand and leading other languishing parts of the world out of recession.

The two rising powers, however, may yet be clashing knights. For in New Delhi it is fear of Beijing, rather than partnership, that all too frequently characterises the trans-Himalayan relationship. While some size up trade balances and growth trajectories, others are measuring missile ranges and comparing military parades.

Mr Mishra advised Atul Behari Vajpayee, the former premier. His views, albeit hawkish, are respected by the current Congress party-led government and carry weight with the diplomatic community.

So his recent forecast that India might face a second military front within five years turned heads. The former intelligence chief predicted that India could find itself locked in an armed stand-off simultaneously with Beijing and Pakistan, the traditional rival.

Mr Mishra’s suspicions of China have been newly aroused by Beijing’s warm relationship with Islamabad and its supply of military hardware to Pakistan’s army.

They have also been stoked by territorial claims to Arunachal Pradesh, a north-eastern Indian state, and predictions on Chinese websites that India, a country of huge diversity, is doomed to fall apart.

Mr Mishra says China’s stridency in its territorial ambitions has grown over the past two years to a level not seen since the early 1960s. Moreover, he accuses China of trying to bring into question India’s sovereignty over the state at the international level.

Military strategists interpret China’s policies as a regional power play. They say that tying India up within its own borders prevents it from projecting itself in the region and rivalling China.

In spite of the fighting talk in India, the relationship between India and China holds much more potential than antagonism. China’s impressive record of infrastructure development and lifting people out of poverty holds lessons for India. Likewise, India’s democratic credentials and inclusiveness are instructive to China.

Read full article hear:  15.11. 2009 by James Lamont in New Delhi

The high stakes of melting Himalayan glaciers, CNN 05.10.2009

Execerpt – The glaciers in the Himalayas are receding quicker than those in other parts of the world and could disappear altogether by 2035 according to the 2007 Intergovernmental Panel on Climate Change (IPCC) report. The result of this deglaciation could be conflict as Himalayan glacial runoff has an essential role in the economies, agriculture and even religions of the regions countries.

Satellite data from the Indian Space Applications Center, in Ahmedabad, India, indicates that from 1962 to 2004, more than 1,000 Himalayan glaciers have retreated by around 16 percent. According to the Chinese Academy of Sciences, China’s glaciers have shrunk by 5 percent since 1950s.

Dr. Vandana Shiva, an environmental activist, physicist and leader in the International Forum on Globalization, has just returned from a “Climate Yatra,” a research journey to the Himalayas to study the impact of climate change and the glacial melt upon communities in Asia.

“Himalayan rivers support nearly half of humanity,” Dr. Shiva told CNN. “Everyone who depends on water from the Himalayas will be affected.”

Both India and China are exploring opportunities to harness Himalayan waters for hydroelectric power projects, and while the initial melt promises to provide plenty of water for both sides, the loss of glaciers could lead to water shortages further in the future.

Water-related conflicts have already been witnessed in other parts of the globe such as in the West Bank and in Darfur.

According to Himanshu Thakkar of the South Asia Network on Dams, Rivers and People, almost 70 percent of the non-monsoon flows in almost all the Himalayan rivers come from glacier melt.

International water security issues within Asia could be likely since the waters of the Indus, Ganges and the Brahmaptura basins flow into China in the upstream, and are shared across South Asia in the downstream.

Dr. Shiva believes the situation will render major security issues, between India and China particularly, as flows reduce and demands intensify.

Read full article here: CNN, 05.10.2009

In retreat: the roof of the world is experiencing rapid summer melting.


Filed under: Asia, China, India, Malaysia, News, Risk Management, Singapore, Thailand, Vietnam, , , , , , , , , , , , , ,

Why China and Japan Need an East Asia Bloc

Withering exports and asset bubbles have forced Asians – especially China and Japan — to work harder at free trade pacts.

All kinds of proposals have been floated about creating an Asian bloc a la European Union. Bilateral and multilateral free trade agreements (FTA) have been suggested for various combinations of Asian countries. Lately, there’s been a flurry of new ideas as Japan’s recently installed DPJ government seeks to differentiate from the ousted LDP.

By promoting ideas that lean toward Asia, DPJ’s leadership is signaling that Japan wants less dependence on the United States. This position offers a hope for the future to Japanese people, whose economy has been comatose for two decades. Closer integration with Asian neighbors could restore growth in Japan.

Whenever global trade gets into trouble, Asian countries talk about regional cooperation as an alternative growth driver. But typically these talks die out as soon as global trade recovers. Today’s chatter is following the same old pattern, although this time global trade is not on track to recover to previous levels and sustain East Asia’s export model. Thus, some sort of regional integration is needed to revive regional growth.

Which regional organization is in a position to lead an integration movement? Certainly not ASEAN, which is too small, nor APEC, which is too big. Something more is needed – like a bloc rooted in a trade pact between Japan and China.

ASEAN’s members are 10 countries in Southeast Asia with a population exceeding 600 million and a combined GDP of US$ 1.5 trillion in 2008. The group embraced an FTA process called AFTA in 1992, which accelerated after the 1997-’98 Asian Financial Crisis and competition with China heated up. When AFTA began, few gave it much chance for success, given the region’s huge disparities in per capita income and economic systems. Today AFTA is almost a reality, which is certainly a miracle.

ASEAN has succeeded beyond its wildest dreams. These days China, Japan, and South Korea join annual meetings as dialogue partners, while the European Union and United States participate in regional forums and bilateral discussions.

China and ASEAN completed FTA negotiations last year, demonstrating that they can function as an economic bloc. Now, China is ASEAN’s third largest trading partner. Indeed, there is a great upside for economic cooperation between the two.

Before the Asian Financial Crisis, the ASEAN region was touted as a “miracle” by international financial institutions for maintaining high GDP growth rates for more than two decades. But some of that growth was built on a bubble that diverted business away from production and toward asset speculation. This developed after credit expansion, driven by the pegging of regional currencies to the U.S. dollar, encouraged land speculation. ASEAN’s emerging economies absorbed massive cross-border capital due to a weak dollar, which slumped after the Federal Reserve responded to a U.S. banking crisis in the early 1990s by maintaining low interest rates.

Back then, I visited companies in the region that produced goods for export. I found that, despite all the talk of miracles, many were making money on financial games — not business. At that time, China was building an export sector that had started exerting downward pressure on tradable goods prices. Instead of focusing on competitiveness, the region hid behind a financial bubble and postponed a resolution. Indeed, ASEAN’s GDP was higher than China’s before the Asian financial crunch; now China’s GDP is three times ASEAN’s.

