Strong demand in Asia seen slowing next year

Business Times – 20 Mar 2008

This poses risks as firm US recovery unlikely: consultancy

 (SINGAPORE) Domestic demand in Asian countries this year look strong, but may slow down in 2009. This may present risks to regional countries as the US economy is unlikely to make a strong recovery next year, according to consultancy firm IMA Asia.

‘Many people in the United States say that (the plunge in global financial markets) will present difficulties for Asia because it would mean a slowdown in its export engine, but this is the second  year of slow export growth for Asia,’ noted Richard Martin, IMA Asia managing director. ‘Last year, export growth was pretty weak; it fell from 2006 for most countries in the region.’

He believes the region will sustain its demand growth for this year. ‘We think domestic demand looks secure in China, and in South-east Asia, we see good domestic growth… we’re pretty confident that domestic demand will carry the region for a second year.’

The issue, however, is ‘what happens next year’, said Mr Martin, who was in Singapore yesterday to speak to IMA Asia’s corporate clients on the region’s economic outlook.

‘By the time we get into the third year of weak exports growth, you’re going to see some difference (in growth) in the region,’ he said, adding that the US economy is unlikely to show a strong recovery in 2009.

And that difference, he said, will boil down to two factors – the level of country risk an economy faces, and the degree of reliance it has on the global market. ‘Economies with relatively high country risk will slow down a lot and have some volatility…we also need to look at the degree of reliance on the global market, not only trade reliance but also finance reliance.’

China, for one, ‘looks fine’ as its export sector makes up only about 25 per cent of its gross domestic product, while the country’s investments are financed from its domestic savings, he said. ‘However, we’ll see quite a different impact in a number of other countries. Hong Kong and Singapore face the prospect that their growths will be halved next year, because they’re highly dependent on global trade and global finance, and it’s the financial sector flows in the bank that are being cut back here.’

‘If it was just the trade cut back, we think domestic demand would keep (both economies) going, but once we cool that off, we could see a significant drop in growth in these economies.’ In view of these factors, Mr Martin advised companies to start revising their plans for next year.

China faces ‘very severe’ unemployment

20m new jobseekers expected every year: labour minister

(BEIJING) China’s labour minister yesterday admitted that the booming economy faced a ‘very severe’ unemployment situation as millions of new jobseekers join the market every year.

The flood of new entrants in both urban and rural areas will continue for a long time, labour and social security minister Tian Chengping told a briefing here.

‘The employment situation that we’re currently facing is very severe,’ he told journalists. ‘The main reason is that 20 million new jobseekers emerge every year in the countryside and in the cities. This will continue for a very long time.’

Mr Tian said that measures to deal with the problem included encouraging more start-ups and providing retraining for workers with outdated skills.

Earlier last week, Premier Wen Jiabao called for more measures to boost employment, saying that the urban jobless rate should be kept below 4.5 per cent in 2008, compared with a 4.6 per cent target last year.

‘We must redouble our efforts to increase employment, a matter that is crucial to people’s well-being,’ Mr Wen told Parliament in his annual work report, the Chinese equivalent to the US president’s State of the Union address.

Unemployment and inflation are the two top priorities for Chinese policy makers, because they affect, or threaten to affect, a large proportion of the population.

The main reason the government is targeting at least 8 per cent growth every year is to ensure that enough new jobs will be created to avoid social unrest.

Compounding the problem, there is no clear picture of the extent of the jobless issue, as Chinese unemployment statistics are notoriously unreliable, and probably higher than the 4 per cent reported for the end of 2007.

They tend to understate the true scale of the problem by, for instance, not counting rural unemployment or workers laid off from state-owned enterprises. – AFP

Source: Business Times 10 Mar 08

Inflation likely to have hit 8.3% in Feb: Bank of China

Reports of bank’s estimate trigger speculation of interest rate hike

(BEIJING) China’s inflation likely hit a new 11-year high of 8.3 per cent last month on the back of rising food prices, state media reported yesterday, triggering speculation of a modest hike in interest rates.

Severe winter weather which crippled transport networks, and the Chinese New Year festival which traditionally brings a surge in demand, were also seen as helping to drive up the price of food and other basic commodities.

The estimate of 8.3 per cent was given by the Bank of China, the country’s second largest lender, and reported by the state news agency Xinhua.

It came ahead of tomorrow’s publication of official inflation data from the National Bureau of statistics, which is used by authorities to decide whether to tighten monetary policy.

The consumer price index (CPI) had already risen 7.1 per cent in January from a year earlier, the highest since September 1996.

‘Everybody knows it’s going to be more than 8 per cent in February. Logically, February’s CPI must be higher than January’s,’ said Chen Xingdong, Beijing-based chief economist with BNP Paribas Asia.

In its report, the Bank of China said that February’s increase in the CPI was fuelled mainly by food, which rose more than 22 per cent from a year earlier, according to Xinhua.

‘It is making things worse . . . when people expect prices to keep rising, they will spend more to avoid those future rises, which in turn will push prices up,’ it reported, quoting the bank.

The effect of the freezing weather across much of China was first felt in January, but the main impact was in February, BNP Paribas Asia’s Mr Chen argued.

Chinese New Year, the biggest consumption festival of the Chinese calendar, also came in February, adding upward pressure on the price of everything from firecrackers to plane tickets. China’s inflation is seen as triggered mainly by the relative scarcity of basic products, such as pork and other staple food items.

According to observers, this leaves economic policymakers with a dilemma when opting for the right response, even though the central bank governor said last week that there was ‘definitely room’ for more interest rate hikes.

If he does raise interest rates – the classic response to rising inflation – he could deter producers of these basic commodities, so making the problem worse.

Another problem is that since early 2007, China has hiked its interest rates six times, while the US Federal Reserve has steadily lowered them. As a result, the spread between the two has widened dramatically, with the benchmark US federal funds rate now at 3 per cent compared with 7.47 per cent for China’s one-year lending rate.

Chinese policymakers fear that a big gap between Chinese and US rates will attract more speculative funds into the economy. – AFP

Source: Business Times 10 Mar 08

India losing its status as world’s top outsourcing hub

China, Morocco and EEurope among new locations for global IT services providers

INDIA’S position as the No. 1 low-cost outsourcing destination is under threat, with China, Morocco and eastern European nations such as Hungary emerging as the sought-after locations by nformation technology (IT) services providers, a recent study has shown.

The study by Pierre Audoin Consultants has highlighted these new locations of choice to set up offshore sourcing centres. PAC is a European market research and strategic consulting firm.

According to the study, since January 2007, Britain’s 20 largest IT services suppliers have launched 21 new global delivery centres. However, only two of them are situated in India.

Four facilities were set up in China, while eastern Europe and Morocco had three each, the study added. The aim is to broad-base operations and not rely on one geographical location.

Although China has been slow to emerge as a global sourcing hub due to language barriers, the report found that BT Global Services, EDS, IBM and Tata Consultancy Services (TCS) have set up sourcing facilities in the country in the past 18 months.

‘India’s position as the premier low-cost IT sourcing centre is not under serious threat in the near term.

But what we are seeing is vendors (are) looking to reduce their reliability on India’s heated labour market,’ Nick Mayes, a senior consultant at Pierre Audoin Consultants, said.

In India itself, there is a movement away from the traditional IT hot spots of Bangalore and Mumbai, the study said, with this perhaps due to rising costs of operations.

IBM has set up its new centre in Delhi suburb Noida, while TCS’ expansion site has come up in Hyderabad.

While rising wages, a shrinking manpower pool and the appreciating rupee are some of the problem areas that outsourcing firms have to face in India, it is also true that the country’s position as the world’s top tech destination for outsourcing will take some beating.

Software body the National Association of Software and Service Companies has estimated that total software and services revenues should rise more than 33 per cent to reach US$64 billion in financial year 2007-2008. Software exports have been estimated to rise 28 per cent to cross US$40 billion.

Indian IT firms are looking at newer income streams from Europe and Japan to move away from dependence on the US, given the depreciating dollar.

Source: Business Times 10 Mar 08

China losing competitive edge in some industries: survey

(SHANGHAI) China is fast losing its manufacturing competitiveness in some industries, and companies need to upgrade their operations there to stay profitable, according to a survey released yesterday.

The study comes amid reports that thousands of manufacturers, both Chinese and foreign, are shifting operations away from coastal regions, where labour and other costs are eroding their profitability, to inland areas or other countries. The ‘China Manufacturing Competitiveness’ survey by the Shanghai Chamber of Commerce found that more than half of the 66 foreign invested companies responding believe China is losing its competitive advantage over other ‘low cost’ countries, such as Vietnam and India.

‘The days of easy China manufacturing are at an end,’ said Ted Hornbein, chairman of the American Chamber of Commerce in Shanghai’s Manufacturers Business Council. ‘You can’t just view it as a workshop anymore.’

The companies surveyed, most of which were based in eastern China near Shanghai, said wages are rising an average 9 per cent to 10 per cent a year, with costs for raw materials up more than 7 per cent, the report said.

But companies can do more to improve their own operations to counter those trends, said Ronald Haddock, vice-president of consulting firm Booz Allen Hamilton, which conducted the study.

‘China’s competitiveness is at risk,’ Mr Haddock said. ‘The question is, is there something we can do about it?’ While many low-cost makers of cheaper products such as shoes, clothing and toys are shifting production to inland regions of China where wages and other costs can be lower, or to other developing countries. Mr Haddock said the survey results showed that many manufacturers could boost profitability by improving how they operate.

If companies don’t improve their management approach, ‘we think it is going to get pretty ugly for some of them,’ he said.

A crucial strategy used by the most profitable companies surveyed was to ensure China operations fit into their global supply chains – how the companies source, make and distribute products.

‘Starting with the right mind-set is the beginning,’ Mr Haddock said.

Source: AP (Business Times 5 Mar 08)

Malaysian economy grows 6.3% in 2007

Strong domestic demand boosted fourth-quarter growth to 7.3%

THE Malaysian economy expanded 6.3 per cent in 2007, with strong domestic demand propelling fourth-quarter growth to 7.3 per cent.

According to figures released by the central bank yesterday, growth was broad-based in all economic sectors. The services sector continued to be a key driver, expanding 9.1 per cent in Q4. Manufacturing’s 5.6 per cent pace was supported by an improvement in export-oriented industries including the electrical and electronic sector, particularly computers and parts. The construction sector, closely watched because of its huge multiplier effect, registered 4.7 per cent expansion.

The agriculture and mining sectors also turned in robust performances, underpinned by bullish commodity prices. Output rose 6.9 per cent and 7.2 per cent respectively.

Ahead of a general election on March 8, analysts expected the figures to be used by the incumbent National Front coalition to argue why voters should stick with it.

In its election manifesto this week, the Front released a slew of figures on its management of the economy since Prime Minister Abdullah Badawi won a landslide victory in 2004 – though he is expected to come up against much tougher opposition this time.

CIMB Research economist Lee Heng Guie stuck by his gross domestic product (GDP) forecast for the current year of 5.8 per cent, which he said will be led by domestic demand driven by strong private consumption spending.

Domestic demand in Q4 was an impressive 9.8 per cent but softer than 12.6 per cent in Q3.

Gross exports expanded a sharp 7.5 per cent in Q4 compared with less than one per cent in Q3, mainly due to higher commodity exports and a turnaround in manufacturing exports. The latter grew almost 3 per cent – a reversal of a 2 per cent contraction in Q3.

Given the ‘intensification of the global slowdown’, CIMB’s Mr Lee said that it remains to be seen whether the pick-up in exports can be sustained. ‘It’s too early to confirm export recovery,’ he said, adding that the local economy could be vulnerable in a prolonged US slowdown or recession. Inflation was a mere 2.2 per cent in Q4 – mainly because fuel, gas to generate power, and many basic food supplies are heavily subsidised. Once the general election is over, it is expected that subsidies – particularly for fuel and gas – will be slashed.

‘Invariably, higher inflation will constrain consumer spending, but there would be off-setting gains in improved incomes because of stronger commodity prices,’ Mr Lee said. The Employees Provident Fund (EPF) withdrawal scheme for mortgage payments,

which attracted 14,600 applications amounting to RM220 million (S$96.2 million) as at mid-February, will also help, be believed.

Still, he pointed out that the middle-class would be far less cushioned in an inflationary squeeze.

Source: Business Times 28 Feb 08

China’s economy leads world: poll

(WASHINGTON) More Americans believe China, not the United States, is the world’s top economic power, according to an opinion poll.The Gallup World Affairs survey found that four in ten Americans say China’s economy leads the world; only 33 per cent picked the United States.In 2000, the United States was top in the poll, with the support of 65 per cent. The World Bank lists the US as the world’s leader in economic output, with Japan second, Gallup said.China was ranked fourth in national economies in 2006.More than half of Americans polled eight years ago believed the US would be the world’s powerhouse economy for the next 20 years. Now, more predict that China will be top in two decades.The firm polled 1,007 adults in the US last week.The margin of sampling error was plus or minus three percentage points.  Source: AP (Business Times 23 Feb 08)

China no more the source of cheapest goods

Rising costs hit its competitive edge, forcing some firms to relocate overseas

(SHANGHAI) The teddy bears selling for US$1.40 each in Shanghai’s Ikea store may be just about the cheapest in town, but they’re not made in China – they’re stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: its huge economy, which has long offered some of the world’s lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labour.

Those expenses, plus higher taxes and stricter enforcement of labour and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

‘It’s true that we are facing difficulties regarding increased costs in China,’ said Linda Xu, public relations manager in China for Swedish retailer Ikea.

Though the competition for lower prices is not new, ‘we are constantly having to compete with other countries and suppliers’, she said.

While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000-60,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbours Hong Kong.

‘Wages are rising, materials cost more. Overall, costs are definitely higher,’ says Duncan Du, general manager of Shenzhen Oriental e-Tecs Ltd, an electronics maker in the southern city of Shenzhen.

To adapt, many multinational manufacturers – including Intel Corp, iPod maker Hon Hai Technology Group and Japanese companies like Canon Inc and Sony Corp are expanding operations in Vietnam.

Car-parts makers are decamping for the Middle East and eastern Europe, and textile makers to Bangladesh and India.

Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China’s traditional export hub of Guangdong are closing or moving out.

As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already shifted production to Vietnam.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese sub-contractors.

‘Americans continue to want to buy at lower prices,’ said Kevin Burke, president and CEO of the American Apparel and Footwear Association. ‘They are used to going to the store during Christmas and getting something cheaper than a year ago.’

That’s no longer a sure thing.

Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer- term pressures on prices for manufactured goods will persist, analysts say.

Despite its huge pool of unskilled rural labourers, China’s supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 per cent to 15 per cent a year.

A new labour law requiring stronger employment contracts is expected to raise costs even more.

Source: AP (Business Times 23 Feb 08)

ECONOMIC REVIEW: Japan downgrades growth assessment

ECONOMIC REVIEW

Japan downgrades growth assessment

TOKYO – JAPAN’S government yesterday downgraded its assessment of Asia’s largest economy for the first time in 15 months, saying the recovery was losing steam due to slowing United States growth.

A monthly report from the Cabinet Office acknowledged that exports and industrial output are cooling, while consumer spending is sluggish.

‘The economy is recovering at a moderate pace,’ the report said, tweaking its previous assessment that the economy ‘is recovering, while some weaknesses are seen’. The government said the move marked the first downgrade since November 2006.

The report cited downside risks to the Japanese economy resulting from slowing US economic growth, financial market volatility and higher oil prices.

The government also downgraded its assessment of exports for the first time in 17 months, saying they were ‘increasing moderately’.

‘Exports to Asia continue to be solid, while shipments to the US are declining and those to the European Union are turning almost flat as its economic recovery is moderating,’ a Cabinet Office official said.

The report lowered its assessment of industrial production for the first time in eight months, saying it was ‘growing at a slower pace’.

Source: AGENCE FRANCE-PRESSE (The Straits Times 23 Feb 08)

Rising costs squeeze Chinese factories

SHANGHAI – THE teddy bears selling for US$1.40 (S$1.97) in Shanghai’s Ikea store may be just about the cheapest in town, but they are not made in China: They are stitched and stuffed in Indonesia.The fluffy brown toys reflect a new challenge for China. Its huge economy, which has long offered some of the world’s lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labour.Those expenses, plus higher taxes and stricter enforcement of labour and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.‘It’s true that we are facing difficulties regarding increased costs in China,’ said Ms Linda Xu, public relations manager in China for Swedish retailer Ikea.Though the competition for lower prices is not new, ‘we are constantly having to compete with other countries and suppliers’, she said.While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000 to 60,000 Hong Kong-run factories could close in the next few months, said Ms Polly Ko of the Economic and Trade Office in Guangdong, which is next to Hong Kong.‘Wages are rising, and materials cost more. Overall, costs are definitely higher,’ said Mr Duncan Du, general manager of Shenzhen Oriental e-Tecs, an electronics maker in the southern city of Shenzhen.To adapt, many multinational manufacturers, including Intel, iPod-maker Hon Hai Technology Group and Japanese companies like Canon and Sony, are expanding operations in Vietnam.Car parts makers are decamping for the Middle East and Eastern Europe, and textile makers to Bangladesh and India. Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China’s traditional export hub of Guangdong are closing or moving out.As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already moved production to Vietnam.Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.The higher costs mean consumers outside China are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent last month, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer-term pressures on prices for manufactured goods will persist with prices for plastics and other materials climbing 30 per cent or more, analysts say. Source: ASSOCIATED PRESS (The Straits Times 23 Feb 08)

Rising inflation across Asia mauls S’pore Reits

Trusts may still get big lift from higher rents, higher hotel rates, say analysts

SOARING inflation across Asia has sucked the life out of real estate investment trusts (Reits), whose high-yielding dividends have made them wildly popular among investors in recent years.

Reits, in general, have fallen about 32.5 per cent in value from their peaks last year, but those with assets in inflation-prone economies, such as China, have fared even worse, according to financial portal Shareinvestor.com.

CapitaRetail China Trust, for instance, has fallen 52 per cent in four months, as inflation in China galloped to 7.1 per cent – its highest level in over a decade.

Reits are financial instruments investing in real estate like shopping malls, office buildings and hotels.

Investors can buy units, which are much like shares, offering attractive dividend yields of 6 per cent to 8 per cent derived from rents. This is far higher than the 1.5 per cent interest on one-year fixed deposits at a bank.

Historically, a low interest rate environment has been good for Reits – if accompanied by low inflation.

Take CapitaMall Trust, the first Reit listed in Singapore. Its assets include the Tampines Mall and Junction 8 shopping centres.

It received an overwhelming response from investors when it listed six years ago, rising from just 96 cents in July 2002 to a record

high of $4.32 in July last year. Inflation played its part by staying at a benign 1 per cent.

As the consumer price index, however, surged from 1.3 per cent in June to 4.4 per cent in December, CapitaMall slid 20 per cent over

the period.

The inflation pressure is unlikely to abate in the near future.

Last week, the Government revised its estimates upwards to between 4.5 per cent and 5.5 per cent for the year, from an earlier forecast of 3.5 per cent to 4.5 per cent.

So, while fears of a United States recession are causing much grief among investors as they watch the value of their growth stocks evaporate, inflation is becoming a big threat to those with high dividend-yield plays like Reits.

One trader explained: ‘A Reit may offer 6 per cent in dividend yield. But if inflation is running at 4.5 per cent, the actual yield an investor is getting is only 1.5 per cent.’

To compensate for the lower return, an investor will demand a lower price for the Reit, which escalates the pressure on its share price.

Still, analysts have not stopped promoting Reits, despite their lacklustre performance, to clients.

Morgan Stanley made a case last month with a report arguing that investors had wrongly penalised Reits with concerns over acquisition growth and credit-tightening conditions.

Investors have ignored the ‘organic’ boost Reits may get from higher rents as leases expire and hotel rates are jacked up during peak periods.

Citigroup noted on Tuesday that while there may not be a clear growth strategy for Reits this year, some are trading at hefty discounts to their net asset values, despite offering single-digit or even double-digit dividend yields. ‘This makes Reits potential takeover targets, if they have loose shareholding structures,’ it added.

Its top picks include Ascendas Reit, Suntec Reit and Parkway Life Reit.

Source: The Straits Times 23 Feb 08

Japan’s exports improve despite US slowdown

Rising import costs due to surging oil, gas prices cause big trade deficit in Jan

IN TOKYO

FACED with slowing demand in the US market, Japan’s exports still managed to improve last month on the back of solid sales to other parts of Asia and to Europe.

But surging oil and natural gas prices pushed the country’s import costs up sharply in January, resulting in an unexpectedly large trade deficit for the month.

The slowdown in the US economy in the wake of the sub-prime mortgage crisis has aroused fears that Japanese exports could take a bad knock, inflicting damage on the economy or even pushing it into recession.

But so far, global demand for Japanese motor vehicles, electronics and other key exports is holding up quite well, data published yesterday showed.

While exports to the US market fell by 3.2 per cent in January, marking their fifth consecutive monthly decline, those to China (which is now Japan’s leading export destination) rose by 4.6 per cent, and the net result was that overall exports for the month rose by 7.7 per cent to 6.41 trillion yen (S$83.6 billion).

But imports jumped by 9 per cent for January to 6.49 trillion yen as oil and natural gas prices surged.

The result was that Japan suffered a near-80 billion yen trade deficit – its biggest in two years.

Economists had predicted a 35 billion yen trade surplus for the month, and some warned that with fuel costs still rising Japan could suffer even larger deficits from now on.

Another reason for caution about the trade picture is that while exports to China are still robust and growing, the rate of growth is slowing, analysts said.

While sales of Japanese motor vehicles to China remain strong, demand for Japanese electronic products in China is weakening, yesterday’s data showed.

The relatively strong trade picture in January came after data last week showed that Japan’s economy expanded at a much more rapid rate than expected 3.2 per cent on an annual basis during the final quarter of last year.

Even so, economists say that the real test of the resilience of the economy will come in the first half of this year as the full impact of the sub-prime crisis is felt by the global economy, including that of China.

 

Source: Business Times 22 Feb 08

MAS fears Asia will hurt if US engine seizes

A negative spiral can take hold, affecting even the real economy

(SINGAPORE) A sharp and deep recession in the United States will hit Asian economies, warned Heng Swee Kiat, managing director, Monetary Authority of Singapore (MAS), yesterday.