China today faces challenges similar to those confronting ASEAN before the crisis. While visiting manufacturers in China, I’ve often been discovering that their profits come from property development, lending or outright speculation. While asset prices rise, these practices are effectively subsidizing manufacturing operations – an asset game that can work wonderfully in the short term, as the U.S. experience demonstrates. When property and stock markets are worth more than twice GDP, 20 percent appreciation would be equivalent to four years of business profits in a normal economy. You can’t blame businesses for shifting their attention to the asset game in a bubbly environment. Yet as they focus on finance rather than manufacturing, their competitiveness erodes. And you know where that leads.

I digress from the main focus for this article — regional integration, not China’s bubble challenge.

So let’s look again at ASEAN’s success. In part, this reflects its soft image: Other major players do not view ASEAN as a competitive threat. Rather, the FTA with China has put pressure on majors such as India and Japan to pursue their own FTAs with ASEAN. Another dimension is that the region’s annual meetings have become important occasions for representatives from China, Japan and South Korea to sit down together.

In contrast to ASEAN’s success, APEC has been an abject failure.
Today, it’s simply a photo opportunity for leaders of member countries from the Americas, Oceania, Russia and Asia. APEC was set up after the Soviet bloc collapsed, and served a psychological purpose during the post-Cold War transition. It was reassuring for the global community to see leaders of former enemy countries shaking hands.

However, APEC is just too big and diverse to provide a foundation for building a trade structure. So general is the scope that anything APEC members agree upon would probably pass the United Nations. Now, two decades after end of the Cold War, APEC has clearly outlived its usefulness and is withering, although it may never shut down. APEC’s annual summit still offers leaders of member countries a venue for meetings on the sidelines to discuss bilateral issues. Maybe the group is useful in this way, offering an efficient venue for multiple summits concurrently.

Although ASEAN has succeeded with its own agenda, and achieved considerable success in relation to non-member countries, it clearly cannot assume the same role as the European Union. Besides, should Asia have an EU-like organization? Asia, by definition, clearly cannot. It’s a geographic region that includes the sub-continent, Middle East and central Asia. Any organization that encompasses Asia as a whole would be as unwieldy as APEC.

I am always puzzled by the word “Asia,” which the Greeks coined. In his classic work Histories, it seems ancient Greek historian Herodotus primarily referred to Asia Minor — today’s Turkey, and perhaps Syria — as Asia. I haven’t read much Greek, but I don’t recall India being included in ancient Greek references. So as far as I can determine, there is no internal logic to treating Asia as a region. It seems to encompass all places that are neither European nor African. Africa is a coherent continent, and Europe has a shared cultural past. Asia belongs to neither, so it shouldn’t be considered an organic entity.

Malaysia’s former prime minister Tun Mahathir bin Mohamad Mahathir was a strong supporter of an East Asia Economic Caucus (EAEC) which would have been comprised of ASEAN nations plus China, Japan and South Korea. But because Japan refused to participate in an organization that excluded the United States, the idea failed.

Yet there is some logic to Mahathir’s proposal. East Asia has a shared history, and intra-regional trade goes back centuries. Population movements have been significant, and as tourism takes off, regional relations should strengthen. One could envision a future marked by free-flowing capital, goods and labor in the region.

Yet differences among the region’s countries are much greater than in Europe. ASEAN’s overall per capita income is US$ 2,000, while it’s US$ 3,500 in China and US$ 40,000 in Japan. China, Japan, South Korea and Vietnam share Confucianism and Mahayana Buddhism, while most Southeast Asian countries embrace Islam or Hinayana Buddhism, and generally are more religious. I think an EU-like organization in East Asia would be very hard to establish, but something less restrictive would be possible.

Because Japan turned down Mahathir’s EAEC idea, there was a lot of interest when recently elected Prime Minister Yukio Hatoyama’s proposed something similar – an East Asia Community — at a recent ASEAN summit. Hatoyama failed to clarify the role of the United States in any such organization. If the United States is included, it would not fly, as it would be too similar to APEC. Nor could such an organization be like the EU. But if Japan is fully committed, the new group could assume substance over time.

The Japanese probably proposed the community idea for domestic political reasons. Yet the fundamental case for Japan to increase integration with the rest of Asia and away from the United States grows stronger every day. Despite high per capita income, Japan remains an export-oriented economy, having missed an opportunity to develop a consumption-led economy in the 1980s and ’90s. In the foolish belief that rising property prices would spread wealth beyond the industrial heartland in the Tokyo-Osaka corridor, the government of former Prime Minister Kakuei Tanaka pursued a high-price land policy, discouraging the middle class from pursuing a consumer lifestyle as they saved for property purchases.

Even more seriously, high property prices have been a major reason for Japan’s rapidly declining birth rate, as land prices inflated living costs. Now, facing a declining population and public debt twice GDP, Japan has few options for rejuvenating the economy by promoting domestic demand. It needs trade if it hopes to achieve any growth at all. Without growth, Japan will sooner or later suffer a public debt crisis.

Japan’s property experience offers a major lesson for China. Every Chinese city is copying the Hong Kong model — raising money from an increasingly expensive land market to fund urban development, leading to rapid urbanization. But this is borrowing growth from the future. Rising land prices lead to rising costs and, hence, slower growth and the same rapid decline in the birth rate that Japan experienced. Unless China reverses its high-land price policy, the consequences will be even more disastrous than in Japan or Hong Kong, as China shifted to the asset game much earlier in its development.

Yet I digress again. The point is that Japan has a strong and genuine case that favors more integration with East Asia. The United States is unlikely to recover soon and with enough strength to feed Japan’s export machine again. There is no more room for fiscal stimulus. Devaluing the yen to gain market share is not an option as long as Washington pursues a weak dollar policy. Without a new source of trade, Japan’s economy is doomed. Closer integration with East Asia is the only way out.

In addition to Hatoyama’s EAC proposal, a study jointly sponsored by China, Japan and South Korea is considering the possibility of a FTA. Of course, ASEAN could offer a template for any new East Asian bloc. ASEAN has signed an FTA with China and is talking with Japan and South Korea. If they all sign, regional integration would be halfway completed.

Whatever proposals for East Asian integration, the key issue is a possible FTA between China and Japan. Adding other parties avoids this main issue. China and Japan together are six times ASEAN’s size and 10 times South Korea’s. Without a China-Japan FTA, no combination in East Asia would truly support regional integration.

Five years ago, I wrote an op-ed piece for the Financial Times entitled China and Japan: Natural Partners. At the time, a prevailing sentiment was that China and Japan were antithetical: Both were still manufacturing export-led economies and could only gain at the other’s expense. I saw complementary demographics and capital: Japan had a declining labor force and China needed to employ tens of millions of youths migrating to cities from the countryside. China needed capital and Japan had surplus capital. And their trade relations indeed tightened, as Japan had increased the Chinese share of its overall trade to 17.4 percent in 2008 from 10.4 percent in ’04.

Today, the situation has changed. China has a capital surplus rather than a shortage. Demographic complementarity is still good and could last another decade. As China shifts its development model from resource intensive to environmentally friendly, a new complementarity is emerging. Japan has already made the transition, and its technologies that supported the transition need a new market such as China’s. So even without a new trade agreement, bilateral trade will continue growing.

An FTA between China and Japan would significantly accelerate their trade, resulting in an efficiency gain of more than US$ 1 trillion. Japan’s aging population lends urgency to increasing the investment returns. On the other hand, as China prepares to make a numerical commitment to limiting greenhouse gas emissions at the upcoming Copenhagen summit on global warming, heavy investment and rapid restructuring are needed for its economy. Japanese technology could come in quite handy.

More importantly, a China-Japan FTA would lay a foundation for an East Asian free trade bloc. The region has a population of 2.1 billion and a GDP of US$ 13 trillion, rivaling the European Union and United States. Blessed with a low base, plenty of capital, sound technology and a huge market, the region’s GDP could easily double in a decade.

Trade and technology are twin engines of growth and prosperity. No boom is sustained without one or the other. And when they come together, the boom can be massive. Prosperity seen over the past decade, for example, is due to information technology along with the opening up of China and other former planned economies. But these factors have been absorbed, forcing the world to find another engine. An integration of East Asian economies would be significant enough to play this role.

The best approach would be for China and Japan to negotiate a comprehensive FTA that encompasses free-flowing goods, services and capital. This task may appear too difficult, but recent changes have made it possible. The two countries should give it a try.

It would be wrong to begin by working out an FTA that includes China, Japan and South Korea. That would triple the task’s level of difficulty, especially since South Korea doesn’t have a meaningful FTA with any country. To imagine that the Seoul government would cut a deal with China or Japan is naive. China and Japan should negotiate bilaterally.

A key issue is that China and Japan should put economics before politics. If the DPJ government wants to gain popularity by increasing international influence rather than boosting the economy, then all the current speculation and discussion about an East Asia bloc would be for nothing. But if DPJ wants to sustain power by rejuvenating Japan’s moribund economy, chances for a deal are good.

While Japan is talking, China should be doing. China should aggressively initiate the FTA process with Japan. Regardless of China’s current difficulties, its growth potential and vast market are what Japan will never have at home nor anywhere else. Hence, China would be able to compromise from a position of strength.

Some may say a free trade area for East Asia is beyond reach. However, history belongs to the daring. The world has changed enough to make it possible. China and Japan should seize the opportunity.

Source: Caijing, 10.11.2009 by Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.

Full article in Chinese

Filed under: Asia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, News, Singapore, Thailand, Vietnam, , , , , , , , , , , , , , , , , , , , , , , , ,

The Demise of the Dollar, Robert Frisk

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk

October 06, 2009 “The Independent” — — In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Source: The Independent, 06.10.2009

Filed under: Asia, Brazil, China, Energy & Environment, India, Japan, Latin America, News, Risk Management, , , , , , , , , , , , , , , , , , , ,

China Takes Aim at Dollar – Update 07.07.2009

Update 07.07.09:   Long live the all mighty US dollar as reserve currency, says China. Chinese Deputy Foreign Minister He Yafei said on Sunday the US dollar would continue to be the world’s leading reserve currency for years to come. The announcement comes before this week’s summit of the Group of Eight in Italy.

Source: MercoPress, 06.07.2009

First published 27.06, 2009: BEIJING — China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.

The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis.

Mr. Zhou’s proposal comes amid preparations for a summit of the world’s industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China’s economic and currency policies.

This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations.

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However, the technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks’ domestic currencies.

Monday’s proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update “the obsolescent unipolar world economic order.”

[Dollar Dominated]

Chinese officials are frustrated at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing “worries” over China’s significant holdings of U.S. government bonds. The size of those holdings means the value of the national rainy-day fund is mainly driven by factors China has little control over, such as fluctuations in the value of the dollar and changes in U.S. economic policies. While Chinese banks have weathered the global downturn and continue to lend, the collapse in demand for the nation’s exports has shuttered factories and left millions jobless.

In his paper, published in Chinese and English on the central bank’s Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance. Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.

Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF.

John Lipsky, the IMF’s deputy managing director, said the Chinese proposal should be treated seriously. “It reflects officials’ concerns about improving the stability of the financial system,” he said. “It’s interesting because of China’s unique position, and because the governor put it in a measured and considered way.”

China’s proposal is likely to have significant implications, said Eswar Prasad, a professor of trade policy at Cornell University and former IMF official. “Nobody believes that this is the perfect solution, but by putting this on the table the Chinese have redefined the debate,” he said. “It represents a very strong pushback by China on a number of fronts where they feel themselves being pushed around by the advanced countries,” such as currency policy and funding for the IMF.

A spokeswoman for the U.S. Treasury Department declined to comment on Mr. Zhou’s views. In recent weeks, senior Obama administration officials have sought to reassure Beijing that the current U.S. spending spree is a short-term effort to restart the stalled American economy, not evidence of long-term U.S. profligacy.

“The re-establishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time,” Mr. Zhou said. In remarks earlier Monday, one of his deputies, Hu Xiaolian, also said the dollar’s dominant position in international trade and investment is unlikely to change soon. Ms. Hu is in charge of reserve management as the head of China’s State Administration of Foreign Exchange.

Mr. Zhou’s comments — coming on the heels of Mr. Wen’s musing about the safety of China’s dollar holdings — appear to be a warning to the U.S. that it can’t expect China to finance its spending indefinitely.

[The Haves and Have Mores]

The central banker’s proposal reflects both China’s desire to hold its $1.95 trillion in reserves in something other than U.S. dollars and the fact that Beijing has few alternatives. With more U.S. dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in U.S. debt.

Mr. Zhou argued, without mentioning the dollar by name, that the loss of the dollar’s de facto reserve status would benefit the U.S. by avoiding future crises. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

“The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr. Zhou said. The increasing number and intensity of financial crises suggests “the costs of such a system to the world may have exceeded its benefits.”