And in his first public comment on the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Wading into the debate on whether Asia has de-coupled from the US, Mr Heng said the region has significant links with the world’s biggest economy through trade, investment and finance. Only if these linkages are significantly weakened can Asia be said to have de-coupled from the US, he said yesterday at a fund management conference.

Still, the short-term outlook for Asia remains generally positive barring any sharp deterioration in the global economy, he noted. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8 per cent in 2008, one percentage point lower compared to last year.

Structural changes have taken place in Asian economies over the last 10 years, he pointed out. ‘Certainly, the fundamentals of the economies and financial markets in Asia have improved significantly since the Asian financial crisis,’ he said.

Most Asian economies have large foreign reserves and current account surpluses. There is a sizable educated and skilful labour force, and a growing middle class that forms a broad consumer base, he said.

Asian corporates and households are doing well after four years of robust growth. Asian capital markets are better developed. Asian banks are better capitalised, have less bad loans, and are better supervised and managed.

‘These are significant changes. However, a long-term or structural de-coupling of Asia from the US is possible only when the economic linkages through trade, investment and finance are significantly weaker,’ said Mr Heng.

Studies by MAS, and other economists, show that this is not the case at this stage, he pointed out.

What we are likely to see, however, is the weaker synchronisation of business cycles, he said.

‘The underlying momentum in the Asian economies will allow Asia to ride out the slowdown in the US if it is mild and short-lived. But a sharp and deep contraction will trigger the threshold where all economies will be affected, albeit in different degrees depending on their reliance on external demand,’ said Mr Heng.

On the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Policy makers are facing the challenge of how to contain the spread of the credit crisis to the real economy, he noted.

‘What is striking is that the securitisation of loans was meant to be a mechanism for risk transfer. Instead, it became a channel through which shocks are amplified and transmitted throughout the system in unpredictable ways. These shocks have now started to have an impact on the real economy,’ he said.

In the US, the housing-sector correction is leading the slowdown in the economy. Consumer spending is constrained by high debt levels. Financial institutions have sustained large losses. And this is driving the turn of the credit cycle, which means restraint on both consumer spending and corporate investments.

Indeed, at this point there is a risk of being caught in a negative spiral involving tighter credit standards, reduced credit availability and slowing down of the macro economy.

‘The extent to which this spiral takes hold determines the extent of the US slowdown, and the extent to which the rest of the world will be affected,’ said Mr Heng.

‘Hence, the immediate challenge for policy makers is to contain the spread of the credit crisis to the real economy, to prevent this spiral.’

The full extent of the exposures is not yet known and central banks face different degrees of slowdown and inflationary pressures in their economies, he explained.

According to Mr Heng, a multi-pronged approach coordinated across jurisdictions, where necessary, was needed to tackle these challenges. ‘The situation is fluid, and we need to remain vigilant.’

 

Source: Business Times 20 Feb 08

China, wary of social unrest, scrambles to contain food prices

It wants to avoid mistakes of 1988 as inflation hits 10-year high of 6.9%

(HONG KONG) Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.

Overall inflation in China is running at a 10-year high – around 6.9 per cent in November year-on-year, official statistics show.

Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 per cent year-on-year.

Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the transport system at the time demand is greatest over the Chinese New Year.

A report by Credit Suisse said 10 per cent of China’s farmland has been affected by the extreme cold, and one per cent could see a complete loss of crops and vegetables.

Price increases have been seen in food items ranging from cooking oil to apple juice, as China’s growth and global demand creates what economists have dubbed ‘agflation’ referring specifically to rises in prices of agricultural commodities.

Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.

‘They (the central government) are increasingly nervous about it,’ said Andy Rothman, Shanghai-based China macro-strategist for CLSA. ‘But it is a long, long way from the inflation problems before 1989.’

In January, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets. This followed the announcement in late December that from Jan 1 the government would slap taxes ranging from 5 to 25 per cent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.

The actions appeared to be stoked by memories of the widespread protests that resulted from the government’s clumsy handling of food price controls that led to inflation of around 50 per cent in the summer of 1988. Public anger prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of civilians.

Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises.

‘If you look at the statistics, then China’s inflation problem is simply a food inflation problem,’ he said. ‘In the past, we have not really had a problem of inflation expectation (but) this year we have already seen that. And that normally means that prices will rise.’

CLSA’s Mr Rothman said pork price inflation is only a short-term problem, and predicted prices will start to fall back later this year.

‘This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease which stopped supply when demand was rising,’ he said.

The other major factor in Chinese inflation, cooking oil, was more complicated, he said, as 60 per cent of it is imported.

‘The major contributor to the rise is US ethanol policy and there is little the Chinese can do about that,’ he said.

Subsidies in the US have seen a major switch in land use to grow crops for fuel, rather than food, prompting worldwide increases in some staple foods.

The UN’s Food and Agriculture Organisation said in October that China was expected to slash its exports of cereals from 7.7 million tonnes in 2006-7 to 6.2 million tonnes in 2007-8. At the same time it would probably increase imports to 10.1 million tonnes from 9.3 million tonnes.

China imported 32.2 million tonnes of oilcrops, including corn and soybeans, in 2006-7, which the FAO said was expected to rise to 37.3 million tonnes in 2007-8, with exports expected to fall to 1.3 million tonnes from 1.5 million tonnes.

Mr Rothman said there had been anecdotal evidence of subsidies to poor rural areas, which if accurate could indicate the government’s willingness to take action to keep a lid on food prices and prevent any hint of social unease.

 

Source: AFP (Business Times 18 Feb 08)

Indian govt struggles to keep food prices down

Surge in global food prices hits millions of people in India

(NEW DELHI) Anand’s restaurant has served flat bread, lentils and vegetables to loyal customers every day for four decades but for the past year he’s been on the receiving end of almost non-stop complaints.

‘They argue because we’ve raised prices. But we had to increase them because everything – wheat, butter and vegetables – has gone up,’ says Sanjay Anand, second-generation owner of the Delhi restaurant.

Small restaurants like his, as well as hundreds of millions of people across India, have been hit by a huge surge in demand and prices for food worldwide.

The price hikes have triggered government anxiety over whether it can continue to ensure supply of affordable food for the country’s 1.1 billion people.

Analysts say India – which produces most of its own food, exports surplus items such as sugar and heavily subsidises supplies for the poor – has so far managed to avoid severe price shocks.

But it faces the same mix of factors as other nations grappling with rising food prices – higher incomes are boosting demand for protein, surging demand for energy is pressuring oil prices, and diversion of agricultural land to urbanisation and industrialisation, as well as grain production for biofuels, is pushing land values sky high.

‘Of course India is impacted by global events,’ said Saumitra Chaudhuri, economic adviser at Indian credit rating agency ICRA.

‘The question is whether there’ll be a supply response. Better yielding seeds, irrigation, technology and more efficient distribution can and probably will have a major impact. But it will take a little time and we’re likely to see no slack in demand or costs soon.’

The price of wheat on the Chicago Board of Trade more than doubled in the past year to a record high above US $10.60 a bushel for March delivery.

That means India’s government will have to boost the subsidies it pays to wheat farmers – and those extra costs have to be passed on to customers in restaurants like Anand’s.

Government subsidies to feed the poor have more than doubled in the past five years to US$7 billion.

Along with other efforts such as selling transport fuel below market rates to stem inflation, India now spends more than 15 per cent of its budget attempting to control food prices.

‘The government would never scrap food and fuel subsidies. It’s politically impossible and, as we’ve seen, can lead to strikes and protests,’ Mr Chaudhuri said.

Inflation in India, measured by wholesale prices, is running at around 4 per cent. Consumer prices, less widely cited, have gained around 5 per cent.

But for Saba, a housewife from Kashmir, the official figure lags far behind the hikes she has seen in her weekly food budget for staples such as cooking oil and wheat.

‘Prices are going up across the world, but in India they’re rising even faster,’ she said, adding that the prices she pays for wheat and cooking oil have doubled in the past year.

The wide gap between government figures and consumer anecdotes comes amid an unprecedented economic boom in India.

The economy is forecast to grow 8.7 per cent in the year ending March, a slowdown from a torrid 9.6 per cent rate for the previous year.

Rising incomes have created a surge in demand for food supplies from a growing middle class, even as almost two thirds of the country continues to survive on less than US$1 a day.

This has created a dichotomy in supply and pricing, illustrated by the spike in demand created by newlyestablished retail chains using grain and cooking oil to produce ranges of processed foods while the government sells bulk items below cost through its public distribution system for the poor.

‘The Indian government procures wheat and edible oils domestically and offshore and sells below world rates for the poor,’ said Si Kannan, associate vice- president at Kotak Commodity Services in Mumbai. ‘But if they pay the local farmer below global prices, he’s not going to grow the crop unless demand from private companies makes the price attractive.

‘So there’s a structural problem and prices for items like wheat, soy and oils are going to remain high in India like the rest of the world because demand is so strong and supply is limited,’ he said.

Record prices of wheat, soy meal and corn impact economic growth patterns worldwide. In India one outcome is that farmers, like their counterparts elsewhere, switch to high-priced crops and set off a chain reaction for other commodities.

As a result, the government has been forced to sharply raise domestic support prices to ensure production stays high enough to avoid large imports.

 

Source: AFP (Business Times 18 Feb 08)

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

Asia won’t catch flu if US gets a cold, says MM Lee

With China and India propelling it, Asia won’t be ‘unduly disadvantaged’ by a recession in the US

ASIA – propelled by the twin engines of China and India – will not be ‘unduly disadvantaged’ if a recession hits the United States, said Minister Mentor Lee Kuan Yew last night.

‘I believe this may be the first time where the US economy catches a cold and we are not going to catch influenza – I hope,’ he said at the Singapore Airshow Aviation Leadership Summit dinner dialogue attended by about 200 aviation pundits.

The Chinese and Indian economies are unlikely to dip below 8, 9, or 10 per cent, he added, and while about 40 per cent of intra-Asian trade today is bound for the US, even if the US cuts its imports by half, Asia will not be too badly hit.

Zeroing in on the aviation industry, he was confident Asia will continue to soar high, as new airports are built and more people take to the skies.

He said: ‘I see enormous growth in Asia in the next 10, 20 years, more in Asia than in any other part of the world.’

China alone is looking at about 240 airports by 2020 and more than 500 by 2050 – and ‘that is just the beginning’ he said.

But on whether Asia, with its booming air travel sector, is well-placed to lead the aviation industry in all areas, including liberalisation going forward – an agenda that the International Air Transport Association (Iata) led by its head Giovanni Bisignani is trying to push – Mr Lee was a bit more sceptical, adding that ‘it will be very difficult’.

Countries with airlines that are not doing so well will want their flag carriers to grow stronger first before they open up. And while in his view, this is the ‘wrong approach’, it is nonetheless the reality.

Citing Singapore Airlines’ example, Mr Lee said its success shows how you become competitive when you are forced to compete internationally.

He remembers telling management and unions when Singapore Airlines (SIA) was set up as a separate entity from Malaysia’s national carrier that ‘if you can fly the flag and make a profit, I will be proud. If you cannot, let us forget it and somebody else can fly this flag’.

Everybody in SIA – from management, to pilots, to cabin crew and catering – understood that unless SIA was better than the rest, there was no reason for people to fly the airline.

Mr Lee said: ‘So I believe many of the problems that our neighbours are facing will go if they get international competition going and get international management to bring them up to speed. Then the whole region will prosper.’

Some progress has been made, he said, noting that by December, Asean will lift all restrictions on flights between capital cities of the 10 member states and by 2015, Asean national carriers will be able to criss-cross the skies over the region with no restrictions.

Turning to the other hot potato of global warming, Mr Lee was also asked during the 45-minute session for his reactions to attacks on the aviation industry by governments and organisations, primarily in Europe. Proposals have included taxes and penalties on airlines.

He replied that the industry contributes to about 2 per cent of man-made carbon emissions, but global warming has to be attacked in every way.

Still, if the problem is to be dealt with in a more cost-effective way, ‘then you must come to the conclusion that surely you can save more by rationalising air routes and have less of this prohibited flights and no-fly zones.’

Other things like more fuel-efficient jets, maybe the use of solar cells and many other options will also have to come.

According to industry average, one minute less of flight time saves 62 litres of fuel and 160kg of carbon emissions.

 

Source: The Straits Times 18 Feb 08

China’s economy may grow around 10% in 2008: IMF

Its MD says a faster pace of appreciation of yuan is needed to address economic challenges

(BEIJING) China’s economy is likely to grow around 10 per cent this year despite a global slowdown stemming from the US sub-prime mortgage crisis, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), said yesterday.

Mr Strauss-Kahn said he had agreed with Premier Wen Jiabao and central bank governor Zhou Xiaochuan on the need for China to run a continued tight monetary policy to contain investment growth and inflation.

The inflation-adjusted exchange rate of the yuan, measured against the currencies of China’s main trading partners, has been moving in the right direction recently, Mr Strauss-Kahn told a news conference during a two-day visit to Beijing.

‘However, we encourage a faster pace of appreciation that would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability,’ he said in a prepared statement.

The central bank, which keeps the currency on a tight leash, let the yuan rise yesterday to 7.1760 per US dollar, the highest since it was revalued by 2.1 per cent in July 2005 and cut free from a dollar peg to float within narrow bands.

The yuan has now appreciated by 13 per cent against the dollar since then. But it has gained much less when measured against a basket of currencies and, to the ire of European policy makers, is actually worth less against the euro than it was in July 2005.

Relations between the IMF and China have been strained since the fund introduced new currency surveillance rules last June. Beijing objected to the rulebook, which will make it easier for the fund to determine whether a country is pursuing policies that lead to a fundamentally misaligned exchange rate in order to boost exports. China regards the new framework as a ploy by the United States to enlist the fund in its campaign for a stronger yuan.

The dispute has delayed the completion of the fund’s 2007 report on China detailing economic consultations between the two sides.

Mr Strauss-Kahn sidestepped a question on whether the yuan was fundamentally misaligned, saying the decision was one for the IMF’s board. But he said he had sought to make the case to Chinese policy-makers that a more flexible exchange rate would contribute both to a better-balanced Chinese economy and to global stability.

 

Source: Reuters (Business Times 16 Feb 08)

Priority is curbing inflation: PM Singh

Rising prices last year caused Congress party to lose power in three states

(NEW DELHI) Indian Prime Minister Manmohan Singh said that inflation hurts the poor the most, indicating that controlling prices was the government’s top priority.

‘There have been some impatient editorials about the sacrifice of growth at the altar of inflation,’ Mr Singh said at a conference here yesterday. ‘I see things differently. Inflation is an iniquitous tax. It is essential that we ensure that the poor are not adversely affected by high inflation.’

India, the world’s fastest growing major economy after China, may slow for the first time this year since 2005, as the highest interest rates in six years hurt consumer demand and investments. While companies seek conditions that favour faster growth, Mr Singh may prefer a firmer grip over inflation, with general elections just a year awayin a country where more than half the people live on less than US$2 a day.

‘Slowing growth is unacceptable to us,’ said Habil F Khorakiwala, president of the Federation of Indian Chambers of Commerce and Industry and managing director of drugmaker Wockhardt Ltd, before Mr Singh’s speech.

‘Interest rates must be brought down to stimulate demand.’ Reserve Bank of India governor Yaga Venugopal Reddy refrained from reducing interest rates at the last monetary policy meeting on Jan 29 on concern that rising oil and food prices will stoke inflation.

The yield on the benchmark nine-year bonds held losses after Mr Singh’s comments, rising two basis points to 7.47 per cent at 12.30 pm in Mumbai. A basis point is 0.01 percentage point. The benchmark stock index was little changed from Thursday’s close.

India’s inflation slowed to 4.07 per cent in the week ended Feb 2 from a year earlier, near a five-month high.

While the pace of price gains is low in relation to historical data, it is still high by world standards and must be reduced, the central bank’s deputy governor Rakesh Mohan said on Thursday.

Rising prices last year caused Mr Singh’s Congress party to lose power in three states and fall further behind in the most populous province of Uttar Pradesh. The party faces 10 state elections this year and general elections before May 2009. People’s tolerance level of inflation is 4 per cent, according to Finance Minister Palaniappan Chidambaram.

India’s statistics office on Feb 7 said that India’s US$906 billion economy may expand 8.7 per cent in the 12 months to March 31, the weakest pace in three years. Growth was 9.6 per cent in the last financial year.

‘I am confident that this year, too, we will be able to sustain 9 per cent growth and hold the price line at acceptable levels,’ Mr Singh said. He said that construction of new roads, railway tracks, airports and other infrastructure was the ‘cornerstone’ of India’s development.

The prime minister said that civil aviation was going through an ‘unprecedented boom’ with two new international airports poised to start operations in the next few weeks in the southern cities of Hyderabad and Bangalore, apart from the ongoing modernisation of the airports in New Delhi and Mumbai.

Mr Singh said that the country’s railway system has undergone ‘revolutionary transformation’ in the past few years and expects companies to soon start investing in building logistics parks, railway stations and railcars.

He said that the planned 2.2 trillion rupee (S$78.5 billion) investment in roads in the next five years will further boost the nation’s infrastructure. He reiterated India’s plan to almost double spending on infrastructure to 9 per cent of gross domestic product by 2012. India’s growth is led mainly by domestic consumer and investment demand, and that was another reason to be optimistic about the nation’s growth prospects as the global economy shows signs of shrinking this year, Mr Singh said.

 

Source: Bloomberg (Business Times 16 Feb 08)

IMF predicts 10% growth in China

Beijing – THE International Monetary Fund (IMF) still sees China’s economy expanding 10 per cent this year.

‘The current financial crisis, which began in the United States housing market, is spreading to affect the real economy in the US and elsewhere,’ IMF managing director Dominique Strauss-Kahn told reporters in Beijing yesterday.

‘There will be some impact on China, but we still expect the economy to expand by 10 per cent this year.’

The World Bank this month cut its forecast for China’s growth to 9.6 per cent. The world’s fourth-largest economy expanded 11.4 per cent last year, the fastest pace in 13 years.

China is trying to slow inflation that is close to an 11-year high without triggering a sharp slowdown.

‘It’s even more necessary than before to have high growth in China,’ the IMF head said, referring to a slowing global economy.

‘More domestic-demand-driven growth will be what China needs rather than export-led growth.’

Mr Strauss-Kahn urged faster appreciation of China’s currency, the yuan, and said the IMF and China agreed the nation still needed a tight monetary policy to contain investment growth and inflation.

He said faster appreciation ‘would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability’.

China’s currency has climbed 1.7 per cent versus the US dollar this year. It traded at 7.181 to the US dollar yesterday.

Mr Strauss-Kahn said that ‘for a number of months now, the real exchange rate is moving in a good direction’.

 

Source: BLOOMBERG NEWS (The Straits Times 16 Feb 08)

Japan’s growth beats forecasts, but economists remain cautious

TOKYO – JAPAN’S economy grew at double the expected rate in the last quarter of 2007, but some economists saw this as the last hurrah before a slowdown this year.

Strong capital spending and exports helped drive quarterly growth to 0.9 per cent, compared with a forecast 0.4 per cent rise, government data showed yesterday.

The bullish growth – an annual pace of 3.7 per cent compared with a yearly growth rate of just 0.6 per cent in the United States in the October-December quarter – eased investor worries about Japan slipping into a recession, pushing Japanese stocks up 4 per cent.

But economists were less upbeat.

‘The Bank of Japan will likely keep open the option of keeping the current interest rate levels or even rate cuts, as situations have gotten a lot worse since January, and on growing uncertainty about the economy,’ said Mr Yasuhiro Onakado, chief economist at Daiwa SB Investments.

Japanese exports have so far held steady despite the slowdown in the US economy from late last year due to strong demand from elsewhere in Asia and other emerging economies.

The gross domestic product data showed net exports contributed 0.4 percentage point of the 0.9 per cent growth.

Still, as weak US economic data in recent weeks has stoked fears of a recession in America, many economists worry that Japan may not be able to count on exports for much longer.

That, in turn, could curb corporate capital spending, possibly jeopardising the Bank of Japan’s view that strength in corporate activity will spill over to households.

Said Economics Minister Hiroko Ota yesterday: ‘The US economy is slowing down. There is a good chance of Japan’s economic growth slowing temporarily.’

 

Source: REUTERS (The Straits Times 15 Feb 08)

Jakarta to cut 2008 growth forecast on downside risks

(TOKYO) Indonesia will cut this year’s growth forecast amid greater ‘downside’ risks stemming from record oil prices and a global economic slowdown, Finance Minister Sri Mulyani Indrawati said.

South-east Asia’s largest economy is expected to grow between 6.4 per cent and 6.5 per cent in 2008, lower than the 6.8 per cent expansion predicted earlier this year, Ms Sri Mulyani said. ‘We are working on a new forecast taking into account the prospect of a global recession and the effect of higher commodity prices,’ she said on Saturday in an interview here. ‘Higher growth is becoming even more difficult.’

Indonesia’s non-oil export growth has dropped below 10 per cent four times in the past five months, less than half the 23 per cent average of the previous year. That may threaten tax revenue for President Susilo Bambang Yudhoyono’s government, which has increased subsidies on cooking oil and rice and will this year double spending to cap fuel prices.

‘If exports slow, that translates into negative growth,’ said Helmi Arman, an economist at PT Bahana Securities in Jakarta. ‘The wild card is domestic demand.’

Ms Sri Mulyani was in Tokyo to attend a meeting between finance ministers from the Group of Seven nations and their counterparts from China, Russia, South Korea and Indonesia.

‘We’re still very optimistic from the domestic side, but we’re looking at the export risks,’ she said. ‘Our deficit will be larger than originally planned’ because of food subsidies, in additional to money being spent to keep energy affordable to consumers.

Indonesia may spend 106.8 trillion rupiah (S$16.4 billion) this year in capping fuel prices, up from an earlier estimate of 45.8 trillion rupiah, while it may spend 44.2 trillion rupiah on keeping power costs below market rates, the Finance Ministry said in a proposal submitted to Parliament last month.

The government has also set aside 2.6 trillion rupiah to finance a plan to allow poor families to buy 15 kg of rice a month at subsidised prices, up from a 10 kg limit last year.

 

Source: Bloomberg (Business Times 11 Feb 08)

China faces economic, political woes on price fears

(CHONGQING, China) China is supposed to be getting richer, but for Liu Gaohua, rising prices on everything from cabbages to houses mean life is only getting tougher.

‘It’s hard to get by day-to-day,’ said the resident of Chongqing, a western Chinese industrial city on the upper reaches of the Yangtze river.

‘We eat less pork than before. Before, we would eat it every day. Now it’s just too expensive. We eat it about every third or fourth day,’ he said.

Mr Liu, who works in the railway industry and is married with a 14-year-old son, is typical of those being squeezed hardest by soaring prices – the lower middle-class urban residents far from China’s wealthier coastal cities.

With consumer prices rising at their fastest rate in 11 years, China’s inflation is not only a sign of economic woes, it has become a political challenge for a leadership worried that any slowdown will erode its support and trigger instability.

President Hu Jintao, Premier Wen Jiabao and their team of economic policy-makers find themselves caught between the goals of their reform programme and their need to step in to moderate prices and ward off the spectre of social unrest that has haunted every generation of China’s Communist rulers.

Inflation figures have been disproportionately affected by rising food costs, especially staples like pork and cooking oil, leading some economists to predict the rises would not last.

But others say that Mr Hu and Mr Wen might be victims of the very success of their programme to build a ‘harmonious society’.

The term has become a catch-phrase referring to a model of more moderate growth that seeks to account for costs previously overlooked, from worker safety to environmental protection. An emphasis on work safety means smaller coal mines are being shut down, a campaign on food and product safety has taken some of the cheaper – and more harmful – pesticides and fertilisers off the shelves and a crackdown on polluters is forcing factories to install better equipment. Wages are also rising as the reservoir of surplus labour begins to be mopped up.

But all of that reflects a broader adjustment in the economy that could mean higher prices will not quickly abate.

‘There’s obviously mounting costs all along the way,’ said Matthew Crabbe, managing director of consumer research group Access Asia.

For some residents, the benefit of those policies that aim to save lives, curb environmental degradation and create a more equitable society, are being obscured by the only immediate consequence they see: the effect on their wallets. Mrs Li, a 52-year-old housewife, complains that she pays about 15 yuan (S$2.96) per half kilo of pork, compared with six yuan a year ago.

It was in a supermarket here in Chongqing that three people were killed in a November supermarket stampede as they scrambled for cut-price cooking oil.

Housing prices in the gritty port city are also soaring.

Mrs Li, who only gave her surname, said that houses in Chongqing were going for around 7,000 yuan per square metre, compared to about 1,200 per square metre a few years ago. ‘We have no means to get by,’ she said.

Her friend, joining her in a game of cards at a chilly temple courtyard tucked away from the city’s bustle, chimed in. ‘Wages are rising but the price of food is going up much faster,’ said the woman, surnamed Tan. ‘Our demands, our wishes, are that the government controls this. They shouldn’t let prices rise too high.’

The government stepped in earlier this month, announcing that it would ‘temporarily intervene’ in the market to prevent excessive price rises, harkening back to China’s planned economy days.

‘Essentially, the government is saying, where possible, and especially if you are a state utility, don’t raise prices and contribute to these worries,’ said Yang Dali, director of Singapore’s East Asian Institute.

In the past few weeks, the Education Ministry has also weighed in with temporary subsidies for student canteens, and Vice-Premier Hui Liangyu called for stricter implementation of farming subsidies and preferential policies for rural workers.

The policy moves play to the image Mr Wen has cultivated for himself as a man of the people. But the strategy, while appeasing the masses, is not without risks.

‘The worry is, if you impose those price controls you may distort the price situation and let deformities increase over time,’ said Singapore’s East Asian Institute’s Yang Dali.

But without controls, the spectre of social unrest looms. Inflation is often cited as a reason the Nationalist government lost the civil war to Communists in 1948-49. Market relaxations in 1988 caused sharp price rises that were seen as contributing to discontent that culminated in the Tiananmen Square demonstrations a year later.

 

Source: Reuters (Business Times 9 Feb 08)

Growth may slow for first time in 3 years

Govt forecasts India’s economy to expand 8.7% as higher interest rates cool consumer demand

(NEW DELHI) India’s government expects economic growth to slow for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances.

Asia’s third largest economy is forecast to expand 8.7 per cent in the 12 months to March 31, the weakest pace since 2005, the statistics office said in a release in New Delhi on Thursday. Growth was 9.6 per cent last financial year.

The pace of expansion will still be the quickest after China among the world’s major economies. And it may remain so even if the US suffers a recession as India’s growth is being driven by the spending of a middle class of about 50 million people, equal to the combined population of Singapore, Hong Kong, Malaysia and Australia.

‘This is not a collapse,’ said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ‘Growth is slowing because of higher real interest rates. US recession or not, the structural drivers of India’s rising potential growth remain intact.’

The government’s growth estimate beats the central bank’s 8.5 per cent forecast and is almost in line with the average 8.8 per cent annual growth in the previous four years, the best expansion since the country’s independence in 1947.

Finance Minister Palaniappan Chidambaram who said that he was ‘disappointed but not too despondent’, expects the final growth figure to be closer to target.

‘Growth will be closer to 9 per cent than what may appear at this moment,’ Mr Chidambaram told reporters here on Thursday.

Reserve Bank of India governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered banks to set aside more money as reserves five times since December 2006 to contain inflation stoked by rapid consumer demand and high oil and food prices. The central bank has also allowed the rupee to strengthen to near a decade-high to make imports cheaper.

Six of nine economists surveyed by Bloomberg News last week said that Mr Reddy will maintain the repurchase rate at 7.75 per cent, the highest in six years, in the next monetary policy statement on April 29, as inflation still does not reflect last year’s 57 per cent increase in crude oil costs.

Inflation, currently at a five-month high of 3.93 per cent, may also accelerate on increased money supply caused by capital flows from overseas investors, seeking higher returns in India, where growth is almost three times that in the US, Europe and Japan. Only China, among economies of more than US$500 billion, grew faster than India, at an 11.2 per cent pace last quarter.

Global investors bought a record US$17.2 billion of shares and US$2.3 billion of bonds in India last year.

Higher interest rates have reduced demand in some segments of the Indian economy. Property prices, for example, have declined. The value of residential flats in Gurgaon, a suburb outside the capital New Delhi, have dropped 40 per cent in the nine months ended Sept 30, according to real estate company Cushman & Wakefield Inc.

India’s manufacturing is expected to expand 9.4 per cent this fiscal year, according to Thursday’s statement.

Agricultural output may grow 2.6 per cent and financial services will advance 11.7 per cent. Bajaj Auto Ltd, India’s second largest motorcycle maker, posted a 7.2 per cent drop in sales in December, its 11th straight month of declines.

‘Rising incomes should support consumption growth,’ Andrea Richter Hume, an International Monetary Fund economist, said in a report on India this week. The IMF expected the South Asian nation to grow at 8 per cent ‘over the next few years’.

India’s middle class, those with annual disposable incomes between US$4,380 and US$21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co, the New York-based consulting firm. It estimated that this group will further increase tenfold to 583 million people by 2025.

Incomes are rising in India because of a spurt in economic growth after Prime Minister Manmohan Singh started dismantling barriers to foreign investment and other Soviet- style controls on industry when he was finance minister in 1991.

India’s economy has expanded at an average annual pace of 6.3 per cent since 1991, compared with growth of about 3.5 per cent between 1950 and 1980.

That acceleration in growth is attracting companies such as Glitnir Bank, Iceland’s third biggest lender by market value, and McDonald’s Corp to India.

‘We think this is the perfect time for us to come to India,’ said Bala Kamallakharan, executive director at Glitnir, which on Wednesday unveiled an Indian joint venture with the LNJ Bhilwara Group to produce thermal energy.

Glitnir is not alone in trying to tap opportunities in India. McDonald’s, the world’s largest restaurant company, last month said that it will boost its stores in India this year by as much as 30 per cent.

Volvo AB, the world’s second largest truckmaker, plans to create a joint venture with India’s Eicher Motors Ltd to win a larger share of the fourth largest truck market, the Swedish company said in December.

 

Source: Bloomberg (Business Times 9 Feb 08)

ECONOMY WATCH: Asia not immune to global market turbulence: ADB chief

Bank will help region if drastic slowdown occurs, by changing ‘lending priorities’

IN TOKYO

WITH the US economy poised on the brink of possible recession this year, the dangers of economic shocks being transmitted to Asia via trade and financial linkages are very real, Asian Development Bank (ADB) president Haruhiko Kuroda warned yesterday in Tokyo.

Asian economies are ‘not immune to global market turbulence and negative developments’, he told a symposium on regional growth prospects. The ADB stands ready to help the region, should a significant slowdown occur, by changing its ‘lending priorities’, Mr Kuroda told The Business Times after the meeting.

While he expected major Asian economies to continuing growing at relatively robust rates in 2008, certain smaller countries with low growth rates could need help, he indicated.

‘So far, the region’s strong macroeconomic fundamentals have helped mitigate the impact of a US slowdown,’ Mr Kuroda noted in his speech to the ADB seminar. Despite a slowing in US growth to 1.5 per cent this year projected by the International Monetary Fund (IMF), the impact on the emerging countries of Asia should be limited by strong expansion in China and India.

But ‘a significant slowdown in the US economy would most certainly affect the region’s growth performance through trade, investment and financial linkages. With its unparalleled presence in world trade, finance and investment, the US exerts a significant influence on the global business cycle. A deep and prolonged US recession could be accompanied by much slower growth in Asia.’

Nearly 42 per cent of exports from emerging Asian economies still go to the Group of Three (G-3) economies – the US, European Union and Japan – and this figure rises above 60 per cent if that part of trade among Asian countries that eventually ends up in exports to the G-3 is included, Mr Kuroda said. ‘Changing conditions in the world’s major economies are still important to emerging Asian export growth.’

Global financial linkages are also strengthening, Mr Kuroda noted, ‘and emerging Asian stock markets tend to follow the US market closely. As stock markets in the region have grown and become more open to foreign investors, stock prices have become more sensitive to global financial shocks. And Asian economies have become more sensitive to swings in stock prices through the balance sheets of both households and financial institutions.’

Likewise, although the exposure of Asian banks to US sub-prime mortgages and related credit products has so far been small relative to the size of their assets, ’spillovers from US and eventually other G-3 financial markets could be potentially large’, Mr Kuroda suggested. ‘The rapid transmission of financial volatility during the recent market sell-off is a vivid reminder of this region’s vulnerability to disruptions in the global financial system.

‘With the region’s trade, investment and financial linkages to global markets still high, potential spillover from a further tightening in global credit markets and a slowing in the US and other economies do pose a significant risk to the regional economic outlook.’

Asian policymakers need to take steps to bolster confidence in the region’s financial markets, Mr Kuroda suggested. They also need to take measures to increase domestic consumption – especially in China – and elsewhere to step up levels of domestic capital investment, which have flagged since crisis struck emerging Asia 10 years ago, he said.

Climate change will be a major theme of the ADB’s annual meeting in Madrid later this year, and Mr Kuroda urged the creation of a ‘pool of funds to help dampen the financial impact on countries that may be called upon to accommodate large populations displaced by climate change’. No single country ’should have to bear the burden of climate-driven refugees on its own’, he said.

 

Source: Business Times 9 Feb 08

The markets are leading Asia to ruin

Europe’s successful politically-led integration model is showing Asia the way ahead – if its leaders would only be willing

TOKYO

WHILE Europe goes from strength to strength as a united continent with a strong economy and a currency to match, Asia continues to wander directionless waiting fearfully to see whether it will be spared the fate of sliding with the US into recession. The contrast could not be greater and the coming trials of the global economy may vindicate Europe’s politically-led integration model while damning Asia’s market-led version.

Two events in Tokyo over the past week have highlighted the differences of approach. On the European side, a confident Hans Poettering, president of the European Parliament, came to Japan bearing tidings that the new European Constitution (the Treaty of Lisbon signed last December) is expected to be fully ratified and go into force on Jan 1, 2009.

The Constitution will mark the culmination of a truly remarkable chapter in European history that will see 27 countries representing a market of 500 million people emerge. Not just a ’single market’ with integrated economies and a common currency and monetary system but also with its own effective foreign policy and with credible defence and security systems, as well as its own Parliament and executive branch, of course.

It will be a united Europe stretching from the Mediterranean to the Baltic and from the Atlantic Ocean to the Black Sea – a Europe that embraces countries at many different stages of economic and political development, speaking a multitude of different languages and with myriad cultural traditions. Even some of the smallest ‘transition’ economies such as Slovenia have been able to adopt the euro.

A few days before Mr Poettering brought the good news of Europe’s latest advance to the Foreign Correspondents Club of Japan in Tokyo, I heard Japanese Minister of Economy, Trade and Industry Akira Amari declare proudly that Japan is ready to ‘consider economic partnership agreements with large markets such as the United States and the European Union’ – a rather modest ambition compared to Europe’s achievements If Tokyo does conclude a free trade or economic partnership agreement with the US, there is no doubt that this will draw Japan more closely into America’s sphere of influence, in the economic and perhaps political sense. It remains to be seen then whether any conflict of interest could arise for Tokyo in negotiating an agreement with Brussels. But the real casualty could be any hope of real Asian unity.

Japan’s philosophy, and that of at least some other Asian countries, boils down to this: go where the markets are, and the market knows best.

This applies not only to their pursuit of mega export markets in the US and elsewhere (rather than building an ‘internal’ market as Europe has done so successfully) but also to their own misguided view that the ‘market-led’ model is the best way to achieve greater economic integration among their own economies. This conception is a wrong one, as Mr Poettering implied.

‘If you want to progress with unification, then it must be on the basis of law,’ he said. ‘Without that, you go nowhere. Political decisions should lead to a legal basis.’

In other words, tackle the process of economic and political integration boldly from the top down by political agreements, statutes and institution building, as Europe has done, rather than timidly leaving it all to businessmen, as Asia is doing (with the exception now of Asean).

The usual excuse offered by Asian policymakers for the lamentable lack of progress in knitting together this region into a coherent and strong whole is that it took Europe 50 years to get there – so, have patience. But what is never started is certainly never finished, and there are no signs yet of any comprehensive plan for Asian unity. There are just a lot of competing countries and alliances, dealing with each other and with the outside world.

Another excuse is that Asia is too diverse culturally and ethnically to follow Europe’s example, and that its member countries are at too different stages of economic development to be able to contemplate integration in the foreseeable future.

Europe’s achievement of unity in diversity has given the lie to this claim, and it is always possible for integration to take place at ‘two speeds’ or more, as accession to the euro under the Maastricht Treaty has proved.

If these arguments do not convince Asian leaders that they need to start talking seriously to one another about market and community building, then events that are likely to unfold during the remainder of this year almost certainly will.

The US will slide inexorably into recession, and Japan will be not far behind. China could slow abruptly under the impetus of reduced external demand and internal restraints, and then the rest of Asia will follow. Only then will the need for a true Asian market (and currency) become apparent.

 

Source: Business Times 7 Feb 08

Asian CEOs bullish on 2008 prospects: PwC

ASIAN CEOs are more confident about business prospects in the year ahead, despite a fall in confidence globally, a PricewaterhouseCoopers (PwC) survey has found.

‘Many companies in Asia continue to be the engine of economic growth that has been driving prosperity for more than a decade,’ PwC said.

As a result, 56 per cent of Asian CEOs are confident going forward, up from 49 per cent last year, according to the firm’s 11th Annual Global CEO Survey.

In contrast, confidence among North American CEOs has sunk to 35 per cent, from 53 per cent last year.

Globally, half of CEOs who responded to the survey said they were ‘very confident’ about revenue growth this year, compared with 52 per cent last year.

There is a ‘wide disparity in confidence levels between CEOs in mature and emerging economies’, said PwC.

Sentiment is strongest in China and India, where 73 per cent and 90 per cent of CEOs respectively expressed confidence.

Latin American and Central and Eastern European respondents were also relatively confident, with 55 per cent strongly believing that their company’s revenue would grow.

‘The world’s economic axis is shifting as Asia consolidates its position and we have good ground for feeling optimistic about the immediate future’, said Gautam Banerjee, executive chairman of PwC Singapore. ‘Our financial systems have held up well during the global credit crisis. We expect the economic outlook to be generally favourable.’

Asian CEOs are also more interested in executing cross-border mergers or acquisitions in the next 12 months, though most would prefer to make their deals in the Asia-Pacific region itself.

Half of all respondents that head big companies with annual revenue of more than $10 billion said that they worry about handling cultural conflicts and capturing deal value.

Surprisingly, CEOs of large companies worry more about such matters than chiefs of smaller firms, despite typically having more experience in cross-border integrations, Mr Banerjee said.

Many Asian and Middle Eastern investors ‘have recognised the need to tread carefully’, he said. They tend to prefer low-profile minority stakes to minimise opposition, and are trying to improve transparency and subject themselves to scrutiny.

Worldwide, Asian CEOs are the most worried about the availability of key skills, with almost 80 per cent of respondents from the region citing this concern. Many also feel they need to change the way their company develops talent.

But CEO commitment to developing people is still highest in North America, where 85 per cent of chiefs said that their time is best spent ‘dealing with the people agenda’.

PwC’s survey involved 1,150 interviews with CEOs in 50 countries in the last quarter of 2007.

 

Source: Business Times 5 Feb 08

Asia more stable now than in 1997

ASIAN banks and markets here are a lot more stable and better placed for long- term growth, despite the sub-prime fears.

Lorraine Tan, S&P’s vice-president for Asian Equity Research, sees Singapore banks, in particular, as being very stable in a market where there is widespread fear of a financial sector collapse brought on by the US sub-prime crisis.

‘Middle Asia banks have always had a naturally growing loans market,’ she noted. ‘They did not need to do much on the treasury side for income growth.’

As such, the exposure of banks in places like Singapore, China and Malaysia to collateralised debt obligations and other financial instruments has not been as rampant, she added.

Ms Tan noted that the sub-prime jitters had nevertheless rattled markets here so badly that values had started emerging in various sectors.

‘In Singapore, we have drifted down from around 15 times earnings, to around 13 times. This is much lower than the 25 times during the 1997 Asian financial crisis.’

She noted that these valuations were supported by strong corporate fundamentals. ‘Asian corporates are much stronger now than they were during the 1997 financial crisis,’ she noted. ‘Balance sheets are strong and debt levels are low, while at the market level, there is still a lot of liquidity out there. And savings rates are very high.’

Still, the Asian markets were clearly in a bear zone. However, given the intrinsic strength within the system, the current US-contagion ‘hit’ will be less severe and the market’s recovery will be speedier than during the previous crisis, she added.

‘As soon as there is some sign of clarity, we should see markets rebound very strongly.’

But governments have to manage the tendency for Asian consumers to stop spending and oversave at the first sign of trouble. And the Asian real estate sector is a key factor, where a diminution in perceived value could have a severe psychological impact on demand and spending.

The good news, she added, was that the current jitters will prevent Asian governments from taking measures which could kill off demand. China, for example, could now hold back from manipulating the yuan.

Ms Tan has nevertheless lowered her target for the Straits Times Index this year to 3,500 points, from 4,000 earlier.

 

Source: Business Times 5 Feb 08

Asian CEOs more upbeat than their Western peers

DESPITE a general decline in confidence levels, Asian chief executive officers (CEOs) are more upbeat than their Western counterparts, says a new PricewaterhouseCoopers (PwC) survey.

The annual survey, conducted late last year, found that 50 per cent of CEOs were ‘very confident’ about revenue growth over the next 12 months, compared to 52 per cent the previous year – the first time confidence levels for CEOs globally has declined since the 2003 survey.

The difference in outlook was stark when comparing mature with emerging economies, however.

The overall drop in business confidence globally was most pronounced in North America, where 35 per cent of CEOs said they were ‘very confident’ about growth, versus 53 per cent last year.

The confidence of Asian CEOs, on the other hand, increased to 56 per cent in 2007, compared to 49 per cent in 2006.

CEOs in China and India were the most upbeat about the growth prospects in the next 12 months, with about 73 per cent and 90 per cent of the CEOs there respectively saying they were ‘very confident’ about next year’s growth prospects.

‘The world’s economic axis is shifting as Asia consolidates its position and we have good grounds for feeling optimistic about the immediate future,’ said PwC Singapore’s executive chairman Gautam Banerjee.

 

Source: The Straits Times 5 Feb 08

Asian exporters brace themselves for slowdown

Companies changing how they operate rather than wait for things to get worse

HONG KONG – ASIAN exporters are already feeling the effects of a United States economic downturn – effects that may be magnified by a weak US dollar, volatile world markets and fears that more bad loans may be ticking in the coffers of American companies.

Rather than waiting for things to get worse, companies from Chinese garment businesses to Japanese equipment manufacturers are changing how they operate.

The weakening US demand is clear. American orders for small tractors fell 5 per cent last year at Kubota in

Osaka, Japan, and are expected to fall further this year. Orders from the US have been weak for a year at Top Form, the Hong Kong company that is the world’s largest bra manufacturer. And at Aigret Industries, a manufacturer of multi-line phone systems and fax machines in Xiamen, China, orders from the US plunged 30 per cent in the fourth quarter compared with a year ago.

In some industries, the result has been deep gloom. At Evergreen Knitting in Ningbo, China, orders from the US for T-shirts and sweaters abruptly dropped 20 per cent this winter.

‘We anticipate that this year, 10 per cent to 20 per cent of the knitwear factories will have to close due to the inability to compete,’ said Mr Sean Zhu, Evergreen’s sales manager.

In response to the downturn, some companies are pursuing remedies that will affect economic output, like Aigret Industries, which has lengthened next month’s Chinese New Year vacation for its workers to 20 days, instead of the usual 10.

Others are investing in more technological research and developing new models, like Xigo Electric in Zhongshan, China, which manufactures air conditioners and liquid-crystal display television sets.

‘We really felt the impact of the slowdown in the US during the second half of 2007,’ said Mr Stan He, a Xigo

sales manager. ‘Orders were generally down by 10 per cent to 20 per cent relative to the same period a year ago.’

Asian exporters lie at the centre of the debate in financial markets over the extent to which Asia has decoupled from the US and can grow strongly even if the American economy slows significantly. The evidence so far is that the effects of a US slowdown will vary widely, depending on each country’s reliance on exports and the extent to which each economy is overheating or stumbling.