Mr. Zhou isn’t the first to make that argument. “The dollar reserve system is part of the problem,” Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the world’s cash was funneled into the U.S. “We need a global reserve system,” he said in the speech.

Mr. Zhou’s idea is to expand the use of “special drawing rights,” or SDRs — a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

These days, the SDR is mainly used in the IMF’s accounting for its transactions with member nations. Mr. Zhou suggested countries could increase their contributions to the IMF in exchange for greater access to a pool of reserves in SDRs.

Holding more international reserves in SDRs would increase the role and powers of the IMF. That indicates China and other developing nations aren’t hostile to international financial institutions — they just want to have more say in running them. China has resisted the U.S. push to make an immediate loan to the IMF because that wouldn’t give China a bigger vote. Ms. Hu said Monday that China, which encourages the IMF to explore other fund-raising options, would consider buying into a bond issue.

The IMF has been working on a proposal to issue bonds, probably only to central banks. Bond purchases are one way for the organization to raise money and meet its goal of at least doubling its lending war chest to $500 billion from $250 billion. Japan has loaned the IMF $100 billion and the European Union has pledged another $100 billion.

Source: Wall Street Journal, 24.06.2009 Terence Poon in Beijing, James T. Areddy in Shanghai, and Bob Davis and Michael M. Phillips in Washington contributed to this article.

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Beware of rising Asian stock markets

Investors who were bold enough to stay invested in Asian equities from the latter part of last year onwards are reaping the rewards of their bravado. The closely watched MSCI Asia ex-Japan Index was, after all, up 41% in the three-month period ending May 15. The sharp gains in Asian shares have, not surprisingly, triggered a bandwagon effect of investors trying to get in on the action and hoping that they’re not too late to cash in later on.

The notion that Asian companies have strong balance sheets is great, if you’re a bondholder.

For investors who are looking for a quick buck, Asian equities — or equities in any market for that matter — isn’t the place to find it. Short-term, Asian stock markets remain volatile and the fact that they have risen by so much in such a short span of time make it even more dangerous ground. If anything, the markets look poised for a correction. It may come later rather than sooner, because the momentum chasers are keeping markets afloat for now, but it will come.

“The global economy has not yet recovered to a healthy state,” says Nick Scott, Hong Kong-based CIO for Asian equities at BlackRock. “The rally in March and April is based upon investor relief that things may not be as bad as was predicted, rather than concrete evidence that the worst is over and a recovery is imminent.”

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For investors who are in this for the long haul — with one year being the minimum investment horizon — then the scenario is vastly different. Asian stock markets are generally expected to outperform US and European markets over the long run. The reasons for this optimism is plentiful, including the region’s relatively strong domestic consumption, sound fiscal position, ability to counteract external shocks with central bank reserves and fiscal spending, less dependence on exports, stronger financial systems, and so on and so forth.

Halbis Capital Management, for one, has kept its bullish long-term view of Asian equities intact.

“Overall, we believe the market is showing signs of stabilisation that should allow bottom-up investors such as ourselves to focus once again on picking the right stocks,” says Ayaz Ebrahim, Hong Kong-based CEO of Halbis Capital Management. “In the last few months of turbulence, investors have focused more on shifting between defensive and cyclical sectors rather than assessing the fundamentals of the companies themselves.”

Still, even for long-term investors, fund managers and analysts are sounding out the alarm bells and warning against chasing the momentum. Waiting for that correction is seen as the best option.

“It is very hard to predict how equities will perform over the next 12 months, particularly following such a strong rally,” says Peter Elston, Singapore-based Asian strategist at Aberdeen Asset Management. “We are still in a period of economic turbulence, in which conditions in the short- to medium-term may either improve or deteriorate unpredictably.”

Alex Ingham, a London-based emerging markets fund manager at Aviva Investors, believes that a pause in the current rally is “almost certain”.

What investors should be mindful at the present are the changes in fundamentals of listed companies, risk tolerance of investors and company-specific outlook. These are the factors that will shape the investment landscape going forward.

“We are beginning to see some discrimination emerging in the markets, different sectors and businesses are starting to demonstrate their ability to either recover more quickly or improve their cost competitiveness,” says Colin Ng, the Hong Kong-based regional head for Asia-Pacific equities at MFC Global Investment Management, the asset management arm of Manulife Financial.

Structural return on equity and earnings growth potential remains higher in Asia than in the world’s developed markets, says BlackRock’s Scott, who like many fund managers is particularly optimistic on the long-term prospects of China and India.

“China of course is the focal point,” says Victor Lee, Hong Kong-based regional investment manager at JP Morgan Asset Management. “We may indeed see China outperforming global markets as the fiscal packages continue to gain traction. It has strong deposit base and fiscal power to keep its economy on track.”

Scott says the strengthening links between China and Taiwan may also throw up some interesting opportunities as mainland companies acquire stakes across the Strait. He believes that India’s economy has cooled as foreign funding has dried up, but that has created some insulation from the collapse in global demand.

Not everyone’s a fan of China.

Desmond Tjiang, Hong Kong-based CIO for Asia ex-Japan equities at Fortis Investments, is wary of the rally in Chinese shares and doubts it is sustainable.

“The consensus overweight in China is a risk because that market is overcrowded,” says Tjiang, who is bullish instead on Indonesia. He believes that the strong domestic consumption in Indonesia, citing that country’s urbanisation, infrastructure, and domestic consumption trends.

Rajiv Jain, managing director for international equities at Vontobel Asset Management in New York, says the notion that Chinese domestic demand is going to rescue the region in fiction.

“Chinese domestic consumption is less than that of the UK,” Jain notes. “An increase there isn’t going to move the needle.”

Worse, it’s in China where the greatest overcapacity exists in areas such as steel and cement. China’s infrastructure spending program is good at boosting GDP figures by adding capacity, but does nothing to help corporate profitability.

Moreover, Jain is sceptical about the ability of government stimulus programs to ultimately boost corporate earnings.

“We don’t trust any government. Why do investors have such confidence in Beijing? Chinese steel companies are being instructed to produce more and not lay off workers, at a time when capacity utilisation rate are at their lowest in 50 years.”

Too many investors are mesmerised by the Asian growth story, but Jain calculates that over the long term, Chinese corporate earnings growth rates have been about the same as America’s — but Chinese stocks are priced far more ambitious.

Jain says the past five years were a bubble and have clouded investors’ expectations about growth in China and other Asian markets. The argument that Asian corporate balance sheets are strong is fine for bondholders but doesn’t equate to earnings growth.