China, which has struggled in recent months with rising inflation, has actually benefited from slower exports, although a steeper decline could prove a problem. The Chinese government announced on Thursday that growth eased to 11.2 per cent in the fourth quarter from 11.5 per cent in the third quarter.

The modest slowing, almost entirely because of less brisk growth in exports, helped reduce inflation to 6.5 percent last month from 6.9 per cent in November, the government said.

But with fixed-asset investment still soaring in China, Mr Xie Fuzhan, the director of the National Bureau of Statistics, said China was still worried that overall growth was too fast to be sustained without inflationary pressures.

 

Source: NEW YORK TIMES (The Straits Times 26 Jan 08)

Overheating of Asian economies likely: Lehman

Better growth rate will attract massive capital inflows

GOOD economic news now could lead to tough times later, an American investment bank is warning. The bank, Lehman Brothers, says that a soft landing for the global economy could lead Asia ex-Japan economies to overheat later this year or into next year.

Lehman’s chief economist Asia ex-Japan, Robert Subbaraman, says the bank expects the region to ‘attract massive capital inflows’ because of its better growth rate than those of other regions, higher interest rates, and stronger economic fundamentals.

‘So our core view of the region is that the aggregate GDP growth for the Asia ex-Japan economies will weaken by about one percentage point this year to about 7.5 per cent,’ he said. ‘The weakening will be because of weakening exports; however, because of the strong capital inflows, the domestic economies are going to be red-hot.’

He also expects that, with the region’s exports weakening, Asian central banks will intervene heavily to slow currency appreciation, even more so than before.

This may result in the dilemma of the ‘impossible trinity’, which holds that a country can have only two of the three economic options of a fixed exchange rate, control over interest rates, and an open capital account.

‘We doubt that countries will impose Draconian capital controls,’ he said. ‘Thus it will become harder for central banks to raise interest rates, because to do so would attract even stronger capital inflows and put greater upward pressure on their currency.

‘In our view, that is a recipe for an overheating economy.’

On the other hand, the bank predicted that if there is a global recession, Asia ex-Japan economies will be severely hit – falling by as much as 4.5 percentage points. This would be nowhere near as bad as during 1997’s Asian financial crisis, because of ’sound economic fundamentals’ and ‘plenty of room for macro policy to respond’.

However, Lehman Brothers has not gone out with a full-blown recession prediction for the United States, forecasting only a 40 per cent risk of a recession this year, slightly higher than its predicted one-in-three chance at the beginning of this year.

 

Source: Business Times 23 Jan 08

Soros warns of worst financial crisis since WWII

(VIENNA) Billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession, according to an interview by the Austrian daily Standard.

‘The situation is much more serious than any other financial crisis since the end of World War II,’ Mr Soros was quoted as saying.

He said that, over the past few years, politics had been guided by some basic misunderstandings stemming from something which he called ‘market fundamentalism’ – the belief financial markets tended to act as a balance.

‘This is the wrong idea,’ he said. ‘We really do have a serious financial crisis now.’

Asked whether he thought the US was headed for a recession, he said: ‘Yes, this is a threat in the United States.’

He added that he was surprised how little understanding there had been on how recession was also a threat to Europe.

European shares fell nearly 6 per cent on Monday, their biggest one-day slide since the Sept 11 attacks of 2001, as fears of a US recession and more writedowns in the financial sector sparked a broad-based selloff.

In Washington, US Treasury Secretary Henry Paulson said that the US economy remained resilient and has healthy long-term fundamentals, but has slowed ‘materially’ in recent weeks.

Warning that, in the short term, risks were clearly to the downside, he said that Congress and the administration need to agree quickly on a package of tax cuts and other measures to boost the economy.

‘Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,’ Mr Paulson said in remarks to the US Chamber of Commerce as House Speaker Nancy Pelosi and leaders in both parties prepared to meet President George W Bush at the White House to discuss a stimulus bill.

Such legislation presumably would involve tax rebates, business tax cuts and funding for a Democraticled call for additional food stamp and employment aid.

 

Source: AP, Reuters (Business Times 23 Jan 08)

Governments urge calm in face of market turmoil

Ministers in Asia and Europe advise investors to stay rational and not overreact

HONG KONG – GOVERNMENTS urged calm yesterday while calling for international cooperation to cope with a global slide in stock markets sparked by fears of a United States recession.

Asian markets experienced a day of heavy losses, with Hong Kong share prices suffering their biggest ever one-day slide, closing down 8.7 per cent, while bourses in Europe also opened in negative territory.

French Finance Minister Christine Lagarde said US President George W. Bush’s US$140 billion (S$201.9 billion) stimulus package for the American economy was a ‘bit vague’ and called on him to spell out his plans more fully.

‘I think he must go further to explain precisely how these billions of dollars are going to be injected into the economy,’ Ms Lagarde told French radio, as French share prices shed 2.57 per cent at the start of the day’s trading.

In Japan, Economics Minister Hiroko Ota told a news conference that the government saw no need for the time being to intervene to halt the rout.

‘Stock markets across the world are falling, and it basically stems from the US,’ she told reporters, before Japanese share prices tumbled 5.65 per cent to a 28-month low.

‘It is difficult at the moment to mull over action by Japan alone. Instead, we should cooperate globally,’ she said.

Mr Bush announced his economic stimulus package of tax cuts and other measures last Friday, but the proposal has failed to allay concerns about the health of the world’s No.1 economy.

Indian Finance Minister Palaniappan Chidambaram, whose country’s shares lost more than 7 per cent in early afternoon trade, urged investors to ignore the financial woes in the West.

‘My advice to investors is to stay calm,’ he said. ‘Corporate profits are high, corporate income tax is at an alltime high in terms of growth. There’s no reason at all to allow the worries of the Western world to overwhelm us.’

Australian share prices plunged by 7.1 per cent yesterday in the biggest one-day fall since October 1997, but the government said the country was likely to be able to weather the storm.

‘We are well-placed to ride out the turbulence that flows from events in the US, even though we are not immune to it,’ said Treasurer Wayne Swan.

‘The prospects for ongoing growth in Asia and the developing markets are assisting us to withstand the fallout occurring elsewhere.’

Meanwhile, European finance ministers said a global stock market slump and an economic slowdown in the US threaten to slow growth in Europe more than forecast.

‘The economic situation and financial markets are highly volatile and uncertain, a good deal more uncertain than usual,’ Luxembourg Finance Minister Jean-Claude Juncker said on Monday in Brussels after presiding over a meeting of counterparts from the euro region.

‘If there is a real slowdown in the US, obviously that would be felt in the euro zone.’

Stock market volatility has heightened uncertainty on the outlook for economic growth in the 15 nations that use the euro, according to a European Union briefing document obtained by Bloomberg News.

The draft document was discussed at Monday’s meeting of finance ministers.

Still, ‘it would be a mistake to fall victim to excessive pessimism’, Mr Juncker told a press conference after the meeting. ‘We shouldn’t overreact to events on the stock exchange.’

AGENCE FRANCE-PRESSE, BLOOMBERG NEWS

DON’T BE OVERWHELMED

‘My advice to investors is to stay calm. Corporate profits are high, corporate income tax is at an all-time high… There’s no reason to allow the worries of the Western world to overwhelm us.’

MR CHIDAMBARAM, India’s finance minister

Source: The Straits Times 23 Jan 08

Recession in US, Europe could shake Asia, S’pore

Region still relies heavily on world’s biggest markets, say economists

A RECESSION in the United States and Europe would badly hurt Asian economies, including Singapore’s, which still rely heavily on these two export markets for growth, according to economists.

Indeed, analysts at Lehman Brothers believe economic growth in Singapore could slump to as low as 2.5 per cent this year, if the worst-case scenario of a recession occurs. The official forecast is for growth of 4.5 per cent to 6.5 per cent.

Economists said yesterday that while the region’s economies have managed to stand on their own feet in recent years, their fortunes are still closely tied to external conditions.

Most economists are maintaining forecasts for a more benign slowdown, but they concede that risks of a severe downturn are on the rise.

‘We are probably only one shock away from the US economy tipping into a recession,’ said Lehman chief global economist Paul Sheard. ‘One thing that we will be thinking about the next week or so: Are we seeing that one shock now hitting the US economy in the form of this equity market meltdown that is unfolding this week?’

Global share prices have crashed since the start of the year and are accelerating their declines amid rising fears that a US recession may send the world economy into a tailspin.

Earlier theories that Asia’s booming economies are plotting their own destinies and escaping this plight are dissipating fast.

‘We don’t really buy the decoupling idea in its strong form,’ said Dr Sheard, adding that it is very unlikely that demand from Asia and other emerging markets can offset a slowdown in the US and Europe.

Singapore is especially vulnerable, given its small and open economy, said Mr Robert Subbaraman, who heads Lehman’s economic research for Asia, excluding Japan.

He believes overall Asian growth this year could fall by 4.5 percentage points from last year’s 8.7 per cent, if the rest of the world goes into recession. Singapore’s growth could come down to between 2.5 per cent and 3 per cent, he said.

For the moment, Mr Subbaraman is still hoping that aggressive US interest rate cuts will avert a recession to support a 5.3 per cent growth in Singapore and a 7.6 per cent expansion in the region.

This scenario, however, brings risks of an overheating economy, as foreign capital inflows drive up inflation to form possible asset bubbles in the region, he warned.

United Overseas Bank economist Ho Woei Chen said a US recession would hit Singapore’s export sector very hard.

‘Although exports to China have increased, enddemand is largely still in the US,’ he said.

Citigroup economist Chua Hak Bin said a 1-percentage-point reduction in US growth would cut Singapore growth by 1.7 percentage points.

He said a contraction in the US and Europe could lower Singapore growth from his current forecast of 5.6 per cent to between 3 per cent and 4 per cent. ‘Ultimately, manufacturing will be hit, as well as trade-related services such as wholesale and transport.’

Barclays economist Leong Wai Ho, though, is much more sanguine.

He tips Singapore growth at 6.5 per cent this year, purely on the strength of the domestic economy.

‘We already expect exports to contribute very little to growth,’ he said, pointing out that last year’s strong growth came amid a weak export performance.

Instead, private consumption, fuelled by record tourist arrivals and investments in the construction sector, should provide a buffer.

Projects, like the integrated resorts, are highly unlikely to be disrupted, while the record new manufacturing investments that Singapore won last year will provide support, Mr Leong said.

‘We have never entered a US recession from such a strong position. We are going into this with good quality, broad-based growth.’

 

Source: The Straits Times 23 Jan 08

Analysts see Asian economies weathering a US recession

Reason: Asia is now less dependent on the US economy

(BANGKOK) Asia would be able to weather any recession in the United States, analysts say, because rising trade and investment within the region make it less dependent on the US economy than in the past.

While a severe downturn in the US would drag on Asian growth by eroding demand for exports, a rapidly growing middle class is fuelling orders for cars, electronics and housing – much of which will be supplied from Asia itself.

Voracious demand for oil, iron ore and other commodities to build roads, sewage systems, and office buildings – especially in the booming economies of China and India – will also help sustain the region through any US slowdown.

‘The US economy is not that important anymore,’ Hans Timmer, a World Bank economist, said in Singapore earlier this month.

Excluding Japan, 43 per cent of Asia’s exports go to other nations in the region, Lehman Brothers calculates – up from 37 per cent in 1995.

‘China and India represent a bigger presence on the world stage than just a half dozen years ago,’ said David Cohen, director of Asian forecasting at Action Economics in Singapore.

A drop of one percentage point in US economic growth would shave 1.3 percentage points from China’s growth rate due to lower exports, Citigroup estimates.

Since China is growing so fast, that isn’t likely to make much of a dent. China’s economy will still expand 11 per cent this year, slightly slower than in 2007, Citigroup projects.

Lehman Brothers forecasts 2008 growth will drop to 9.8 per cent, still remarkably strong.

Most regional projections show some drop-off from 2007, but still reflect healthy expectations.

The UN Economic and Social Commission for Asia and the Pacific said 38 developing economies in the region – including China and India – will expand an overall 7.8 per cent this year, slightly lower than growth of 8.3 per cent in 2007.

Global growth, meanwhile, will moderate to 3.3 per cent in 2008 from 3.6 per cent last year, with any slowdown in the US largely offset by growth in developing countries, the World Bank projects.

But Rajeev Malik, an economist with JPMorgan Chase in Singapore, cautioned that growth in China and India could not make up all the slack of a US downturn.

‘Demand in industrial countries is still pretty important for the rest of Asia,’ Mr Malik said. ‘While China, and to some extent India, offer some offsetting demand, there will still be some downshifting in activity if the US goes into recession.’

If the US economy does contract, India’s growth will likely slow to 7 per cent from the current rate of about 9 per cent, he predicted.

Asian stock markets have tumbled in recent weeks amid worries that a slowdown in the US will hurt exporters’ profits.

Still, some analysts say some stocks appear oversold and the drop may present a buying opportunity given the region’s growth potential.

Japan, the world’s second-largest economy, may suffer the most from a US contraction.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, predicts the nation’s economic growth will drop this year to about half of the 2 per cent it has marked in recent years.

Lower demand for exports could even have a silver lining for China by restraining inflation, which has soared to the highest level in more than a decade.

‘If China’s exports slow down significantly, you definitely will see lower prices rather than inflation,’ said Minggao Shen, an economist with Citigroup in Beijing.

But he did warn that weaker export demand could leave Chinese manufacturers with overcapacity problems.

 

Source: AP (Business Times 22 Jan 08)

CHINESE ECONOMY’S SUPER-GROWTH

‘Growth’ problems won’t go away yet

THE Chinese economy, having chalked up an average growth rate of 9.7 per cent for over two decades, sustained another year of double-digit growth last year, at 11.5 per cent. This was first announced by Premier Wen Jiabao on Nov 20 last year whilst visiting Singapore. Soon after this, the Chinese Academy of Social Sciences put 2007 growth at 11.6 per cent. After the usual statistical adjustment, real growth is likely to be 11.6 per cent or slightly higher.

Since its accession to the World Trade Organisation (WTO) in December 2001, China has experienced doubledigit economic growth rates averaging 10.6 per cent. As a result, its total gross domestic product (GDP) last year was almost double its 2002 level. China, already a huge economy of almost US$3.2 trillion (S$4.6 trillion) at market exchange rates, is about to displace Germany as the world’s third-largest economy.

When a mammoth economy like that grows so fast, the effects can reverberate far and wide, affecting global levels of production, consumption, trade, and financial movements.

In fact, last year the Chinese economy contributed about as much to global GDP as the United States.

East Asian economies such as Japan, South Korea, Taiwan and Singapore have also enjoyed growth at near double-digit rates for two to three decades. But they have never registered double-digit rates of growth for five years in a row like China. The country’s ’super-growth’, with annual inflation kept below 3 per cent, is quite unprecedented, particularly since China is already a large economic powerhouse with a huge base.

Such growth has even taken China’s economic policymakers by surprise. The 11th Five-Year Programme (2006-2010) had envisioned a potential annual growth rate of only 7 to 8 per cent. As a result, the Chinese leadership was initially quite worried about economic overheating. Indeed, foreign commentators have for some time anticipated an imminent hard landing.

Why has China’s super-growth been able to consistently defy gravity? High growth has been mainly propelled by high levels of domestic fixed investment, which has been growing at an average rate of 26 per cent since 2002. Domestic consumption, while a less important source of growth, has also been growing at double-digit rates (around 12 per cent for the same period).

Foreign trade and foreign direct investment have also contributed to economic expansion, with exports growing over 30 per cent a year since China joined the WTO. More significantly, the bulk of investment spending every year goes to infrastructure building and industrial expansion (which in turn builds up capacity for further growth), with a relatively smaller proportion for property and housing development.

Rare exception

INDEED, China is a rare example of an economy that has sustained high levels of capital investment over a long period. China has regularly devoted almost 45 per cent of its GDP to gross domestic investment. This has been matched by an equally high level of gross domestic savings (almost 50 per cent). Chinese households are fabulous savers.

The retained income of corporations is also an important part of domestic savings, as state-owned enterprises usually plough back their earnings into investment instead of redistributing them to shareholders. In short, there is no scarcity of capital for domestic investment.

The pro-growth policies of the central government are well known. The ruling Chinese Communist Party critically depends on good economic growth for social stability as well as political legitimacy.

The central government is always inclined to mobilise domestic savings as cheap (in fact, subsidised) capital for many large-scale infrastructure projects, from highways and railways to ports. This explains how China constructed the world’s second-largest highway network after the US in just over a decade.

Indeed, such ‘growth bias’ has extended all the way down to provincial and local governments. These governments are vying for more foreign direct investment for industrial expansion. They also want more domestic capital for infrastructure-building in order to generate more local employment and deliver economic growth.

Deeply entrenched

HIGH economic performance is of critical importance to the political careers of local officials, though environmental protection has recently been added as another indicator of performance. The pro-growth institutional structure in China is indeed extensive and deeply entrenched.

Economic theory suggests that decade-long growth and low inflation is the result of a rise in total factor productivity. Various academic studies and much anecdotal evidence indicate that the Chinese economy has indeed experienced substantial productivity gains. Wage increases in recent years offer a good example of labour productivity growth. It stands to reason that the heavy investment in physical and human capital, the successful financial sector reform, the extensive technology spillovers (and the learning effect) from multinationals, together with China’s integration with the global economy, must have borne fruit.

China has also exhibited a highly impressive external sector performance, as manifested in its swelling foreign reserves, rising trade surplus, and extremely low external debt. All these show that the prolonged economic boom was not built on a house of cards, but on real economic fundamentals.

But the fact that sustained growth is supported by strong economic fundamentals does not mean that the economy will not overheat or run into other constraints. Any economy experiencing a long period of high growth will inevitably develop structural tensions, giving rise to various distortions and imbalances. Cracks will show up sooner or later.

Inflation has already become a problem. The consumer price index (CPI) began to move up in February (2.7 per cent) last year, initially because of rising food prices. It soon snowballed to 6.5 per cent in October and further to 6.9 per cent in November, the highest in more than a decade. China’s annual inflation for last year as a whole is likely to exceed 4.7 per cent.

This is still not serious in terms of ‘core inflation’, that is, excluding food items. But it is sufficient to cause the government to take action. This is partly because the current inflation rate has well exceeded the long-held ‘comfort level’ of 3 per cent, and partly because it is set to rise further in the months ahead after ‘importing’ more international inflation, partly as a result of rising energy prices.

In late November, China’s top leadership, the Politburo, led by President Hu Jintao, declared that preventing economic overheating and curbing inflation would be the country’s most important policy priorities this year.

Overheating and inflation have been officially described as ‘twin economic woes’.

The subsequent annual Central Economic Work Conference reaffirmed the same policy line and came up with specific macroeconomic controls and price-stabilising measures. China’s top economic planning body, the National Development and Reform Commission, urged local authorities to stay vigilant against chain reaction price hikes.

It remains to be seen how far the government wants its retrenchment policies to cool growth. If the government is really determined to tackle the underlying causes of China’s long-term overheating, it will have to push much more vigorously for effective policy measures that go beyond battling inflation. It will need to include a broader range of policies to address the yuan exchange rate and macroeconomic imbalances.

All signs point to another year of strong growth of about 10 per cent this year, but with higher inflation, possibly from 5 to 6 per cent.

Just a few months ago, some analysts were unsure if inflation would pose a real threat to economic growth and social stability. The socalled ‘headline inflation’ (6.5 per cent for October and 6.9 per cent for November) was still reasonable for an economy growing at doubledigit rates. The rise in the CPI was primarily driven by increases in food prices (which constitute a third of the weighting in the CPI basket).

The price hike was actually not across the board, as many manufactured products still faced problems of overproduction.

Hence, the government refers to current inflation as ’structural inflation’. ‘Core inflation’ remains quite subdued, rising to just around 1.5 per cent last year, again much better than in many countries in the region. Except for pork (in short supply due to an epidemic that led to culling of pigs), China is facing no serious food shortages. In fact, a bumper harvest was recorded last year.

Overall, China today is facing a kind of cost-push inflation. The government still has the means to contain it, using such measures as removing supply bottlenecks, stabilising prices through controls and subsidies (particularly fuel subsidies), increasing imports, and curbing speculative activities.

Inflationary expectations

HIGHER food prices are actually good for farmers, as they reverse the terms of trade in their favour and thus transfer more resources to rural development. If the government could tolerate annual inflation at between 5 and 6 per cent, then officials would not be worried about economic overheating. But the fact is that Beijing finds 4 to 5 per cent inflation unacceptable.

The Politburo has already adopted tighter macroeconomic control measures. Whether or not the present rate of core inflation is actually serious is now a matter of semantics.

The Chinese people, who have been used to years of low inflation or even deflation, are understandably sensitive to even mild inflation. Urban dwellers are easily agitated over food price hikes, and these areas still have a large number of low-income people, notably migrant labourers.

But inflation can hurt even the members of the more affluent middle class, who now have to cope with negative interest rates. In fact, some have started to withdraw their savings to invest in the stock market and the property market. This is a sign of rising inflationary expectations, which will, in turn, fuel further inflation.

For a leadership known to have a strong fear of social instability, recent policy shifts targeting economic overheating and inflation are certainly rational and timely. What remains to be seen is the effectiveness of the policy package. Given Beijing’s strong vested interest in high growth, the strength of the government’s commitment to reducing overheating also remains to be seen.

Viewed from the demand side, inflation is a monetary phenomenon. Because of China’s persistent current and capital account surpluses, the People’s Bank of China has been unable to stem the rapid growth in money supply. This is despite the fact that the central bank raised interest rates six times and the reserve requirement ratio for commercial banks 10 times last year.

Because the yuan is grossly undervalued, the government’s ‘proactive, controllable, and gradual’ exchange rate reform is evidently not working. This is partly because of leakages in the capital control system and partly because of the increasing cost of sterilising large foreign capital inflows.

Last year, the yuan appreciated by about 6.9 per cent against the US dollar (compared with 3.4 per cent in 2006) and 1.8 per cent against the yen; but weakened by about 4.2 per cent against the euro. Overall, the yuan has risen about 13 per cent against the US dollar since July 2005, when the fixed exchange rate regime ended.

But the yuan’s lack of flexibility provides an opportunity for the influx of speculative capital, as well as a major source of excessive domestic liquidity. The central bank’s recent move to widen the yuan’s trading band gradually is not expected to be very effective. It could even invite more speculative capital inflows, given the big gap between the yuan’s nominal rate and effective exchange rate.

Underlying the yuan’s problems are China’s acute external and internal macroeconomic imbalances. These are, in turn, the cumulative results of the country’s high growth based on over-savings, over-investment and over-exports combined with under-consumption.

The Chinese government is not oblivious to these fundamental economic problems. In fact, the 11th Five-Year Programme is supposed to address such long-term issues. The central government has also emphasised the importance and urgency of more ‘balanced’ growth. However, the leadership, with its penchant for stability and the late Deng Xiaoping’s gradualist approach to reform, has become politically and institutionally incapable of undertaking bold reform measures.

This means that the government’s recent attempts to reduce overheating will only provide a breather. This year will not mark the end of China’s era of high growth. High growth (at around 10 per cent) will continue.

The fundamental problems associated with long-term high growth will also remain.

Professor John Wong is Research Director at the East Asia Institute.

Source: The Straits Times 18 Jan 08

US hurdles force Dubai state fund to look to China

Istithmar among such funds seeking out less developed markets to avoid excessive scrutiny DUBAI government investment agency Istithmar is considering investments in China, after being rebuffed in the United States, The Wall Street Journal reported yesterday.

Istithmar comes under the umbrella of state-owned Dubai World, which also includes Dubai Ports World (DP World), a container port handler that was forced by US lawmakers to sell American assets over security concerns.

‘Everyone is aware of the backlash DP World faced in the US, and as a result, sovereign wealth funds are looking towards non-developed markets to avoid such a backlash,’ Istithmar chief executive officer David Jackson was quoted as saying on the Journal’s website.

‘Countries such as China, where we recently opened an office, are very welcoming to sovereign wealth funds, so more are looking to invest there.’

Asian and Middle Eastern sovereign funds have made headlines recently by acquiring stakes in major financial groups such as Merrill Lynch and Citigroup in the US and Switzerland’s UBS.

Merrill and Citigroup have received billions of dollars in cash infusions from sovereign wealth funds, including those of Singapore. And they are in talks to get even more capital from outside investors – raising eyebrows in Washington, where lawmakers have more closely scrutinised foreign investments in recent years, the Journal said.

DP World was forced to sell its US assets after agreeing to buy British ports and ferries group P&O for US$6.8 billion (S$9.7 billion) last year. P&O operated six terminals in the US.

Dubai World, whose businesses include property developer Nakheel Group, has a multibillion-dollar global portfolio, including P&O, US retailer Barney’s, a stake in British bank Standard Chartered and about US$20 billion in real estate assets around the world outside of Dubai.

‘There is a lack of trust in sovereign wealth funds and better initiatives are needed to curb such suspicions,’ Mr Jackson said. ‘Countries such as the US, Britain and Germany are very reluctant to allow sovereign wealth funds in.’

 

Source: REUTERS (The Straits Times 18 Jan 08)

US recession fears send Asian markets into a tailspin

STI, Hang Seng suffer big drops; bank and tech stocks, energy and base metal prices also hit

STOCK markets across Asia plummeted yesterday amid fears that a gathering financial storm in the United States might tip the global economy into a recession.

Hong Kong was the worst hit as the Hang Seng Index plunged an eye-popping 5.4 per cent, reflecting mainland fears that US consumers will buy fewer China exports.

Yesterday’s slide means Singapore and Hong Kong are now officially ‘bear’ markets, ending an unbroken five-year bull run, along with Tokyo, which went bearish on Jan 7. It means these markets are down 20 per cent or more from peaks in the last year.

In the US, the Dow Jones Industrial Index is down 12 per cent from its October highs.

When Asian markets opened yesterday, they were spooked by a double whammy of bad news from the US.

First, an US$18.1 billion (S$25.8 billion) write-down by financial giant Citigroup over the sub-prime mortgage crisis, then a 2.2 per cent slump in the Dow.

Jumpy investors in Singapore epitomised deepening gloom around Asia as they sent the Straits Times Index (STI) tumbling about 3 per cent at the opening bell. The STI regained about half its losses – only to slide again as the dramatic scale of Hong Kong’s losses became clear.

In its fifth straight day of losses, the STI ended down 96.09 points, or 3.05 per cent, at 3,058.49, its lowest level in 10 months.

The index is now down 20.1 per cent from its peak of 3,831 points on Oct 11. It is down 11.75 per cent for the year, its worst two-week year opening since 2000, after the bursting of the dot.com bubble.

Across Asia, bank stocks were badly hit over fears that other major US banks might unveil massive losses.

Technology stocks also skidded after US tech giant Intel posted disappointing quarterly sales and a cautious outlook for this year.

This suggests a possible slowdown in the key personal computer market, which accounts for major business among Asian manufacturers.

Worries over the health of the US economy also took their toll on the ailing greenback and accelerated its decline against regional currencies. It fell by 1.5 yen to a 32-month low of 106.09 yen.

Even energy and base metal prices took a direct hit from the prospects of a global economic slowdown.

Crude oil fell by US$2.30 to US$91.90 a barrel yesterday, while analysts said major steel producers were cutting back on production targets by as much as 30 per cent.

It all boiled down to a very grim trading session for investors.

‘What is scary is the rapid pace in which investors’ sentiment had soured in the past week,’ said remisier Bernie Lee in Singapore.

In Singapore, banks such as DBS Group Holdings and United Overseas Bank each fell by about 3 per cent.

In Hong Kong, HSBC, which gets about one-third of its revenues from North America, plunged 4.5 per cent.

Investors are now clamouring for the US central bank to announce an emergency interest-rate cut ahead of its next meeting at the end of this month.

‘The Fed is beyond the curve. We are not talking about sub-prime, but an increasing spate of loan and creditcard defaults in the US,’ said Mr Kevin Scully, managing director of corporate finance house NRA Capital.

But for long-term investors, the sell-down presented a good opportunity to buy shares at attractive prices, noted Mr Elan Cohen, JP Morgan Private Bank’s senior portfolio manager.

 

Source: The Straits Times 17 Jan 08

MARKET TUMBLE: Bank stocks hit by US recession, sub-prime fears

Sell-off symptomatic of broader sell-down, slowing in S’pore’s economy: analysts

BANK stocks were clobbered yesterday on continuing concerns of a possible recession in the United States, subprime lending woes and a general slowing down of the Singapore economy.

This comes on the back of the news that Citigroup reported its biggest loss in its 196-year history due to US$18 billion worth of write-downs from the sub-prime crisis. The fall also came on a day when the broad market came under selling pressure.

Shares of DBS Bank, South-east Asia’s largest lender, were among the top losers yesterday, shedding 62 cents or 3.3 per cent to end at $18.20, the lowest in a year.

Shares of United Overseas Bank (UOB), Singapore’s second-largest bank by market capitalisation, also featured among the top losers. They ended yesterday 48 cents or 2.7 per cent lower at $17.08, their lowest price in a year.

OCBC Bank shares dropped seven cents or 0.9 per cent to end at $7.61, their lowest in 11 months.

This mirrors the fate of bank stocks in the Asian region, where Japanese bank shares fell on worries about the persisting US sub-prime crisis. Shares of Mizuho Financial Group and Mitsubishi UFJ – Japan’s largest bank – plummeted after suffering losses related to US sub-prime lending.

Shares of Bank of China, the country’s third-biggest bank, also dropped, as did those of Kookmin Bank, South Korea’s largest lender by market value.

In Australia, shares of Commonwealth Bank of Australia, Macquarie Group and National Australia Bank also declined.

Analysts said the sell-off in shares of Singapore banks was symptomatic of a broader sell-down in the markets, and a slowing in Singapore’s economy due to recession fears in the US.

‘Bank stocks are taking the lead from the US, which appears to be going into recession,’ said Matthew Wilson, a banking analyst at Morgan Stanley. ‘This will be bad for Singapore, given its small and open economy.’

David Lum, an analyst at the Daiwa Institute of Research, said a recession in the US would have a knock-on effect on Singapore bank stocks as these are the bellwether for the economy.

‘GDP growth has slowed in Singapore,’ he said. ‘If financial markets are weak, there will be a spillover effect on banks since they are closely tied to the economy.’

Mr Wilson noted that underlying pressure from sub-prime problems in the US remains and the prospect of collateralised debt obligation (CDO) write-downs still looms. ‘Financial stocks globally are under pressure.’

But Mr Lum was of the view that the prices of local bank stocks were hit by factors other than the US sub-prime lending crisis. ‘The sell-down should not be due to sub-prime problems,’ he said. ‘Singapore banks don’t need capital, and their capital ratio looks strong.’

Operationally too, banks are falling victim to low interest rates, possibly depressing their share prices. ‘The Singapore interbank offered rate (Sibor) is falling, and is likely to stay low as the US cuts its interest rates,’ Mr Wilson noted. ‘This is negative for banks’ net interest margins.’

He also said mortgage loan growth, although strong, generates low earnings for banks with narrow spreads.

The local banks are due to report full-year earnings next month. Analysts are expecting to see more write-downs relating to the CDO exposure. ‘There will be more write-downs though not as much as in the third quarter,’ said Pauline Lee, an analyst at Kim Eng Securities. ‘We won’t see as much write-downs at UOB and OCBC, compared to DBS.’

 

Source: Business Times 17 Jan 08

Goldman Sachs cuts Asia’s growth forecast

Expected US recession seen eroding demand for region’s exports

(SINGAPORE) Goldman Sachs Group has lowered its growth forecast for Asia on concern that an expected US recession will erode demand for the region’s exports.

Asia, excluding Japan, will expand 8.3 per cent this year, down from an earlier estimate of 8.6 per cent, Hong Kong-based economist Michael Buchanan said in a report. The investment bank last week cut its forecasts for US and Japan.

Goldman, which last year said Asian growth was decoupling from the US, is now forecasting that a US recession may hit shipments to Asia’s biggest export destination. South Korea and Taiwan have already warned that easing demand for semiconductors, mobile phones and computers portends weaker growth in 2008.

‘There could be a ‘tipping point’ at which the US slowdown has a more significant impact on Asia than before,’ Mr Buchanan wrote. ‘The further deterioration in the US economy comes as Japan is also teetering on the edge of recession.’

Morgan Stanley and Merrill Lynch have also forecast that the US would slip into recession this year for the first time since 2001 amid fallout from the subprime mortgage crisis.

Goldman is predicting a 50 per cent chance of a recession in Japan, the world’s second-largest economy. It lowered its growth forecasts for all 10 Asian economies that it covered in the report, including China and India.

‘We’ll probably see suppressed US import demand because of an anticipated slowdown in consumer spending,’ said Thomas Lam, an economist at United Overseas Bank Ltd, Singapore’s second-largest lender. ‘The contribution from export- led growth for Asia from the US will be impacted. Larger Asian economies will not be spared.’

East Asia’s exports are forecast to climb 15.2 per cent this year, after jumping 17.8 per cent in 2007, the World Bank said in its Global Economic Prospects 2008 report released last week.

The region is almost twice as reliant on exports as the rest of the world, with 60 per cent of shipments abroad ultimately destined for the US, Europe and Japan.

Still, the US may need to go through a larger-than- expected slowdown before Asia’s growth will reach a ‘tipping point’, Mr Buchanan said.

‘The greater acceptance of the decoupling of Asia from the US that has built up over the last year or so may mean the tipping point for Asian households, firms and markets is at a lower, more negative growth rate than normal,’ he said. ‘There may still be a growth rate at which Asia caves in and consumption and capex slow more appreciably, but it may now take more than just a very mild technical US recession.’

China will expand 10 per cent this year, from an earlier forecast of 10.3 per cent, Goldman predicted. The US buys about 19 per cent of China’s exports.

The company cut India’s growth estimate to 7.8 per cent from 8 per cent, and expects export growth to probably halve. The Reserve Bank of India may cut interest rates twice in 2008, once in April and again in the second half, it predicted.

In Singapore, where consumer price gains are at the highest in a quarter of a century, Goldman expects inflation to outweigh growth concerns. It is ‘even less confident’ of growth in Thailand as political uncertainty hampers policy decisions.

Taiwan remains the ‘most-exposed’ to a US slowdown, while a greater-than-expected decline in Philippine exports will ‘take its toll’ on the country’s economy, Goldman said.

‘Overall, these forecast reductions are meaningful but not disastrous,’ Mr Buchanan said. ‘The impact on currencies is in general likely to be contained, although equity markets could be in for more volatility.’

 

Source: Bloomberg (Business Times 15 Jan 08)

Markets brace for news of big losses by banks

Citigroup could write off US$24b, lay off 20,000 staff

(LONDON) Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis.

Citigroup could write off as much as US$24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its website in a report dated Sunday.

CNBC said the plans will be unveiled today when Citi, the largest US bank by assets, reports its fourth-quarter results.

Investment bank Merrill Lynch is just as troubled.

The Financial Times said yesterday that Merrill was seeking about US$4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the newspaper said, citing people familiar with the matter.

The New York Times on Friday said that Merrill was expected to suffer US$15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate, when it releases its results later this week.

FT also reported on Saturday that Citigroup was putting the final touches to its second big fund-raising, seeking up to US$14 billion from Chinese, Kuwaiti and other investors.

The US$200 billion Kuwait Investment Authority had no immediate comment yesterday on the reports that it may buy into the two damaged American banks.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill secured as much as US$7.5 billion by selling a stake to Temasek Holdings and New York based money manager Davis Selected Advisors.

The month before, Citi agreed to sell up to a 4.9 per cent stake to Abu Dhabi for the same amount.

As well as Merrill and Citi, other big names such as State Street and JP Morgan report results this week.

Wall Street analysts have turned increasingly wary over US financial results for the fourth quarter as well as the first two quarters of 2008, according to a weekly survey by Reuters Estimates yesterday.

The survey showed that analysts expect S&P 500 companies’ fourth-quarter earnings to fall 9.1 per cent from a year earlier.

That was gloomier than the 8.4 per cent decline forecast a week earlier, and the 11.5 per cent growth forecast in an Oct 1 survey.

The Federal Reserve was to auction US$30 billion later yesterday and the European Central Bank and Swiss National Bank will continue their unprecedented US dollar lending to banks as part of coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in.

Results of the latest ‘term auctions’, a plan agreed in December and one which has helped money market rates ease, will come today.

One to three-month Euribor interbank interest rates fell yesterday amid central banks’ moves to inject liquidity into markets.

Most analysts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

The Fed is forecast to use its other policy lever – interest rates – before the month is out. It is seen slashing rates by a half-point at its two-day meeting ending on Jan 30 after Fed chairman Ben Bernanke gave a downbeat assessment of the US economy last week and said the central bank was ready to take ’substantive additional action’.

Swiss banking giant UBS appealed to shareholders last week to back a capital injection by Singapore’s Temasek and a Middle East investor and warned it still could not predict how the sub-prime crisis would play out.

And shares in Northern Rock fell as much as 7 per cent early yesterday on fresh concerns that the bank is facing imminent nationalisation. Northern Rock is Britain’s biggest casualty of the credit crunch and has borrowed around 26 billion pounds (S$72.8 billion) from the Bank of England since it requested emergency funds in September.

 

Source: Reuters (Business Times 15 Jan 08)

China increases penalties for price-fixing to fight inflation

Firms that hoard goods can be fined up to one million yuan: Cabinet

(BEIJING) China’s Cabinet yesterday sharply increased penalties for price-fixing, expanding an anti-inflation campaign that has failed to cool a surge in politically sensitive food costs.

Food costs soared by 18.2 per cent in November, pushing the overall monthly inflation rate to 6.9 per cent, its highest level in 11 years.

Companies that hoard goods or try to fix prices can be fined up to one million yuan (S$197,055), up to 10 times the previous penalty, the Cabinet said on its Website.

The increased penalties are meant to ’strike (at) the activities of driving up prices through hoarding or cheating’, the government’s Xinhua news agency said.

In another development, official sources told Reuters that China’s consumer price inflation in December eased to 6.5 per cent from a year earlier, off an 11-year high of 6.9 per cent in November, official sources said.

The consumer price index for all of 2007 probably rose 4.8 per cent compared with a 1.5 per cent increase in 2006, the sources said.

If confirmed when official data are released next week, the December drop would provide some relief to policy makers in Beijing, who have voiced growing alarm about inflationary trends.

But Zhou Xiaochuan, central bank governor, has long expressed optimism that December’s inflation data would show a marked moderation because of a high base effect from a year earlier.

A pace of 6.5 per cent would match October and August as the second fastest on the year.

China International Capital Corp, a top China-based investment bank, raised its forecast for 2008 full-year inflation to 5-5.5 per cent, a full percentage point higher than its previous range.

Ha Jiming, its chief economist, said global oil and grain prices and domestic pork prices would provide most pressure, while China’s new labour law would also push production costs up.

Mr Ha suggested that Beijing lean towards credit tightening, yuan appreciation and agricultural subsidies to ease inflation.

The government’s intervention, announced last week, to hold down prices for basic necessities, potentially including cooking oil and rice, was not a long-term solution, he said.

‘Price controls will not alter people’s expectations on inflation, and negative real interest rates will continue to exist,’ Mr Ha wrote in a note to clients.

Vice-Finance Minister Li Yong said on Sunday that China would have a tough time in 2008 battling inflation.

Strong rumours of a 6.5 per cent December reading have been circulating for several days in China’s financial markets which, nevertheless, remain unconvinced that inflation has peaked.

In August, the government accused Chinese instant noodle makers of pushing up food costs by illegally colluding to raise prices by up to 40 per cent. It has given no indication whether it has evidence of illegal behaviour by other producers.

The price surge, which began in mid-2007, has so far been limited to food and is blamed on shortages of pork and grain. The government raised gasoline and diesel prices in November to curb rising demand, but said that should add only 0.05 percentage points to monthly inflation.

The surge in food prices has been especially painful for China’s poor majority, who spend up to half their incomes on food. And the government worries that sustained high inflation for food could start to push up prices in other parts of the economy.

Higher food costs will hit hard as China prepares for the Chinese New Year in early February, an important family holiday when households stock up on groceries to throw banquets.

Suppliers of meat, eggs and other food have been ordered to report price increases over 5 per cent to the government.

In September, the government froze prices of cooking oil and some other basic food items that still are state-set.

But prices for meat, vegetables, noodles and other processed food are dictated by the market and have risen sharply.

Beijing also has tried to increase food supplies by raising subsidies to pig farmers and imposing curbs on grain exports.

But Premier Wen Jiabao warned last week that with global prices for crude oil, grain and other commodities rising, pressure for Chinese prices to rise ‘is still great’.

Beijing has raised interest rates repeatedly to curb a boom in construction and investment that regulators worry could lead to financial problems if borrowers fail to repay loans. Economists say the inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP, Reuters (Business Times 15 Jan 08)

Big China firms’ bonds better: ING

(HONG KONG) Investors in Chinese property bonds should adjust their portfolios in favour of larger, diversified firms and cut their exposure to smaller developers which are focused on fewer cities, ING Bank said in a report yesterday.

The bank advised bond investors to remain invested in bigger firms like Shimao Property Holdings, Agile Property Holdings and Hopson Development Holdings, and said it expected less bond issuance from large developers this year.

It also recommended that investors pare positions in bonds issued by Greentown China Holdings and Shanghai Real Estate due in 2013.

Tightening credit conditions in China, growing risk aversion in global markets, a property-sector slowdown in some Chinese cities and concerns about fresh bond supplies have caused a widening of credit spreads in the Chinese property sector recently, the report said.

‘Despite our long term positive outlook on the sector, spreads are likely to stay wide in the near term due to soft market sentiment,’ it said.

‘However, we do not see any immediate credit-specific problems, especially for large developers.’

Bonds issued by firms with higher ratings, large land banks and diversified geographic exposure were worth buying because of their strong sales and resilience to property-sector downturns in selected cities, it said.

ING analyst Steve Chow said that spreads on Shimao’s bonds maturing in 2016 and on Lai Fung Holdings’s bonds maturing in 2014 had widened less than the spreads on other Chinese property bonds due to their respective credit strengths.

He expects more bond offerings from Chinese property companies this year, with small and medium developers bearing a low BB and B credit rating seen as the primary source.

Firms that had initial public offers last year are also potential bond issuers in 2008, he said.

Large firms, with the exception of Country Garden Holdings Co and Agile Property, are likely to make few issuances in 2008 because they are either highly geared or have prudent expansion strategies, he said.

 

Source: Reuters (Business Times 15 Jan 08)

EU seeking partnership with China in Africa

Proposal comes as Chinese presence is eroding Europe’s influence in region

LONDON – THE European Union has announced that it is seeking Chinese cooperation in Africa.

EU Development Commissioner Louis Michel has pledged to present Beijing with an ‘African partnership’ when he visits China in March.

But Mr Michel, a former Belgian foreign minister known for his promotion of human rights, risks running afoul of Europe’s non-governmental organisations, most of which view China as a hindrance in Africa.

And, judging by the initial reactions from Beijing, the Chinese are not impressed by his concept either.

European governments are used to dealing with Africa on their own. After all, the overwhelming majority of African states are former European colonies.

Commercial links remain strong. In 2006 – the last year for which complete figures are available – Europe was still Africa’s top economic partner, accounting for S$425 billion worth of trade.

But the Europeans have watched with incomprehension and subsequent fury as China has made deep inroads into Africa.

The Chinese interest was initially in oil, gas and other raw materials. However, it has evolved into a far broader political and economic engagement that, while transforming the African continent, is also marginalising the Europeans.

According to Chris Alden, the author of a new book on Beijing’s African involvement, the Chinese are attractive to local governments because they finance infrastructure projects at a speed that the Europeans simply cannot match.

‘They have a very light touch when it comes to bureaucracy, while the EU is the master of bureaucracy,’ he points out.

And, while the Europeans anguish over the human rights implications of their investments, ‘China does not suffer from such concerns’, he adds.

Since the start of this decade, China’s trade with the world’s poorest continent has risen from virtually nothing to a total of S$71 billion in 2006. Beijing’s Export-Import Bank recently earmarked another S$30 billion specifically for African investments.