Source:AsianInvestor, 03.07.2009 by Rita Raagas De Ramos

This is an excerpt from a story that originally appeared in the June edition of AsianInvestor magazine. To learn more about the content in the magazine, please contact Stephen Tang at

Filed under: Asia, China, Hong Kong, Indonesia, Korea, News, Risk Management, , , , , , , , , , ,

India: The dark side of the emerging powers

India is the up-and-coming superpower that much of the world loves to love. But not, of course, everyone. Not environmentalists pushing for stronger climate change treaties. Not India’s smaller neighbours. Not Burmese democracy activists, appalled by New Delhi’s embrace of their country’s military rulers.

But by and large India is seen as a “good” emerging power – in implicit contrast to China – by virtue of its noisy democracy, which through largely credible elections has repeatedly allocated and transferred national and state power.

India’s global image also trades on its deep reserves of soft power, especially its export of charismatic gurus and yoga masters preaching peace, love, tolerance and harmony – values that the political establishment often manages to portray as intrinsic to society at large and the state itself.

Yet India has a dark underbelly in which state and society often fall dreadfully short of the liberal, democratic ideals they profess; where law shields the powerful and persecutes the weak. It is this that Arundhati Roy, the Booker Prize-winning novelist and prominent social activist, seeks to draw attention to in her provocative new book, Listening to Grasshoppers.

The book is an uneven collection of essays, opinion pieces, speeches and other writings published between 2002 – when an estimated 2,000 Muslims were massacred in the western state of Gujarat – and the aftermath of last November’s terror attacks in Mumbai. Roy calls the collection “a detailed under-view” of the darker side of the world’s largest democracy – or what she describes as “the cunning, Brahmanical, intricate, bureaucratic, file-bound ‘apply-through-through-the-proper channels’ nature of governance and subjugation in India.”

Roy paints a grim picture of India as a society of unaccountable political elites, a malevolent law-enforcement system, a rapacious emerging middle-class and a deeply-alienated impoverished mass, battling to avoid dispossession from their land.

She points accusing fingers at corporate India for its greed and for its silence about human rights atrocities, at the media for ignoring the crisis she sees unfolding in the country, and at right-wing Hindus for channelling public anger into religious intolerance.

The main essays focus on the Gujarat riots, the arrests and trial of Muslim suspects after the 2001 attacks on the Indian Parliament, the de facto military occupation of Muslim-majority Kashmir, and the Mumbai attacks.

And although Roy, who sits firmly within India’s radical left tradition, claims she has no Big Theory – no overview – of modern India, she does offer up one big idea. In a strand running through several essays, which suffer from repetitiveness, she argues that the rise of Hindu nationalist extremism was inextricably linked to India’s market-oriented economic development project of the past two decades.

“While one arm is busy selling off the nation’s assets in chunks, the other, to divert attention, is arranging a baying, howling deranged chorus of cultural nationalism,” she proclaims in the transcript of a 2004 lecture about the then-ruling Hindu nationalist Bharatiya Janata Party.

The essays were written before the recent Congress party victory over the BJP, the Hindu nationalist party’s second consecutive electoral defeat – and its worst electoral performance in years. But Roy’s introduction makes clear she takes little comfort from that, given her gloomy view of Congress, most other arms of the Indian state – and Indian society.

She rightly points to India’s persistently high rates of malnutrition, and rising tension over land, raising the question of whether India has either the capacity or will to improve the lives of its poorest citizens.

Yet her sweeping denunciations of India’s privatisation efforts make it seem as though New Delhi was callously dismantling the Swedish welfare state.

She dismisses the economic boom as having merely created “a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it – and a much, much vaster desperate under class”.

There is little doubt that Roy, with her eloquence, concern for the poor, and personal magnetism, is an important voice in the Indian public sphere.

But the danger is that her extreme views – and her fierce hostility to a liberalisation programme that many Indians credit with dramatic improvements in their own lives – will alienate those whose support will be essential in India’s struggle for social justice in the years ahead.

Read full article “Listening to Grasshoppers” here.

Source: Financial Time, 05.07.2009 by Amy Kazim

Filed under: Asia, Energy & Environment, India, News, Risk Management, , , , ,

Credit Card Crisis: Banks rush to emergency rescue of credit card trusts/securitisation vehicles

Credit card issuers have had to resort to extreme measures to keep their businesses alive as US consumers buckle under the weight of the recession. Record credit card losses are pushing big US banks to come to the rescue of off-balance sheet vehicles they use to transform hundreds of billions of dollars in consumer loans into securities sold to investors.

The support provided by Citigroup, Bank of America, JPMorgan Chase and American Express underscores how the deteriorating health of the US consumer is opening new fronts in the financial crisis.

Losses on US credit cards as measured by Moody’s Credit Card Index rose beyond 10 per cent of total loans outstanding in May, a new high in the 20-year history of the index and the sixth consecutive monthly record.
Most credit card loans are placed into pools – structured as trusts – that are used to back bonds sold to investors. Banks rely on such “securitisations” to fund their huge levels of credit card lending while keeping most of the risk off their books.

Although they are not obligated to support the pools of credit card receivables when losses mount, banks have done so to ensure investors continue to buy such securities.

The doomsday scenario facing banks is that credit card losses will rise to levels that force the vehicles to repay bondholders early.

Banks have been supporting card trusts by issuing – and then buying – bonds that would absorb the first layer of losses in the underlying loans. This is designed to provide a protective buffer for existing bondholders.

BofA bought $8.5bn of junior debt from one of its trusts in the first quarter and put aside $750m to cover losses on the investment.

Citi bought $265m of so-called junior debt from one of its credit card trusts in October and an additional $2.3bn of junior debt from the same trust in April, according to a regulatory filing. JPMorgan and Amex also have issued new junior debt for their credit card trusts.

In addition, JPMorgan has supported credit card bonds issued by Washington Mutual – the troubled lender bought by JPMorgan last year – by substituting its own credit card loans for WaMu’s lower quality ones.

The loss rate on the WaMu pool was 14.8 per cent in October. By comparison, a JPMorgan credit-card pool had an 8.1 per cent loss rate in May.

Source: Financial Times, 24.06.2009 by Saskia Scholtes and Francesco Guerrera in New York

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The State of the Environment of China in 2008

In 2008, China’s environmental protection system achieved great success in response to environmental emergency accidents caused by unprecedented natural disasters and in delivering satisfied environmental quality during the Beijing Olympics under the strong leadership of the CPC Central Committee and the State Council. Positive progress was made in such aspects as pollution reduction, construction of environmental infrastructures, pollution control of major river basins, capacity building, environmental economic policies and the three major strategic programs, marking a solid foundation for historic transformation of environmental protection.