The Europeans are feeling the pinch from all directions. Their companies, which used to mine most of Africa’s raw materials, are now regularly trounced by the Chinese.

And, more importantly, African leaders – who now have China for financial and political support – are rejecting Europe’s traditional lectures about good governance and human rights.

Portugal, itself a former African colonial power, tried to reassert Europe’s voice by holding an Africa-EU summit last December. It was a total fiasco: African leaders refused to sign a new trade agreement which the EU offered, mainly because it imposed a demand to open local markets.

The Europeans have now decided that, if they cannot beat the Chinese, they had better join them. And the EU thinks it has something to offer.

Mr Michel believes that if China does not buy into Europe’s agenda, which concentrates on improving African governance, sooner or later the Chinese will repeat Europe’s old colonial experience: African governments will not repay their loans, and may repudiate their raw materials deals.

So, the EU leader hopes that, by making China an offer of partnership, the two trading blocks could agree on a common African agenda.

Unfortunately for Mr Michel, the Chinese are not interested.

‘We are happy to discuss African questions,’ said Mr Jiang Yu, a spokesman for China’s Foreign Ministry. But, he added, this can only take place by ‘respecting and listening to the opinions of the Africans’.

The EU may well be right in its prediction that China will ultimately be disappointed in Africa.

Yet the Chinese remain determined to find this out for themselves, without Europe’s help.

 

Source: The Straits Times 15 Jan 08

Slowing Europe may be bigger concern for S’pore, region

FOR Singapore and other Asian economies that are heavily dependent on exports, a decelerating Europe may be a cause for greater concern than a slowdown in the United States.

While the US economy will slow down in the first half of the year, it is unlikely to sink into a recession, said Deutsche Bank chief Asia economist Michael Spencer.

‘We are more concerned about growth slowing down in Europe than in the US, partly because the ECB has been persisting with a tight monetary policy,’ he said, referring to the European Central Bank (ECB). ‘Europe, we think, is under more distress now than the US.’

Asia’s red-hot economies are expected to slow this year as growing concerns of a US recession dominate the horizon.

Financial turmoil and a flagging housing market are expected to plague the world’s largest economy, which has also been the key growth driver of Asian exports.

Dr Spencer said that while US growth will moderate in the first half of the year, the economy should find its feet in the later part of the year.

In fact, the bank is predicting US growth to hit 2.5 per cent this year, up from last year’s 2.3 per cent.

He said that while the housing recession will deepen and consumers will finally trim their spending, the slowdown will not be that serious since wage growth has been sustained and interest rates are still relatively low.

‘We’ve never had a recession induced by housing alone,’ he said, noting that previous US recessions had been accompanied by oil price spikes, runaway inflation and tight monetary policy.

As for the still-brewing sub- prime mortgage debacle, US banks are sufficiently well-capitalised to stomach the huge write-downs, unlike Asian banks during the 1997 crisis.

It is a less reassuring story in Europe, where the economy is weaker than in the US, said Dr Spencer.

‘Industrial production and retail sales both probably contracted in the fourth quarter of last year when the US grew 2 per cent.’

And with inflation running higher in Europe than in the US, the ECB will be less keen to cut rates until actual economic contractions are recorded, he said.

 

Source: The Straits Times 15 Jan 08

50% chance of recession in Japan: Goldman

View contrasts with upbeat reports from World Bank, OECD on major economies

IN TOKYO

JAPAN’S economy could follow that of the US into recession this year, investment bank Goldman Sachs warned yesterday, underlining a growing gulf between analysts in the private and public sectors over prospects for the global economy in 2008.

A senior Bank of Japan official, meanwhile, acknowledged that Japan’s positive economic cycle is weakening, and that risks to global growth are also increasing.

Goldman Sachs advised clients that there is now an at least 50 per cent chance that Japan’s economy will slip into recession in 2008, meaning that growth would turn negative for at least two consecutive quarters. A day earlier, the leading US investment bank had predicted that America could suffer a recession this year, because of weaker consumer spending and a tumbling housing market.

These and other bearish views expressed by leading investment houses contrast with upbeat recent reports from the World Bank and OECD arguing that major economies can avoid recession in the wake of the sub-prime mortgage crisis.

A similarly optimistic note was sounded yesterday by the Institute of International Finance (IIF) in Washington, which said that recession should be avoidable in the US and Japan.

‘A difficult environment featuring continual credit market tensions and highly elevated oil prices should contribute to a slowdown in the global economy this year,’ the IIF suggested. ‘However, a recession in the United States is likely to be avoided, while emerging market growth is seen as remaining strong,’ said the institute, which speaks on behalf of 370 leading financial institutions around the world.

Goldman Sachs, meanwhile, cut its forecast for growth in the Japanese economy this year to just 1 per cent overall, taking into account an expected shrinkage in the US economy during the second and third quarters of this year.

Goldman also said that it expects the Bank of Japan to keep interest rates on hold throughout this year and into 2009.

BOJ deputy governor Toshiro Muto declined to say when the bank will move on interest rates but he rejected speculation that the BOJ might be forced to lower its short-term policy lending rate (currently at 0.5 per cent) to fend off possible recession. ‘The positive cycle of output, income and expenditures is weakening temporarily,’ he said ‘But I don’t think the mechanism itself will break,’ he added.

The IIF suggested in its report that Japan’s economy will slow to 1.3 per cent real growth this year from an estimated 1.9 per cent in 2007. It claimed that the Japanese economy is supported by ‘healthy levels of business confidence’, a strong labour market and a banking system that is ‘relatively immune from the turmoil affecting in the United States and Europe. The institute forecast GDP growth of 2.3 per cent this year for the US and 2.2 per cent for the euro area.

For emerging markets, the IIF said that ‘the main factor pushing growth slightly lower in 2008 is the effect of tighter monetary policies put in place by many emerging market central banks through 2007.

‘For example, monetary tightening in China is likely to contribute to a slowdown in growth to 10.5 per cent from 11.5 per cent in 2007. Elsewhere in Asia, growth in India should be stable, and an acceleration is in prospect in Thailand and the Philippines.’

The IIF said that the volume of net private capital flows to emerging markets in 2007 reached a record of US$681 billion, compared to US$560 billion in 2006.

This reflects ’sustained momentum in flows to emerging markets, despite the turmoil in mature credit markets in the second half of the year. The flow of equity capital remains robust, and diminution of commercial bank lending to emerging markets looks to have been remarkably limited to date.’

 

Source: Business Times 11 Jan 08

Japan only has itself to blame for its economy

However it is hardly alone in shooting its economy in the foot

By WILLIAM PESEK JR

AS ECONOMISTS buzz about a Japanese recession, officials in Tokyo are racing to assign blame. An unfolding global slowdown is the most mentioned excuse. Fallout from the US sub-prime debacle is a close second. Surging oil prices also are being held up as an ominous force imperilling Japanese prosperity.

Yet if the second-biggest economy contracts this year, it will have only itself to blame. The list of self-inflicted wounds includes clumsy policies that over the last 12 months slammed Japan’s construction and consumer-lending industries and a pension scandal that dented household confidence.

Those missteps, as damaging as they were, pale in comparison with the biggest failing: Complacency. Officials in Tokyo have done little to make this recovery self-reinforcing, leaving Japan highly vulnerable to slowing global growth.

Japan is hardly alone in shooting its economy in the foot. Ten years after the Asian crisis, for example, the region remains too reliant on exports for growth. From Seoul to Bangkok, Asia is awash in instances of policy failures that may imperil the region’s ability to withstand a global recession.

Take the generals who ousted Thai prime minister Thaksin Shinawatra in a September 2006 coup and then spooked investors with unsteady policies. In South Korea, attempts to restrain surging property prices and redistribute national wealth drove away foreign investment.

Malaysia isn’t using today’s good times to tweak a 37-year-old affirmative action policy that gives preferential treatment to ethnic Malays and hobbles the economy’s competitiveness. The Philippines isn’t doing enough to attack corruption, Indonesia isn’t upgrading infrastructure and Taiwan’s leaders are mired in political squabbling.

China put off slowing its economy to avoid overheating and has been slow to address a worsening pollution problem. India hasn’t reduced its staggering bureaucracy or altered its restrictive labour laws.

These are but a few examples of how Asia hasn’t used strong growth in recent years to remove the headwinds holding back living standards. Policymakers will regret not acting more boldly as the US loses speed.

The US doesn’t get a pass from responsibility. A decade ago, it lectured Asia on strengthening financial systems and becoming more transparent. Troubles in credit markets exposed cracks in American-style capitalism, sending contagion Asia’s way.

Yet for all its efforts to shore up its economies, Asia hasn’t prepared for this day. While the region has come a long way since the late 1990s, it has much further to go.

Japan’s woes will come as a disappointment to investors expecting big things from the longest post-war recovery.

While global growth gets most of the credit, the upgrades championed by Junichiro Koizumi, prime minister from 2001-2006, helped turn things around. As growth returned, though, reform fatigue set in and Mr Koizumi’s drive to get the government out of the economy and boost Japan’s competitiveness lost momentum.

The one-year tenure of Mr Koizumi’s successor, Shinzo Abe, accelerated the return of Japan Inc. By the time Mr Abe resigned amid scandals and general incompetence, the old practice of cross-shareholdings between companies and takeover defences were back in vogue.

Many of the needed reforms have been sidelined, from boosting productivity and importing foreign labour to increasing entrepreneurship. The same is true of efforts to scrap Japan’s dependence on near-zero interest rates, massive public borrowing and a weak currency. Current Prime Minister Yasuo Fukuda is too preoccupied with halting the drop in the ruling-Liberal Democratic Party’s popularity to tend to the economy.

A return to the crisis days of the late 1990s is unlikely. Japan’s banking system is stable and companies have done considerable restructuring. Still, Japan has yet to defeat deflation at a time when options are limited.

‘Unlike the three major business-cycle downturns that preceded this one, neither fiscal nor monetary policy are available to soften or shorten the decline,’ says Carl Weinberg, chief economist at High Frequency Economics Ltd in Valhalla, New York.

Crude oil prices near US$100 per barrel pose an additional challenge. ‘The nature of the latest threat to the cycle is particularly problematic for the Bank of Japan (BOJ), as it faces the risk of input cost-driven inflation, while real demand is under downward pressure,’ says Richard Jerram, chief Japan economist at Macquarie Securities Ltd in Tokyo.

Japan failed to use five years of decent growth to rein in a public debt the government says will reach 147 per cent of gross domestic product by March 2009. BOJ governor Toshihiro Fukui failed to normalise monetary policy.

Japan’s benchmark lending rate is 0.5 per cent, by far the lowest among major economies.

That might be fine if consumers were responding to growth as hoped. The key to making Japan’s recovery selfreinforcing is getting households to spend more.

Elected officials are offering households little confidence that their economy won’t be eclipsed by China and India in the decades ahead. Nor are workers convinced that companies will share more of their profits. Wages slid 0.2 per cent in October from a year earlier.

Such failings will become more obvious if the storm on Asia’s periphery closes in. That would have Asia wishing it had fixed its leaky roof when the sun was shining.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own

 

Source: Business Times 10 Jan 08

Developing nations to lift world economy amid US slowdown

They will be the biggest drivers of global growth as pace slows to 3.3% this year: World Bank

DEVELOPING nations will be key in helping the global economy mitigate the drag from a slowing United States.

With their domestic economies coming into their own, poor countries will be the world’s biggest growth driver this year, the World Bank said in a report yesterday.

And Singapore is especially well-poised to take advantage of this as it is located amid the hottest of the world’s emerging economies.

‘I do believe that there is an impact from whatever happens in the US economy on the developing regions,’ World Bank lead economist Hans Timmer said at a press conference to present the bank’s outlook for the world economy.

‘But the result is not that the world economy will be on its knees.’

The bank is predicting global economic growth will moderate to 3.3 per cent this year, due mainly to a slowdown in the US, the world’s biggest economy.

The US, mired in a severe housing market downturn that has caused much financial turmoil worldwide, is widely expected to decelerate further this year.

While the World Bank has estimated that the US should manage a modest 1.9 per cent expansion this year, fears of a recession appear to be rising, prompted by recent economic data.

‘We can certainly smell a US recession although we can’t taste one yet,’ said United Overseas Bank economist Thomas Lam.

Against this ominous backdrop, developing economies are emerging as a bright spot for the year. They are expected to grow 7.1 per cent this year, with East Asia’s growth stars clocking in at an average of 9.7 per cent.

‘Singapore benefits from its location in Asia, which has shown the strongest dynamism in the world,’ said Mr Timmers, who cited the region’s red-hot economies of China and Vietnam. He pointed out that developing nations have become much more resilient to external demand shocks in the past few years.

The US housing slowdown, for instance, began two years ago and has been hurting US imports of goods made in poorer countries.

But that has not derailed the developing world from its growth path as its robust domestic economies – bolstered by better economic policies, open borders and stronger supply-side structures – have been picking up the slack.

Many emerging economies have also been largely unscathed by financial problems caused by the US subprime crisis as their direct exposure to the crisis has been limited.

‘With that resilience, with their strong performance, developing countries are now mitigating the slowdown that is occurring in the US,’ said Mr Timmers.

He noted that the developing economies together equal the US economy in size.

‘But they are growing more than three times as fast. That means their contribution to global demand is more than three times as important as the contribution of the United States.’

Still, a sharp and drastic slowdown in the US remains a key risk to the developing world and the global economy.

Also, an overreaction by policymakers might result in bigger problems down the road.

The World bank warned that if central banks overstimulate the economy with over-aggressive rate cuts, asset bubbles could be created.

‘Commodity markets could tighten further, inflationary pressures would mount and financial imbalances would increase rather than recede.

‘Such a scenario could sow the seeds of a much sharper downturn in the medium term.’

 

Source: The Straits Times 10 Jan 08

When US sneezes, Asia now does not catch cold

THE axiom ‘when the US sneezes, Asia catches cold’ does not hold true any more.

Asian economies have become less dependent on the United States market, though not completely immune to its changes.

That, at least, was the consensus at the 6th Annual Business Outlook Forum, jointly organised by the Singapore Chinese Chamber of Commerce & Industry and The Business Times on Monday.

Benjamin Yeo, executive director and head of UBS Wealth Management Research, highlighted the growing importance of emerging markets like China against the declining export markets of the US.

Mr Yeo said: ‘As far as Asian growth is concerned, we remain cautiously optimistic.’

He attributed his optimism to several factors including the increase in export diversification away from the US in Asia.

Currency strategist Idris Nizam analysed the possible directions of the US dollar versus the Singapore dollar and other Asian currencies like the Chinese yuan and the Malaysian ringgit.

Mr Nizam, director of foreign exchange research at UBS AG, said: ‘In my view, global growth has peaked.’

He does not expect a recession in the US, but slower growth is likely.

Asian Property Equities fund manager Frankie Lee discussed the structural growth of the region and the fundamentals of domestic property.

He said that it is not too late to invest in Asia-Pacific property as valuation becomes favourable.

In fact, the timing now is as good as at any point in the past 18 months, Mr Lee said.

Vikram Khanna, associate editor of The Business Times, chaired the panel discussion that followed the analysts’ speeches.

 

Source: Business Times 9 Jan 08

Inflation and trade surplus driving yuan: Central bank

BASEL (SWITZERLAND) – CHINESE central bank governor Zhou Xiaochuan has said the trade surplus and faster inflation are driving the yuan’s appreciation.

The currency’s gains reflect ‘economic data’, Mr Zhou told reporters yesterday in Basel, where he was meeting Group of 10 central bankers.

The surplus, rising prices and Chinese institutions selling currency reserves ‘may be major factors to the formulation of the exchange rate’, he said.

The yuan has gained about 14 per cent against the US dollar since the end of a peg in July 2005. A stronger Chinese currency would help cool inflation by lowering import costs and slowing money inflows by pushing up export prices.

China’s trade surplus surged 52 per cent in the first 11 months of last year from a year earlier to US$238 billion (S$341 billion).

China is trying to prevent cash from the trade surplus from fanning inflation, asset prices and fixed-asset investment. The People’s Bank of China will keep monetary policy tight this year, Mr Zhou said last month.

The currency has reached 7.263 per US dollar, the strongest since the peg was abandoned.

Standard Chartered this month raised forecasts for the yuan. The currency may gain 9 per cent against the dollar this year and 7 per cent next year, economist Stephen Green wrote in a research report.

‘The primary reason for our change of view is domestic inflation and the increasing disquiet it is causing senior policymakers,’ he said. ‘Beijing is becoming ever more concerned about domestic inflation.’

China consumer prices surged 6.9 per cent in November from a year earlier, the fastest pace since December 1996, as food and fuel costs jumped. Producer prices rose 4.6 per cent, the biggest gain in more than two years.

A record 48 per cent of 20,000 households said prices were ‘too high and difficult to accept’, a quarterly survey released by the central bank last month showed.

About 65 per cent of interviewees expected prices to keep rising this year.

Source: BLOOMBERG NEWS (The Straits Times 8 Jan 08)

China’s growth, inflation expected to slow

SHANGHAI – CHINA’S economic growth and consumer price inflation are expected to slow moderately this year as cooling policies take effect and food supplies increase, a major government research institute forecast yesterday.

Gross domestic product growth is projected to ease to 10.8 per cent this year from an estimated 11.4 per cent last year, the State Information Centre said in a report published by the official Shanghai Securities News.

The centre, which is part of the National Development and Reform Commission, the top economic planning agency, predicted that consumer price inflation would drop to about 4.5 per cent for all of this year from an estimated 4.7 per cent in 2007.

The third and fourth quarters of last year saw the peak of food price inflation, and food prices should now rise more slowly as agricultural investment and production pick up, the centre said.

However, producer price inflation – prices at factory gates – is actually expected to rise, to 3.5 per cent from 2.9 per cent.

The centre cited rising prices of energy, raw materials and labour, and said that overall, industrial profits would trend downwards this year because of such pressures.

Growth in China’s trade surplus will slow this year, given overseas protectionism, uncertainty about the strength of the United States economy and policy steps taken by Beijing such as the abolition of export tax rebates and faster appreciation of the yuan, the centre forecast.

It estimated the trade surplus at US$328.4 billion (S$472.3 billion) this year, up 22.5 per cent from US$268 billion in 2007. That would represent a slower rise than last year’s estimated 51 per cent leap of the surplus.

China’s export growth is expected to slow to 19 per cent from 25.7 per cent in 2007, helping to slow growth in urban fixed asset investment to 24 per cent from 26.3 per cent, the centre said.

Investment in the real estate sector is forecast to ease to 25 per cent growth from 29.5 per cent.

The centre’s major forecasts were broadly in line with previous statements by other government officials and agencies.

Source: REUTERS (The Straits Times 3 Jan 08)

Bombs, security fears mar revelry as world greets 2008

(NEW YORK) Millions staged midnight parties at iconic landmarks around the world to ring in 2008, but bomb attacks and security fears quickly darkened New Year festivities in places.

In New York, hundreds of thousands of revellers crowded the fabled Times Square, braving cold temperatures and stringent security measures to see Mayor Michael Bloomberg release the New Year’s Eve ball on its 100th lowering, with a dazzling display of new environmentally-friendly lights.

But it was Sydney that got the global party going as more than a million people lined the harbour for fireworks. The giant steel archway of the Sydney Harbour Bridge was again the centrepiece of the traditional display in Australia’s main city, with a giant neon hourglass illustrating the theme of time passing.

An estimated 700,000 people were out on the damp London streets and crammed on riverbanks to watch the 10-minute fireworks display on the Thames, which focused on the giant London Eye observation wheel, police said.

However, bombs planted by suspected separatist rebels at discos and other entertainment centres rocked Thailand’s troubled south as revelry was at its peak. In Pakistan’s biggest city, Karachi, police stopped thousands from attending a traditional gathering on a beach overlooking the Arabian Sea amid security fears after the assassination of Opposition leader Benazir Bhutto.

Belgian authorities cancelled a traditional fireworks show in Brussels as the country went on maximum alert over possible terror threats. French authorities put 13,000 police on the streets of Paris and its troubled suburbs to deter any repeat of riots last month. But an estimated 400,000 French and foreign visitors still turned the Champs Elysees into a mass of car-honking festivities. Even more people – around one million according to police – packed streets around the Brandenburg Gate in what German media billed as the world’s biggest New Year’s party.

In China – set to host the 2008 Olympics in Beijing – President Hu Jintao called for world peace and development in his New Year address. ‘We sincerely hope people of all nations live under the same blue sky freely, equally, harmoniously and happily, and enjoy the achievements in peace and development of the humankind,’ he said. Thousands in Hong Kong ignored unusually low temperatures to see the fireworks in Victoria Harbour. In the northern Chinese city of Harbin, tourists strolled through a display of ice structures and some toasted the New Year in a bar made from ice blocks.

As tens of thousands of people flocked to Moscow’s Red Square, Russia’s President Vladimir Putin used his final New Year address as president to congratulate Russians on a ‘national renaissance’ driven by ‘colossal resources’, in a pre-recorded broadcast.

In Iraq, crowds surged into the streets of strife-torn Baghdad, setting off firecrackers and firing weapons and dancing in a rare moment of freedom from the daily violence that has recently eased.

 

Source: AFP (Busines Times 2 Jan 08)

Minister sees Japan’s economy continuing recovery next year

IN JAPAN

JAPAN’S economy is likely to continue growing next year, Minister for Economic and Fiscal Policy Hiroko Ota suggested yesterday, dismissing growing fears that it could plunge into recession as a result of an expected global slowdown in 2008. But she acknowledged a number of longer-term challenges to the continued growth of the economy.

Ms Ota spoke of an eventual ‘crisis’ facing the economy, because of lagging productivity and an ageing population, but added that the economic recovery that began in 2002 should continue next year. Prime Minister Yasuo Fukuda’s government will come up with a new growth strategy next month, she said. Polls published yesterday showed, however, that voter support for Mr Fukuda’s government has plunged to 35 per cent, within months of its coming into office to replace the short-lived administration of former prime minister Shinzo Abe. The prospect of a general election next month has increased, analysts say, adding political uncertainty to the country’s economic woes.

Meanwhile, further gloom enveloped the Tokyo stock market where the benchmark Nikkei 225 average tumbled for a fourth consecutive trading day, shedding 1.7 per cent to end at 15, 249.79. Sentiment was hit by official data showing that a diffusion index of economic indicators for October had been revised downwards and that wages also declined in that month.

Economic growth in Japan fell to just 0.4 per cent in the third quarter, and many analysts fear that it could soon turn negative given that only exports are providing impetus to growth now. With the prospect of a significant downturn in the US economy, on the heels of the sub-prime mortgage crisis, Japan cannot rely on continuing strong external demand, they say.

Speaking at the Foreign Correspondents Club of Japan, Ms Ota said: ‘I believe the economy will continue to recover in 2008,’ citing an expected pick-up in housing activity following a crash in construction activity this year because of tighter building regulations. But she declined to specify what policy tools are available to fight recession, given the country’s strained fiscal situation and already very loose monetary policy.

The government is focusing on longer-term challenges, including low productivity in Japan’s service industries and in agriculture, she said. The new official ‘growth strategy’ due to be published next month will address these issue, Ms Ota promised. A new strategy for raising the contribution of financial services to gross domestic product is also due to be unveiled soon, she added.

 

Source: Business Times 18 Dec 07

Asia’s growth may slow in ‘08

Emerging problems in major economies cloud outlook

(SHANGHAI, China) Asia’s dynamic economic growth is expected to slow modestly next year as its biggest economies grapple with emerging problems, from inflation in China to appreciating currencies in India and Japan.

The expected slowdown in the US economy – a vital export market – and higher oil prices also cloud Asia’s outlook.

In China, worries persist that the economy is overheating. Inflation hit a peak of 6.5 per cent this year, while real estate and stock prices also have soared, posing a challenge to policymakers whose options are limited by China’s continued controls on the currency and capital markets.

‘It’s a delicate balance,’ said Nick Lardy of the Peterson Institute, a Washington think-tank.

‘They want growth, but they don’t want inflation. At the same time they might cut investment too much,’ he added.

Still, despite the uncertainties, China looks set for yet another year of double-digit expansion, with both the World Bank and Asian Development Bank forecasting gross domestic product growth at 10.8 per cent in 2008, down from the 11 per cent-plus growth anticipated for this year.

In India, a record surge in foreign investment has resulted in a sharp appreciation of the rupee, which is already hurting exports, especially earnings of the highly profitable outsourcing industry.

The country’s central bank has repeatedly tightened its monetary policy and somewhat succeeded in reversing a spike in inflation earlier this year.

But its measures have sapped the momentum of growth as new investments and sales in areas such as automobiles have slowed with higher lending rates.

Analysts expect the Indian economy to grow 9 per cent this year for the fourth straight year and to slow slightly to between 8 per cent and 8.5 per cent in 2008.

In Japan, Asia’s biggest economy, the major concerns are about a slowdown in US growth and a stronger yen, which erodes the foreign-earned income of the country’s exporters.

Direct exposure of Japanese financial organisations to US mortgage market troubles is expected to be limited.

But uncertainty over a possible fallout has weighed on Tokyo share prices and dampened Japanese investor sentiment.

The International Monetary Fund is forecasting that Japan will grow 1.7 per cent in 2008, down from an estimated 2.0 per cent this year.

 

Source: AP (Business Times 18 Dec 07)

Global economy facing threat of stagflation

Growth may slow to 4-year low and inflation could hit 10-year high

WASHINGTON – THE world economy is facing the risk of stagflation – the double whammy of suffering both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase.

The worst United States housing slump in 16 years, coupled with a tightening of credit by banks, have brought the world’s largest economy ‘close to stall speed’, according to former US Federal Reserve chairman Alan Greenspan.

At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

‘What lies ahead is a period of stagflation – slow or no growth combined with rising inflation – in the advanced economies,’ says Morgan Stanley co-chief global economist Joachim Fels.

Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a tenfold increase in oil prices drove both unemployment and inflation above 10 per cent.

Mr Feldstein, who heads the national bureau that serves as the arbiter of when US recessions begin and end, said the combination of a stalled economy and rising inflation could be seen as a form of stagflation.

‘It depends on how you want to define it,’ he said. ‘If you say an inflation rate of 3.5 per cent and a recession is stagflation, then we could have stagflation.’

Mr David Hensley, director of global economic coordination at JPMorgan, sees global growth of 2.4 per cent this quarter and next, and inflation at 3.5 per cent.

That is a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 per cent in 1982 while inflation ran at an annual rate of 13.7 per cent, according to data compiled by the International Monetary Fund.

Even so, no less an authority than Mr Greenspan himself expressed concerns.

Speaking on ABC’s This Week programme aired last Sunday, he said a period of ‘remarkable disinflation’ is ending.

‘We are beginning to get not stagflation, but the early symptoms of it,’ he said.

The situation poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first. How they respond will go a long way in determining which danger proves to be bigger: a slumping global economy or rising prices worldwide.

For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose last month at the fastest pace in more than two years.

As of last Friday, investors put a 74 per cent probability on another quarter percentage-point cut in the Fed’s benchmark overnight rate next month, down from 100 per cent the day before.

If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates.

Yet, with growth slowing in the US and Europe, central banks remain under pressure to cut rates

 

Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)

IMF expects to lower global growth outlook

(ZURICH) The International Monetary Fund will lower its growth outlook as the continued credit crisis hurts the US and European economies, while global imbalances also weigh on growth, its top economist was quoted as saying.

‘Given this background, the numbers will indeed be weaker than in our latest World Economic Outlook,’ IMF chief economist Simon Johnson told Switzerland’s Finanz und Wirtschaft business newspaper in an interview on Saturday.

The IMF already lowered the forecasts from its July World Economic Outlook in October. But the numbers would in all likelihood have to be revised down again at the Fund’s next update in January, when it gives a preview of its April official forecasts. ‘We will not be able to stick to 1.9 per cent 2008 gross domestic product growth for the United States, nor to 2.1 per cent for Europe,’ Mr Johnson said. ‘By how much we will have to lower our GDP forecasts, we will know in January.’

The Fund already warned in November that the global economic growth outlook had dimmed, because of a troublesome mix of tighter credit terms and rising energy prices. The US dollar remained overvalued despite its continued drop since 2002, Mr Johnson said, which could be an obstacle for the US trade deficit to gradually diminish. Too high oil prices and the undervalued Chinese currency boosting exports in US trading partners formed the other side of the trade imbalance equation, he added.

The IMF did not have a foreign exchange target in mind for the greenback, but it should fall even further despite its persistent decline, to help diminish the US trade deficit and the chance of disorderly currency movements.

 

Source: Reuters (Business Times 17 Dec 07)

Potential and problems in Ho Chi Minh City

IN HO CHI MINH CITY

BUSINESSMEN, some of them Singaporean, shared their optimism about Vietnam’s economy with Senior Minister Goh Chok Tong over lunch yesterday when he arrived in Ho Chi Minh City on the final leg of his week-long visit to the country.

But the businessmen, among them executives from Singapore’s Keppel Land and Kim Eng Securities, also spoke of the problems they face in doing business there – which Mr Goh later conveyed to Le Hoang Quan, chairman of the People’s Committee in Ho Chi Minh City.

The businessmen complained about infrastructure bottlenecks and the shortage of skilled workers, among other issues.

In his hour-long meeting with Chairman Quan in the evening, Mr Goh suggested that Vietnam, with the help of foreigners, could set up a technical institute to train more skilled workers which, in turn, would attract more foreign investors to the country.

Mr Goh, who has urged Vietnam to shoot for double-digit economic growth during his current trip, is upbeat about Vietnam, especially Ho Chi Minh City.

He told Mr Quan that the city is obviously doing very well.

Mr Goh, who was last in Ho Chi Minh City in 1996, said that as he was driven from the city to the downtown hotel where he is staying, he noticed there were many cars on the road, many of them new.

Indeed, he said, traffic congestion is now a problem.

Shops were filled with branded goods, Mr Goh observed. There were also new buildings, including those built by Singaporean companies like Keppel Land. And Mr Goh said he was impressed with the Saigon South City project, which he was given a viewing of in the afternoon. The city project is built by Central Trading Development, a Taiwanese company.

According to him, these signs suggest that Vietnam’s economic growth took off only in recent years. But Mr Goh expressed concern about rising inflation in Ho Chi Minh City, which Mr Quan pointed out was also a worldwide problem. Mr Quan said inflation would be tackled at the national level in Vietnam.

 

Source: Business Times 15 Dec 07

Japanese business sentiment drops to 2-year low

Tankan survey results boost expectations that rate hike will be delayed to second half

TOKYO – BIG Japanese manufacturers’ business sentiment has slipped to a two-year low, a Bank of Japan (BOJ) survey showed yesterday, reinforcing expectations that a rise in interest rates will be delayed to the second half of next year.

Rising raw material costs, plummeting construction activity due to tighter building rules and fears of a United States recession because of the credit crisis all played a part in eroding optimism.

But the BOJ’s tankan survey this month also showed that companies are sticking to their robust capital spending plans, and sentiment at small manufacturers showed a surprising improvement, allowing financial markets to take the data largely in stride.

‘The outlook has sharply deteriorated, and the risk of an economic downturn has increased,’ said Mr Yasuhiro Onakado, chief economist at Daiwa SB Investments.

‘A rate hike by the Bank of Japan may have to wait until after the middle of next year.’ The yen dipped to a one-month low of 112.66 yen per US dollar, which in turn helped boost the Nikkei share average by about 0.6 per cent in morning trade.

Swap contracts on the overnight call rate, the BOJ’s main benchmark, are pricing in only a 5 per cent chance of a rate hike by March, and just above a 50 per cent chance by September.

The index of big manufacturers’ sentiment in the quarterly survey fell by four points to plus 19, below economists’ median forecast of plus 21 and matching a figure hit in September 2005.

The worsening sentiment among big manufacturers, the engine of Japan’s export-led growth, raised worries that a likely slowdown in the US economy in the wake of the credit crisis could deal a blow to Japan.

‘The weak figures reflect a worsening of the corporate business environment, such as a rise in oil prices and an expected decline in US gross domestic product,’ said Mr Mamoru Yamazaki, chief economist at RBS Securities.

The survey raises doubts about when or if strength in the corporate sector will spill over to households, a scenario that the BOJ relies on to justify raising rates.

‘The tankan showed firms are cautious, so it would be hard for the BOJ to raise rates at least during the first half of next year,’ said Mr Yoshimasa Maruyama, an economist at BNP Paribas.

‘We’re at the point where we cannot really pinpoint when the BOJ could raise rates.’

 

Source: REUTERS (The Straits Times 15 Dec 07)

PECC sees slower Asia-Pacific growth in 2008

Think-tank forecasts 4.9% GDP growth this year and next

(SINGAPORE) Asia-Pacific’s economic outlook is now more uncertain than any time since the 1997 Asian crisis, and the region is expected to post slower economic growth in 2008, according to one think-tank.

In its latest State of the Region report, the Pacific Economic Cooperation Council (PECC) forecast a 4.9 per cent real gross domestic product (GDP) growth for the region this year and next – lower than the 5 per cent seen in 2006. The equivalent forecast for 2009 is 5.2 per cent.

East Asia is expected to post GDP growth of 6.4 per cent and 5.6 per cent in 2008 and 2009 respectively.

PECC is an international tripartite partnership of senior individuals from business and industry, government, academic and other intellectual circles. Its forecasts are based on the assumptions that the US will not enter into a recession and that there will be a recovery in the housing sector there in the second half of next year.

‘The US slowdown will affect exports from East Asia but this will be offset somewhat by robust import growth in China,’ the report says.

PECC said that the external sector continues to be characterised by huge current account imbalances across the Pacific.

While the weakening greenback had slowed the growth of American imports to just 2.2 per cent this year and PECC expected the deficit to be about 5.1 per cent of US GDP by 2009, the deficit will still remain very large in dollar value terms.

After falling from US$794 billion in 2006 to US$760 billion in 2008, the deficit is expected to balloon again in 2009, to around US$786 billion, the report said.

As for China, the current account balance is forecast to balloon to about US$507 billion in 2009, which is roughly 10 per cent of GDP.

The Chinese currency is expected to appreciate to an average of 6.9 yuan (S$1.35) per US dollar in 2008 and 6.4 yuan in 2009.

The report singled out the spillover of recent financial market volatility into the real economy as a major new source of risk, especially in the US.

‘The full extent of the damage from the sub-prime mortgage crisis is still being worked out, but it could be as much as US$300 billion,’ it says.

‘Together with a falling dollar, the result will be downward pressure on investment, employment, asset prices and consumer confidence.’

On the impact of the crisis on Asia, the report believes that a large share of the sub-prime mortgage market may be held by Asian investors from both private sector and public sector, who will be hit by value downgrades in their holdings and a depreciating greenback.

Asian central banks will be concerned that massive withdrawals from US dollar assets could lead to domestic currency appreciation and a loss of export competitiveness.

‘With the Federal Reserve expected to cut interest rates at its forthcoming meetings, Asian central banks will face conflicting pressures to either follow suit – and thus hold back the upward pressure on their currencies and the costs of sterilisation activities – or to keep domestic interest rates high in order to restrain inflation and to cool overheated property markets even at the expense of export competitiveness,’ says the report.

Although it said that the possibility of a severe market crash leading to systemic financial sector crisis and a deep US recession is small, it cannot be ruled out entirely.

There are also worries about inflationary pressures in the world economy, speculative bubbles in Asia and the rapid unwinding of the US current account imbalance.

The report pointed out that while East Asian economies continue to show strong growth, it is premature to suggest that the region has ‘decoupled’ from North America.

 

Source: Business Times 14 Dec 07

Asia at risk if US growth slows: ADB

Region still depends on outside markets despite growing intra-Asian trade

IN TOKYO

ASIA’S emerging economies are likely to be hit hard by any serious slowdown in the wake of the US sub-prime mortgage crisis, the Asian Development Bank warns in a report published yesterday.

Asia still depends heavily on the US and other outside markets despite growing trade between the region’s emerging economies, the report says.

The cautious tone contrasts with that of an up-beat report published recently by the World Bank, which suggested emerging Asian economies including China would suffer only marginally even if GDP growth in the US were to slump to zero in 2008.

ADB forecasts that economic growth in emerging East Asia will ease from 8.5 per cent in 2007 to 8 per cent in 2008 amid volatility in financial markets and rising oil prices.

‘Risks are tilted more to the downside on expectations of a sharper slowdown in the US economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rises in oil and commodity prices,’ it says.

Growth in China is forecast to slow to 10.5 per cent next year from an expected 11.7 per cent in 2007, as government measures to cool the economy take hold.

But growth in Asean is tipped to moderate only slightly, from an expected 6.3 per cent in 2007 to 6.1 per cent in 2008.

Inflation is rising in many economies and price pressures are likely to remain in 2008. ‘Slower growth but rising inflationary pressures, despite appreciating currencies, pose major challenges for the region’s policymakers.’

The report warns that a hard landing of the US economy could have a significant impact on East Asia because the region’s trade with the major industrialised economies remains strong despite increasing intra-regional trade.

‘If we take into account the total share of intra-regional trade that is ultimately destined for the G3 markets (Japan, Europe and US), the share of G3 markets in the region’s total exports is still over 60 per cent,’ ADB says.

‘The region’s macro-economic managers will gain by adopting greater flexibility of exchange rates and exploring ways to maintain stability among intra-regional exchange rates.’

ADB says boosting domestic demand, managing capital inflows and strengthening financial systems would help underpin growth in East Asia.

‘So far the turmoil in the US sub-prime market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited,’ it says. ‘However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks.

‘The changing structure of capital inflows, with volatile short-term capital accounting for more than 60 per cent of total inflows, remains a cause for worry. The sharp rise in asset prices is also at risk of correction if swings in global financial markets spread to the region. Changes in asset prices could impact growth through wealth effects and higher cost of capital.

‘Despite resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trades.’

 

Source: Business Times 14 Dec 07

Central bankers’ liquidity plan fails to impress Asian investors

China and HK biggest losers in Asia; STI down 2%

(SINGAPORE) Investors in Asian stock markets, clearly sceptical that a plan by central banks to inject liquidity into the system to ease sub-prime pressure would work, yesterday braced themselves for an expected Wall Street sell-off by first dumping stocks throughout the region.

The losses were greatest in China and Hong Kong, where the major indices lost 2.5-3.7 per cent, while here, the Straits Times Index caved in by 69.94 points or 2 per cent to 3,479.31.

However, the STI had already risen 300 points or 8.5 per cent in little under the previous three weeks in anticipation of a US interest rate cut and/or bailout packages.

Similarly, although Hong Kong’s Hang Seng Index yesterday plunged 777 points or 2.7 per cent to 27,744.45, it had surged almost 3,300 points or 13 per cent over the same period.

Dealers said investors, who on Wednesday had apparently embraced news that the Fed is to join hands with other central banks in injecting money into the system by pushing Wall Street higher, had seemingly suffered a change of heart – the December futures contract on the Dow Jones Industrial Average yesterday suffered a loss during Asian trading, suggesting a weak session on Thursday.

‘Just like interest rate cuts, they’ve done it before and it hasn’t helped,’ said a dealer. ‘So markets are understandably cautious and sceptical.’

The New York Fed injected US$62 billion into the US banking system on Aug 9 and 10 in order to ease the credit market’s problems and followed this up with a discount rate cut a week later, but after initially rallying in response, stock markets have continued to suffer from a series of sub-prime related blows.

The suggestion was also made that the pressure of the past two days was due to disappointment over Tuesday’s 25 basis points cut in short-term US interest rates since 50 might have signalled greater Fed resolve to aid the credit market and stave off a recession.

An increasing number of economic commentators have been highlighting the increased likelihood of a US recession, most prominently Morgan Stanley.

In an Asia-Pacific Economics report released yesterday, it said the risk of credit problems attacking the heart of US growth, that is, household consumption, has increased significantly.

‘We believe that Asia ex-Japan (AXJ) will face the real test during the first quarter of 2008 as the US dips into recession,’ said Morgan Stanley.

‘We believe that the market may first be surprised on the downside as the growth trend slows in AXJ in 2008 before it builds the conviction for soft decoupling.’

The US bank also warned of potential turbulence in US equities. ‘In the past few years, globalisation of financial markets has meant that we cannot ignore the possible transmission of growth shocks through financial market linkages . . . during 2000-6, the average correlation between MSCI Asia-Pacific ex-Japan and MSCI US was 72.6 per cent,’ it said.

 

Source: Business Times 14 Dec 07

China’s ‘07 inflation may exceed 4.4%

Nov consumer prices likely at 6.5%, the highest in a decade

(BEIJING) China’s 2007 inflation may exceed 4.4 per cent, driven mainly by rising food prices, China’s banking regulator said.

‘We will focus on preventing the structural rise in prices from transforming into overall inflation,’ Liu Mingkang, chairman of the China Banking Regulatory Commission, said at a conference organised by Caijing magazine yesterday in Beijing. ‘Next year, the government will take a series of measures to stabilise prices of goods, including pork, food and cooking oil.’

Mr Liu’s comments underscore the Chinese government’s move to set new growth and inflation targets next year, as prices soar beyond state control. China’s November consumer prices may have risen 6.5 per cent, according to the median estimate of 21 economists in a Bloomberg News survey, the highest level in more than a decade, adding pressure on the central bank to raise interest rates a sixth time this year or let the yuan rise faster.

The pressure of economic overheating is still ‘very large’ and the central government will continue with measures to curb excess liquidity and rapid asset price growth, Mr Liu said yesterday without elaborating.

China on Dec 8 ordered banks to increase reserves by the most in four years, three days after the government said it would shift to a ‘tight’ monetary policy among measures to cool the world’s fastest-growing major economy.

Starting Dec 25, the central bank will require lenders to put aside a record 14.5 per cent of deposits, up from 13.5 per cent.

China’s economy, the world’s fourth largest, expanded 11.5 per cent in the third quarter from a year earlier.

China’s banks must enhance their risk management policies and ‘learn’ from the experience of US financial institutions in their exposure to sub-prime lending, the Chinese bank regulator said.

‘Risk control is very important for the financial sector, especially in the light of lessons learnt from exposure to subprime loans,’ Mr Liu said. ‘The turbulence from the sub-prime lending crisis is not over.’ The Industrial & Commercial Bank of China, the country’s largest bank by value, wrote off about US$58 million of investments in US mortgage-backed securities in the third quarter.

The regulator said it won’t interfere with Chinese banks’ plans to expand overseas. ICBC last week won shareholder approval to pay US$5.6 billion to buy a 20 per cent stake in South Africa’s Standard Bank. The Chinese lender, armed with enough cash to buy JPMorgan Chase & Co, has announced acquisitions in Indonesia, and Macau in the past year, and is buying a stake in a Thai Bank.

Meanwhile, China’s factory gate prices jumped 4.6 per cent in the year to November, overshooting forecasts by a wide margin and fuelling concern that inflation could pose a stiffer challenge than many anticipated.

Producer price inflation registered a 27-month high less than a week after China’s top leaders said a main goal for next year was to prevent inflation, hitherto concentrated in food prices, from spreading more widely in the economy.

The leap in the producer price index (PPI), which surpassed forecasts of a 3.4 per cent rise, sets the stage for today’s consumer price data.

 

Source: Bloomberg, Reuters (Business Times 11 Dec 07)

Japan lowers third-quarter GDP forecast

Central bank will have no chance to hike rates until late next year, analysts predict

TOKYO – JAPAN revised down yesterday third-quarter growth, surprising markets that had expected an upward revision and prompting many to predict the Bank of Japan (BOJ) would have no chance to raise rates until late next year.

Soft capital spending saw gross domestic product (GDP) rise just 0.4 per cent in July-September, compared with an initial estimate of a 0.6 per cent growth and lagging behind the consensus forecast for a revision to a 0.7 per cent growth.

‘It’s quite a bad number and shows Japan’s economy is not in really good health,’ said Norinchukin Research Institute chief economist Takeshi Minami.

‘We expect the next Bank of Japan rate hike to come in July-September next year, but the timing may be delayed further.’

Rate-hike expectations have fallen sharply in recent months.

Swap contracts on overnight call rates are now pricing in a less than 20 per cent chance of a rate hike by March. Just two months ago, a rate hike by March was fully priced in.

The Organisation for Economic Cooperation and Development has said the BOJ should not raise rates until the risk of deflation becomes negligible, and it sees no rate hike until 2009.