Read official summary report by Ministy of Environmental Protection PRC in English

Inserted comments by  Charlie McElwee of China Environmental Law Blog

First, the CPC Central Committee and the State Council have made important arrangements for environmental protection under the new circumstances. At the mobilization meeting on intensive study of Scientific Outlook on Development and a training session for provincial and ministerial-level officials, Secretary General Hu Jintao made a speech and recognized, for the first time, ecological civilization as a major constituent of the master plan for the great undertaking of building a socialist society with Chinese characteristics. Ecological civilization was elevated to a strategic position matched by economic, political, cultural and social development, charting a course for environmental protection work in the new era. Premier Wen Jiabao and Vice Premier Li Keqiang also highlighted on many occasions that we should spare no efforts in pollution reduction and ecological conservation, combine expansion of domestic consumption with the effort to improve people’s well being and ecological environment so as to promote balanced and sustainable development. The first meeting of the 11th National People’s Congress approved the establishment of Ministry of Environmental Protection with the aim of reinforcing its functions ranging from coordination, macro control, to supervision of law enforcement and public service, hence providing stronger institutional guarantee for advancing historic transformation of environmental protection.

Second, the environmental impact assessment system has played an important role in macro control. We have been active in addressing the international financial crisis by making prompt adjustment in environmental impact assessment, improving the approval mechanism, simplifying procedures, honoring seven commitments, opening up a green channel to qualified projects while exercising strict control over energy and resource-intensive and heavy pollution projects. In 2008, MEP denied or suspended 156 such projects and of the 579 projects given instructions, pollution reduction measures helped to cut down 468,600 tons of SO2 and 38,400 tons of COD annually.

Second, the environmental impact assessment system has played an important role in macro control. [Not sure I would have placed this item quite so high given concerns about lax review of stimulus projects and the Jinsha River dam debacle]

  • 156 projects were denied or suspended.
  • Pollution reduction measures helped to cut down 468,600 tons of SO2 and 38,400 tons of COD annually.

Third, a breakthrough has been made in pollution reduction. The country newly added urban sewage treatment capacity by 11.49 million tons/day and 97.12 GW installed capacity with desulphurization facilities and shut down small thermal power plants with a capacity of 16.69 GW. Total discharge of COD and SO2 dropped by 4.42% and 5.95% respectively compared with that of 2007, a decrease of 6.61% and 8.95% respectively against that of 2005. For the first time the progress of our pollution reduction work was in keep with the timetable, laying a sound groundwork for achieving the target of the Eleventh Five-Year Plan period.

Third, a breakthrough has been made in pollution reduction.

  • Urban sewage treatment capacity was increased by 11.49 million tons/day.
  • 97.12 GW of installed electric generation capacity was installed with desulphurization facilities.
  • 16.69 GW small thermal power plant capacity was shut down.
  • COD discharges dropped by 4.42% compared with 2007, and 6.61% against 2005 levels.
  • SO2 emissions dropped by 5.95% compared with 2007, and 8.95% against 2005 levels.

Fourth, we have accomplished emergency response to severe natural disasters and guaranteed environmental quality for Beijing Olympics. Environmental emergency response was launched to cope with the snowstorm in South China and the unprecedented earthquake in Wenchuan to ensure the safety of radiation environment and drinking water. Beijing cooperated with its neighboring five provinces (autonomous region and municipality) for full implementation of measures to guarantee air quality during the Olympic Games, honoring the earnest commitment to a Green Olympic Games and completing the task in success.

Fourth, accomplished emergency response to severe natural disasters and guaranteed environmental quality for Beijing Olympics.

Fifth, steady progress has been made in prevention and control of pollution in river basins. Seven plans on water pollution control for the Huaihe River, Haihe River and so on have been approved by the State Council and put into operation. Ecological safety assessment on Taihu Lake, Chaohu Lake and the Three Gorges Reservoir area was made accompanied by full-scale eco-safety monitoring work, which paved the way for integrated management of lakes. We have launched a baseline investigation on concentrated drinking water sources in counties across the country, inspecting 15,000 source areas and urging over 4,600 protection areas to carry out rectification measures. This move further safeguarded drinking water safety for the public.

Fifth, steady progress has been made in prevention and control of pollution in river basins.

Sixth, environmental protection work has been unfolded in rural areas. The State Council held the first national teleconference on environmental protection in rural areas and put forward a set of important policies, such as giving incentives to environmental improvement in the form of reward and replacing subsidy by reward. The Central Government also set up a special fund for rural environmental protection, allocating 500 million Yuan to support environmental redress and ecological demonstration in 700 villages. This program generated nearly 1 billion Yuan local investment, benefiting over 4 million farmers.

Sixth, environmental protection work has been unfolded in rural areas.

Seventh, intensified efforts have been made in supervision of law enforcement. We continued the special campaign to correct illegal polluting enterprises and safeguarding people’s health. Inspections were made on hidden environmental dangers as well as urban sewage treatment plants and landfill sites. With mounting effort on expost supervision, we supervised 16,000 plus cases put on the rectification blacklist nationwide since 2005 and more than 8,000 papermaking companies inspected in 2007 and shut down 621 paper mills violating national industrial policy and total discharge standard. This helped to consolidate what we have achieved in this regard.

We have strengthened routine review and supervision on the safety of nuclear power plants in service, tightened regulation and assessment of nuclear power plants under construction or to be built and stepped up management of radioactive sources to ensure the safety of nuclear and radiation environment.

Seventh, intensified efforts have been made in supervision of law enforcement.

  • 16,000 enterprises have been placed on the nationwide “rectification blacklist” since 2005.
  • More than 8,000 papermaking companies inspected in 2007 [sic] and 621 were shut down for violating national industrial policy and total discharge standards.

Eighth, new achievement has been made in environmental legislation, policy, technology, publicity and education and international cooperation. The revised Law on Prevention and Control of Water Pollution was formally put into effect and environmental quality standard for noise was released for the first time together with emission standard for industrial enterprises and community noise. Active exploration was made on environmental economic policies such as green credit, green securities, green taxation and green insurance. Varied activities were organized for publicity and education on environmental protection and international environmental cooperation was developed in a more pragmatic manner.

Eighth, new achievement has been made in environmental legislation, policy, technology, publicity and education and international cooperation.

Ninth, we have further built up our capacity. The Central Government invested 34 billion Yuan for environmental protection, an increase of more than 10 billion Yuan compared to that of 2007. With the implementation of the three major programs for pollution reduction, we will build 363 monitoring centers on pollution sources, 36 automatic water quality monitoring stations and add 3,900 cars for law enforcement, creating an information transmission system linking national, provincial, municipal and county network and three data analysis platforms. The satellite for monitoring environment and disaster was launched successfully.

Ninth, further built up capacity.

  • The central government invested 34 billion Yuan for environmental protection, an increase of more than 10 billion Yuan compared to that of 2007.

Tenth, the three strategic programs are proceeding smoothly. General investigation of pollution sources entered the final stage for summary and release after completing such basic work as filling out forms, data input, quality control, data reporting and collection, examination and modification. Macro strategic study of China’s environment was basically completed and the major technological program on control and treatment of water body pollution was started on a full scale.

Tenth, the three strategic programs are proceeding smoothly. [What the “three strategic programs” are, however, is hard to figure out from the description provided].

Thanks to down-to-earth and effective work, the year 2008 saw obvious changes in some environmental quality indicators. The annual average concentration of permanganate index of surface water was 5.7 mg/L, down by 12.3 percentage points than last year and 20.8 percentage points than in 2005. It was the first time for this index to have ever reached national Grade III standard. The annual average concentration of SO2 in urban areas was 0.048 mg/m3, down by 7.7 percentage points than last year and 15.8 percentage points than that of 2005. It met Grade II national standard for ambient air quality. However, China was still confronted with serious environmental situation and the general environmental conditions were as follows:

First of all, surface water pollution remained very serious. The general water quality of the seven major waters including the Yangtze River, Yellow River, Pearl River, Songhua River, Huaihe River, Haihe River and Liaohe River were about the same as in last year. 55.0% of 409 sections in 200 rivers had water quality at Grade I~III national standards, 24.2% of them at Grade IV~V standards, and 20.8% worse than Grade V standard. The Pearl River and Yangtze River enjoyed good water quality, Songhua River was slightly polluted, Yellow River, Huaihe River and Liaohe River suffered from moderate pollution, and Haihe River was badly polluted. 46.2% of the 26 lakes (reservoirs) under national monitoring programs on their nutrition state suffered from eutrophication.

First, surface water pollution remained very serious.

  • The general water quality of the seven major waters including the Yangtze River, Yellow River, Pearl River, Songhua River, Huaihe River, Haihe River and Liaohe River were about the same as last year.
  • 20.8% of 409 sections in 200 rivers were graded worse than Grade V standard [presumably this means you could walk across the water segment].
  • 46.2% of the 26 lakes (reservoirs) under national monitoring programs on their nutrition state suffered from eutrophication.

Second, the coastal areas nationwide were slightly polluted. 70.4% of coastal seawater had water quality at national Grade I and II standards, up 7.6 percentage points than last year; 11.3% of the seawater met Grade III national standard, about the same as last year; and 18.3% ranked at Grade IV national standard or worse, down 7.1 percentage points. Of the coastal areas of the major four seas, the Yellow Sea and South China Sea enjoyed good water quality, the Bohai Sea had common water quality and East China Sea had poor water quality. The proportion of seawater at Grade I and II national standards increased by more than 10% in the Bohai Bay, Yangtze River estuary, Pearl River estuary and Beibu Bay compared with that of last year.

Second, the coastal areas nationwide were slightly polluted.

Third, some cities had good air quality better than last year, but other cities still suffered from serious pollution. The acid rain distributed in about the same areas, but the pollution it caused was still grave. 519 cities across the country reported air quality data in 2008. 21 of them reached national Grade I standard for air quality, accounting for 4.0%; 378 ones was up to national Grade II standard, accounting for 72.8%; 113 cities hit Grade III standard, taking up 21.8%; and 7 failed to meet Grade III standard, accounting for 1.4%. 71.6% of the country’s cities at or above prefecture level had qualified water quality, and 85.6% of county-level cities managed to do so.

The air quality in 113 major cities on environmental protection turned better. 57.5% of them had air quality up to Grade II national standard, 41.6% up to Grade III standard, and 0.9% had air quality worse than Grade III standard. 13.3% more cities had air quality up to standard compared with last year, and the proportion of cities failing to reach Grade III standard did not change.

Third, some cities had good air quality better than last year, but other cities still suffered from serious pollution.

  • 519 cities across the country reported air quality data in 2008. 21 of them reached national Grade I standard for air quality, accounting for 4.0%; 378 ones was up to national Grade II standard, accounting for 72.8%; 113 cities hit Grade III standard, taking up 21.8%; and 7 failed to meet Grade III standard, accounting for 1.4%. 71.6% of the country’s cities at or above prefecture level had qualified water quality, and 85.6% of county-level cities managed to do so.

Fourth, 71.7% of the country’s cities enjoyed good or relatively good regional acoustic environment, and 75.2% of the 113 major cities on environmental protection managed to do so. 65.3% of the cities across the country had good road acoustic environment, and 93.8% of the 113 major cities on environmental protection enjoyed good or relatively good road acoustic environment. 86.4% of the function zones in all cities met standard for acoustic environment at day, and 74.7% of them met standard at night.

Fourth, 71.7% of the country’s cities enjoyed good or relatively good regional acoustic environment, and 75.2% of the 113 major cities on environmental protection managed to do so.

Fifth, the radiation environmental quality across the country was good at large. The ionizing radiation level remained stable, and the radiation near nuclear facilities and equipment was within the normal range. The electromagnetic radiation level was also good. The comprehensive field strengthen in parts of several high-power radiators exceeded the national standards, but the radiation levels near other electromagnetic radiators were up to national standards.

Fifth, the radiation environmental quality across the country was good at large. [“Good at large” does not provide me with the level of comfort I’m looking for when it comes to radiation]

Sixth, some progress was made in ecological construction. By the end of 2008, 2,538 nature reserves of all kinds at all levels had been established across the country, covering a total area of 1.49 million km2. Among them there were 303 national-level nature reserves, accounting for 11.9% of the total. They covered 91.2 million ha, accounting for 61.2% of the total area. 28 nature reserves joined the “Man and the Biosphere” network of UNESCO, and 20-odd nature reserves became World Natural Heritage Sites.

Sixth, some progress was made in ecological construction.

Seventh, the environmental problems in rural areas were increasingly prominent, with aggravated household pollution, worsening non-point pollution, sharpening industrial and mine pollution, and hidden risk for drinking water safety. The pollution tended to transfer from urban areas to rural areas.

Seventh, the environmental problems in rural areas were increasingly prominent, with aggravated household pollution, worsening non-point pollution, sharpening industrial and mine pollution, and hidden risk for drinking water safety. The pollution tended to transfer from urban areas to rural areas.

Source: Ministry of Environmental Protection of PRC,  o5.06.2009

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Worldbank: State and Trends of the Carbon Market 2009

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Malaysia, Singapore eye changes to economic models

Malaysia and Singapore said Friday they may tweak their economic models as a collapse in demand from the US and Europe sends the Southeast Asian neighbours into recession.

Malaysia plans to emphasize “greater creativity, innovation and high-value” as part of an effort to spark economic growth, prime minister Najib Razak said. Details of the plan would be announced “when we’re ready,” he said.

“We’re taking advantage of the current global downturn… to come up with a new economic model for Malaysia,” Najib said at a joint news conference with Singapore prime minister Lee Hsien Loong.

Malaysia and Singapore, which formed a single country from 1963 to 1965, have seen their exports plummet this year amid the worst global economic slowdown since World War II. The International Monetary Fund said earlier this month it expects Malaysia’s economy to shrink 3.5 percent in 2009 while Singapore’s will likely contract 10 percent.

Each country has announced major fiscal stimulus packages this year in a bid to boost domestic consumption.

The prime ministers also said they began discussions on building a third causeway between the two countries, which are separated by the Straits of Johor.

Singapore, which relies on trade, finance and tourism, will review over the next few months which manufacturing and services it may branch into, Lee said. “At the broadest level, our approaches are sound and have to remain,” Lee said. “But what sort of manufacturing, what new services? These are issues which we have to consider.”

Najib has already scrapped a requirement for 30 percent Malay ownership for companies in several sectors, such as health care and transport, as part of a pledge to roll back decades-old affirmative action programmes for the ethnic Malay majority.

The Malaysian government has said it would like to boost manufacturing productivity and add more value to exports.

Source: AFP 25.05.2009

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Venezuela announces joint oil venture with Vietnam

President Hugo Chavez’s government says it is forming a joint oil company with Vietnam to exploit Venezuela’s heavy crude.

State-run Petroleos de Venezuela SA, or PDVSA, will cooperate with Vietnam’s state oil and gas monopoly, PetroVietnam, on oil exploration and production in Venezuela, according to a presidential decree in the Official Gazette issued Friday.  The company, to be called PetroMacareo SA, will operate in Venezuela’s eastern Orinoco River basin, and may also participate in transporting and selling oil, the decree said.  Under Venezuelan law, PDVSA’s partners may hold only a minority stake in oil production projects.

During a visit from Vietnamese President Nguyen Minh Triet in November, the two leaders discussed the possibility of building an oil refinery in Vietnam, and of cooperating with the Asian nation to build oil tankers. Chavez’s government has been forming joint oil ventures with allies ranging from Russia to China as Venezuela aims to diversify its oil clientele.

The United States remains the top buyer of oil from Venezuela, which is the fourth-largest oil supplier to the US.

Source: Forbes, 25.05.2009  click here for original article

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Shenzhen Stock Exchange General Manager Song Liping : to develop a Multi-Level Capital Market

Song Liping, general manager of Shenzhen Stock Exchange, made a speech with the topic of “The New Opportunity for China’s Capital Market” during a panel discussion at the Lujiazui Forum. Song stressed the importance of developing multi-level capital market and diversified investment groups.

“Different enterprises at different stages need multi-level market to meet their different financing needs, and investors having different risk preference also need diversified investment groups to meet their needs.” Song said.

“Small and medium investors made prominent distribution to the liquidity of China capital market”, Song said. “It results in outstanding feature of short-term behavior of investors in the market; and the problem of homogenization phenomena in investment activities among institutions, especially among fund management companies, is also serious.”

For the progress of preparation of the new market, Song expressed that Shenzhen Stock Exchange was proceeding on doing research in other similar market in other countries so as to learn related experience and doing research in the sources of planned listed companies, and strengthening the preparation work for the trading system for the new market.

Song noted that Shenzhen Stock Exchange would accelerate the release of corresponding measures for the new market and make further requirement for enterprises and sponsors. Song also stressed that the late-developing advantages of emerging capital market status of China shall be drawn attention to.

Source: SZSE 19.05.2009

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Fitch expresses concern about China’s loan cascade

The ratings agency points to early warning signs that indicate asset quality is deteriorating.

This year, China’s banks have opened the floodgates of credit: between January and the end of April, $757 billion worth of new loans were dished out, equivalent to 17% of the GDP in 2008. As such, China’s banks are enjoying a rate of growth that their Western peers would kill for. The increase in lending is the government’s doing, since it has given banks the task of financing the infrastructure spending that forms a large part of China’s stimulus package. Read original article.

Looking to the medium- to long-term, however, analysts are beginning to air concerns about what effect such a rapid increase in lending could have on the quality of the banks’ loan portfolios.

A report released yesterday by Fitch Ratings highlights issues with the banking sector’s $4.2 trillion corporate loan portfolio. The worry arises from the fact that China’s banks are increasing their corporate exposure at a time when corporate profits are declining.

“Ordinarily, falling corporate earnings are met with tightened lending, but in China precisely the reverse is happening,” said the report. This illustrates that “despite years of reform Chinese banks still retain an important policy function in upholding local enterprises”.

Infrastructure spending is not the only thing underlying the loan growth, according to the report. All the banks set a profit growth target. Since interest rates are down, the only way that banks can possibly meet their targets is by focusing purely on volumes. In the process of increasing the number of loans, it is more likely that money will be lent to commercially unviable projects. However, the banks don’t see this as a problem, since there is an implicit assumption that any coming losses will be paid for by the government.

Although bank earnings have held up well so far, Fitch points to what it calls “early warning signals” that indicate asset quality could be deteriorating.

One sign is that the banks are increasing the assessment rate for how much money should be kept aside for losses against unimpaired loans, which suggests that they expect greater losses to come from the loans that are currently considered performing. The banks are also reclassifying more special mention loans, a category of weak loans just one step from being a non-performing loan (NPL), into NPLs. Finally, the foreign banks, which have better risk management systems than the local banks, saw a rise in their NPLs in the first quarter.

But the full extent of the problem of future credit losses may not come to light for some time, for several reasons, said the report. The structure of corporate debt is such that the inability of the borrower to pay will not become apparent until the principal is due, which will often be years after the loan was made. Furthermore, it is a common practice in China to roll over loans by extending the maturity, which in effect postpones the bad news and allows the loan to remain classified as adequate.

Source:, 23.05.2009 by  Daniel Inman

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