The weak outlook for a rate rise boosted Japanese government bonds. Ten-year JGB futures rose briefly from a one-month low hit early in the day.

Financial markets expect the credit crisis in the United States and Europe to tie the hands of the BOJ, which has kept its key policy rate at 0.5 per cent since February.

The central bank wants to restore ultra-low interest rates to more normal levels to avoid the risk of overheating, but it has been stymied by weak consumer prices and worries about global growth.

Its effort to raise rates is made more difficult by increasing caution shown by the world’s central banks over the global market turbulence.

The US Federal Reserve has lopped 0.75 percentage point off its rates and is seen cutting them again next week, while the Bank of Canada and the Bank of England cut rates this week.

The downward revision in GDP was largely due to slowing capital expenditure growth, which was marked down to a 1.1 per cent increase from the initial estimate of a 1.7 per cent rise.

Economists had forecast an upward revision to a 1.9 per cent rise.

The revised data also showed domestic demand shrank 0.1 per cent, compared with a preliminary reading of a 0.2 per cent growth.

‘Today’s data showed domestic demand is pretty weak. The economy is relying on external demand and is quite vulnerable,’ said ABN Amro Securities economist Junko Nishioka.

On an annualised basis, the economy grew 1.5 per cent, much lower than a preliminary reading of 2.6 per cent and economists’ median forecast for a revision to 2.7 per cent.

 

Source: REUTERS (The Straits Times 8 Dec 07)

‘It’s quite a bad number and shows Japan’s economy is not in really good health. We expect the next rate hike to come in July to September, but the timing may be delayed further.’

MR MINAMI, an economist, assessing the surprise revision

China’s policy shift signals concerns about inflation

BEIJING – CHINA’S announcement that it will move to a tight monetary policy from what it called the prudent stance of the past decade may not mark a radical new departure.

But the change in rhetoric suggests the Chinese leadership wants to signal concern about living standards as people fret about inflation.

Analysts say the pronouncement on next year’s policy, from a top-level economic policy committee this week, points to a more intensive use of tools already in play, such as the stricter enforcement of banks’ lending quotas.

‘The official announcement of ‘monetary policy biased towards tightening’ is not really new news,’ Mr Frank Gong, JPMorgan’s chief China economist, said in a note. ‘The authorities have been trying to tighten the monetary environment throughout this year.’

Inflation in October matched an 11-year high at 6.5 per cent and analysts do not expect it to be much different when data for last month is published next week.

Rises in the consumer price index have come almost entirely from food. Some economists argue that since core inflation, which excludes food and energy, has held steady near 1 per cent, the broader economy is not threatened.

That may miss the point. ‘Inflation is still very narrowly confined to a small group of food items, but they’re highly visible,’ said Mr Arthur Kroeber of research firm Dragonomics. ‘Authorities want to be super cautious that they’re seen to be vigilant about inflation.’

The government said on Wednesday its two main economic policy goals for next year were to prevent the economy from overheating and to keep food price inflation from spreading to other sectors.

A string of officials and government think tanks have forecast that inflation will taper to about 4 per cent next year. But the central bank made clear in its third-quarter monetary policy statement that the country could be in trouble if inflationary expectations became entrenched.

The latest batch of data showed meat and poultry cost 38.3 per cent more in October than a year before, vegetables were up 29.9 per cent and food oil climbed 34 per cent.

That makes a serious dent in the average Chinese wallet.

 

Source: REUTERS (The Straits Times 8 Dec 07)

OECD warns of inflation risk in China

PARIS – CHINA’S economy faces serious inflation risks which, if unchecked, could fuel yet more speculation in stocks and property, the Organisation of Economic Cooperation and Development (OECD) said yesterday.

Economic growth is likely to reach 10.7 per cent next year and 10.1 per cent in 2009, the OECD said in its twice-yearly Economic Outlook report, meaning China would experience seven consecutive years of doubledigit expansion.

‘The economy has moved to a situation of excess demand with increasing pressure on monetary aggregates,’ it said.

‘If this situation persists and global food prices do not moderate as expected, there is a risk of inflation becoming entrenched.’

The OECD’s warning coincides with a markedly growing emphasis on inflation among policymakers in Beijing.

Inflation in China hit a 10-year high of 6.5 per cent in August and again in October, while for the full year it is likely to be 4.4 per cent.

‘Speculative activity has already increased, both in the equities market and in real estate markets in southern coastal areas,’ the OECD said.

 

Source: AGENCE FRANCE-PRESSE (The Straits Times 7 Dec 07)

Thai Q3 growth faster than expected

(BANGKOK) Thailand’s economy grew faster than expected in the third quarter, buoyed by exports and a recovery in private consumption almost a year after a military coup. South-east Asia’s second-biggest economy expanded 4.9 per cent in the three months ended Sept 30 from a year earlier, compared with a revised 4.3 per cent gain in the second quarter, the government said yesterday. The median estimate of 14 economists surveyed by Bloomberg News was 4.4 per cent.

Thailand’s central bank kept its key interest rate unchanged at the last two meetings as local demand started to pick up after five consecutive cuts from January.

‘Thailand’s economy has been blessed by the unexpectedly strong growth in exports,’ Isara Ordeedolchest, an economist at KTB Securities Co in Bangkok, said before yesterday’s report. ‘Export growth will slow in 2008, but still rise at double-digit growth.’ Still, Thailand’s Q3 growth was the slowest among six Southeast Asian countries tracked by Bloomberg, with Singapore’s 8.9 per cent pace the fastest and Indonesia’s 6.5 per cent the second slowest.

The Thai economy will expand 4.3 per cent this year, based on the median of 11 of the economists’ predictions. That would be the lowest growth since 2001 and compares with the government’s 4.5 per cent forecast.

Ampon Kittiampon, secretary-general of the National Economic and Social Development Board, the government’s economic advisory agency,said Thailand’s US$206 billion economy may expand by between 4 and 5 per cent next year. Economists in a Bloomberg survey expect growth of 4.8 per cent in 2008.

 

Source: Bloomberg (Business Times 4 Dec 07)

India can sustain 9% growth for third year: minister

(NEW DELHI) India’s 9 per cent economic growth may be sustained for a record third year on prospects of bumper crops and a retreat in crude oil prices, Finance Minister Palaniappan Chidambaram said.

‘If harvests are good, we are able to enjoy a bit of luck with crude oil, and we are able to moderate capital flows, which are putting pressure on inflation, we should have 9 per cent,’ the Harvard-educated minister said in an interview.

Asia’s third-largest economy grew last quarter at the slowest pace this year amid decade-high borrowing costs. JPMorgan Chase and HSBC Group expect more than three years of interest-rate increases by the central bank to moderate India’s expansion further.

‘The combination of monetary tightening and a higher value of the rupee in the foreign-exchange market can put the brakes on the economy in the near term,’ said Stephen Roach, chairman of Morgan Stanley in Asia. ‘I am very optimistic about India over the next three to five years.’ Mr Roach says the economic slowdown will be temporary, and India’s adoption of China-like policies on foreign investment and infrastructure development makes growth of as much as 9 per cent ‘eminently achievable.’

India’s US$906 billion economy grew 8.9 per cent last quarter from a year ago. China’s US$2.6 trillion economy expanded 11.5 per cent. That kind of pace is more than three times the rate of growth in the US and countries sharing the euro.

Industry Minister Kamal Nath last month said almost all of India’s economy is now open to overseas investment since Prime Minister Manmohan Singh, as the finance minister in 1991 started to dismantle India’s Soviet-style controls on industry. Only some defence-related areas and retail remain closed, Mr Nath said.

Since assuming office in May 2004, Mr Singh’s government has relaxed foreign investments in telecommunications and single-brand retail outlets. The government will this week consider easing foreign investment rules in aircraft maintenance companies, petroleum-marketing firms and commodity exchanges, the Economic Times reported.

To attract more funds from abroad, India last year enacted a law to enable construction of special economic zones, enclaves modelled on China’s Shenzhen. The government also has a five-year plan to attract investments of US$500 billion in roads, ports and other infrastructure.

Mr Chidambaram said that while investment will continue to drive India’s economic growth, ‘there are some risks, such as crude oil prices, over which we have no control.’

India is Asia’s third-biggest oil consumer and imports almost three-quarters of its needs.

 

Source: Bloomberg (Business Times 4 Dec 07)

Developers planning RM9b KL riverside redevelopment project

(KUALA LUMPUR) A group of Australian and Malaysian firms plan to redevelop a riverside precinct of Kuala Lumpur at a cost of about RM9 billion (S$3.89 billion), the Malaysian Business Times said yesterday.

The urban-regeneration project is backed by Australian bank Macquarie, Australian builder Leighton and two unlisted Malaysian firms, the paper said. Construction is due to begin next month and be completed within eight years, it added.

To be known as Tamansari Riverside Garden City, the project will cover 22.3 hectares, feature a 60-storey tower and comprise commercial and residential properties. The government had awarded the project to local firm ASIE Sdn Bhd in 1998 but the firm needed to wait for residents of existing apartments in the precinct to be relocated, the paper said.

 

Source: Reuters (Business Times 4 Dec 07)

Japan October inflation bucks downtrend

Markets cheered by other positive news but small, mid-size firms still hurting

IN TOKYO

JAPAN received more positive economic news yesterday when it was reported that consumer prices rose for the first time in 10 months during October, while household spending rose by 0.6 per cent during the same month. This came on the heels of data this week showing that October industrial production rose by an unexpectedly strong 1.6 per cent to its highest ever level.

The news pushed the Nikkei 225 stock average up a further 166.3 points or 1.1 per cent to 15,680.93 where it is well off the floor it hit following recent widespread falls in leading stock markets. Investor sentiment was also buoyed by the fact that the yen slipped further against a recovering dollar yesterday, to under 110, thereby bolstering prospects for exporters.

The rise in consumer prices reflected higher energy and food costs and economists predicted further rises in coming months. Nevertheless, with consumer price inflation running at only 0.1 per cent on an annualised basis, the Bank of Japan has little cause to raise interest rates and the central bank’s short-term policy lending rate is expected to remain at its current level of 0.5 per cent until well into next year.

Economics Minister Hiroko Ota said yesterday that the economy is still moving towards the end of deflation, although price moves need to be monitored carefully. ‘We are watching for the possible negative impact of price rises in food and crude oil on consumer sentiment and small and mid-size company earnings,’ Ms Ota added.

Another reason for continuing caution by the BOJ, analysts said, is that the unemployment rate remained at 4 per cent in October, with the number of jobs per applicant declining. ‘Rising raw material costs are hurting business sentiment at medium-sized and small companies, which are unable to pass rising costs on to their customers. That’s why the job market is losing momentum,’ said Seiji Adachi, senior economist at Deutsche Securities.

The need for caution is also indicated by the fact that housing starts fell by 35 per cent in October from their level a year earlier, analysts said. The Ministry of Land, Infrastructure and Transport reported the fourth consecutive monthly decline yesterday following a 44 per cent drop in September. The plunge was due to tighter construction rules adopted by the government in June, which also resulted in a 23 per cent drop in orders received by major construction firms in October.

 

Source: Business Times 1 Dec 07

Oil price falls below US$90

(LONDON) The price of oil fell back below US$90 yesterday as the market speculated about the chances of an increase in Opec output at the cartel’s meeting next week, dealers said.

They said prices also fell after it appeared more likely that an explosion on a key pipeline from Canada into the United States would have only a limited impact on supply.

Yesterday, New York’s main contract, light sweet crude for January delivery, was down US$1.75 to US $89.35 per barrel, after earlier striking a one-month low of US$88.52. Brent North Sea crude for January tumbled US$1.32 to US$88.93.

The Organization of the Petroleum Exporting Countries (Opec) meets in Abu Dhabi on Wednesday with many participants expecting the group to boost output to help counter record- breaking prices.

‘All eyes will be on Opec now ahead of the group’s meeting on Dec 5,’ said Nimit Khamar, analyst at the Sucden brokerage here. ‘Many expect the group to hike supplies in order to cool off prices.’

The oil producers’ group is a key player in the energy market because it produces about 40 per cent of the world’s crude.

Opec last decided to raise production in September when it agreed to provide an extra 500,000 barrels a day to the market from Nov 1. ‘The forthcoming Opec conference now looms large over the oil market,’ the Commonwealth Bank of Australia (CBA) said in a report to clients.

‘It appears that oil markets are considering the possibility that there will be an increase in Opec production ceilings of at least 0.5 million barrels per day.’

Earlier this week, Saudi Oil Minister Ali Al-Nuaimi said the market was well supplied and that high prices did not properly reflect supply and demand. Asked whether Saudi Arabia, the world’s biggest oil exporter, would push for an increase in production at next Wednesday’s meeting, Mr Nuaimi said the cartel would first need to see market data.

Since striking record peaks just under US$100 last week, prices have slumped by about US$10 in New York and almost US$8 here.

 

Source: AFP (Business Times 1 Dec 07)

China, India seen driving Asia’s wealth market

SG PRIVATE Bank is looking to China and India to drive Asia’s wealth markets, and the sub-prime crisis is a short-term hiccup, says chief executive Pierre Baer.

The firm advises on some US$20 billion in Asian clients’ assets, posting an annual growth of about 30 per cent. It set up its Singapore office in 1998.

‘Despite the recent increases in their stock markets, China and India will be the wealth drivers. This is a structural, fundamental shift in wealth generation that we’ve not seen previously,’ says Mr Baer.

SG Private Bank recently opened its new office at One Raffles Quay, on which it spent millions of dollars – in ‘double-digit millions’ – to renovate. The centre is adorned with a collection of contemporary Asian and Australian art.

The bank employs some 600 staff in the region, of whom half are based in Singapore. It has separate teams to service non-resident Indian clients, as well as non-Asian clients from Europe and the Middle East.

The bank continues to hire, but is ‘elitist’ in its approach, he says. ‘The growth and quality of the financial industry will depend on the quality of its people… We are somewhat elitist in our hiring. We’ve turned down candidates even if they have a book of business because we didn’t think they had all the skill sets required for the long term.’

The bank, he says, does not set product targets, which run against the grain of client advisory. Bankers should be at pains to identify clients’ needs.

SG will set up its own training centres in Hong Kong and Singapore for its career bankers. At the moment, some 110 bankers have been sent to Paris and London to complete a number of training modules.

He says clients are at the moment concerned about volatility, and are tapping structured products to temper that. ‘It is not about how much money you can make but how much you avoid losing. The fear of losing is key.’

SG’s key services include philanthropic and trust advisory. On the alternative front, the bank offers a wine investment fund which has so far attracted some US$40 million in assets.

 

Source: Business Times 28 Nov 07

Asia should be on inflation alert: JPMorgan

Countries that let currency strengthen will be better off

(SINGAPORE) Inflation poses a bigger and more immediate threat to countries in Asia than a US economic recession, said a senior equity strategist.

Emerging-market countries that allow their currencies to strengthen in the next 12 months are more likely to see sustained economic growth and escape runaway price inflation later, said Adrian Mowat, chief Asian and emerging-market equity strategist for JPMorgan, in an interview with BT last week.

The JPMorgan view is that there is a roughly one-in-three chance of a brief recession in the United States, with the economy shrinking in the first six months of 2008, then recovering in the second half.

But the economies in Asia have been growing strongly despite weaker demand from the US, where economic growth has been slowing for some time now, he pointed out.

‘I think the real issue for our economies is that they’re growing very rapidly. And if there’s a concern it should be about price stability and inflation.’

So far, central banks in Asia have tended to keep their currencies relatively weak, intervening in order to prevent rapid appreciation, he said.

‘But as we go into 2008, you’ve got the Fed (the US Federal Reserve) cutting interest rates . . . yet we need to push up interest rates to deal with our rapid growth.’

The combination of lower interest rates in the US and higher interest rates and rising price inflation in emerging markets will put greater pressure on central banks in Asia to allow their currencies to strengthen further, he said.

His advice to investors is to favour stocks in markets with strengthening currencies – for now, mainly the Asean countries, mainland China and Hong Kong – as these are more likely to maintain rapid economic growth for longer.

In Singapore, JPMorgan estimates that the Straits Times Index of blue-chip stocks could reach 4,800 points by the end of next year, about 40 per cent above its current level.

Countries which continue to keep their currencies weak would likely see domestic asset prices rising faster in the near term – generating high returns to investors in those assets – but those countries ‘ultimately will end up with an inflation problem that will require higher interest rates and a reduction in growth’, he said.

Others, including senior economists, have also warned that rising price inflation is fast becoming a major risk in emerging markets due to surging food, oil and asset prices.

Philip Poole, HSBC’s chief emerging markets economist, told BT last month that he expects governments and central banks in these countries to step up their fight against inflation, and that investors in emerging market currencies, stocks, commodities and property stand to benefit from the inflationary pressures and the likely policy response in the near future.

Here, too, the latest indicators suggest that inflation is on the rise. According to official data released on Friday, the consumer price index in October rose 3.6 per cent from a year ago, the fastest year-on-year increase in the monthly indicator of consumer price changes since August 1991.

The Monetary Authority of Singapore said last month in its twice-yearly monetary policy statement that it would allow the Sing dollar to strengthen at a slightly faster pace than before to curb inflationary pressures, while maintaining its long-standing official policy of allowing a ‘modest and gradual appreciation’ of the currency.

 

Source: Business Times 26 Nov 07

Japanese Reits likely to be takeover targets

Those trading at less than their net asset value are likely to be bought out

(TOKYO) Japanese real estate trusts and asset managers may be ripe for takeovers after share prices plunged and stricter compliance guidelines raised costs, said property managers including a local real estate executive at Morgan Stanley.

Regulations to boost investor protection went into effect on Sept 30, raising compliance costs which may make it difficult for smaller real estate managers to survive.

Real estate investment trusts (Reits) trading at less than their net asset value are likely to be takeover targets.

‘Consolidation is imminent,’ said Marcus Merner, managing director for real estate at Morgan Stanley Japan Securities Co, at a conference on Wednesday. ‘All the arrows are pointed in the right direction for that to happen.’

The Tokyo Stock Exchange Reit Index has fallen even as land prices advanced.

The index has dropped about one-third in the past six months, eroding gains earlier in the year, after rising defaults of sub-prime mortgage loans in the US prompted some investors to sell stock to make up for losses elsewhere.

Japan may see buyouts of property holders similar to some of those in the US, said Alan Miyasaki, managing director of the Blackstone Group Japan KK.

Blackstone Group LP bought Equity Office Properties Trust (EOP), the biggest US office landlord, for US$23 billion in March, and may have made as much as US$2 billion in profit by selling off properties in EOP’s portfolio, according to Bloomberg calculations. ‘Growth fundamentals in the market place are appropriate to have similar M&A here in Japan,’ Mr Miyasaki said.

Thirty out of 40 Reits listed on the Tokyo Stock Exchange (TSE) trade below their net fixed asset value, according to Bloomberg calculations.

The share declines may have prompted LaSalle Investment Management Inc, a unit of the world’s second-largest commercial real estate broker, to take control of eAsset Investment Corp, the first ever takeover in Japan’s 4.9 trillion yen (S$64.6 billion) Reit market.

LaSalle, a subsidiary of Jones Lang LaSalle Inc, bought the asset manager of eAsset on Nov 19 and plans to expand the trust.

Earlier this month, Goldman Sachs Group Inc and Aetos Capital LLC bought property manager Simplex Investment Advisors Inc for 154.1 billion yen.

Goldman plans to invest about 200 billion yen this year in Japanese property, betting that real estate is short of its peak after a two-year rally.

Tighter regulations under the Financial Instruments and Exchange Law have increased administration costs for compliance standards, and the burden could turn smaller funds into takeover targets, said Yasuhiko Amino,

operating officer and chief marketing officer of Japan at GE Real Estate Corp.

‘The number of opportunities will increase,’ Mr Amino said.

As land prices recover, property values on some companies’ books are increasing at a faster pace than their market worth.

Property assets generated more profit last year for Sapporo Holdings Ltd, Japan’s third-largest beermaker, than its alcohol business did.

Sapporo formed a property alliance with Morgan Stanley on Oct 30 as it seeks to fend off a hostile bid from Warren Lichtenstein’s Steel Partners Japan Strategic Fund, which wants the brewer to sell off its real estate.

Mitsubishi Estate Co and Sumitomo Realty & Development Co, Japan’s second and third-biggest developer by revenue, are among builders that have set up takeover defences this year.

 

Source: Bloomberg (Business Times 23 Nov 07)

Australian poll largesse risks high rates, inflation

(SYDNEY) Generous promises from Australia’s two main political parties ahead of tomorrow’s general election have stoked fears that interest rates, already at the highest in a decade, may go up even further than the market anticipates.

Financial markets are pricing in a rate rise early next year, but analysts say investors might have to factor in more increases if the tax cuts and spending promised by the politicians boost demand and add to price pressures.

‘In the run-up to the Federal election, both political parties are running a real risk of eliminating the budget surpluses projected by the Treasury,’ said Stephen Halmarick, co- head of economics and market analysis at Citigroup here.

‘The result could be more upward pressure on inflation and rates. We already expect another rate rise from the Reserve Bank of Australia (RBA) early next year and the risks are slanted to the official cash rate going beyond the 7 per cent that markets are currently pricing.’ The central bank raised the cash rate to an 11-year high of 6.75 per cent this month.

Latest polling suggests the opposition Labor Party will be swept into office, unseating veteran conservative Prime Minister John Howard, who is hoping for a fifth term in office.

In a bid to win back voters, Mr Howard has promised A$34 billion (S$43 billion) in income tax cuts as part of some A$66 billion in election largesse. Labor’s Kevin Rudd, almost as generous, has unveiled a package worth A$59 billion, including A$31 billion in tax cuts. Both are relying on large budget surpluses as Australia rides a commodities boom.

The surplus for 2006/07 was A$17.2 billion, or about 1.6 per cent of gross domestic product (GDP), and the Treasury estimates it will total A$61.4 billion over the next four years, boosted by high revenue at a time of robust domestic growth. GDP grew 4.3 per cent in the year to June, giving 16 years of uninterrupted expansion.

But that is pushing up consumer prices. The RBA raised its forecast for annual underlying inflation to 3.25 per cent for the current quarter and up to mid-2008, up from a 3 per cent forecast.

The RBA, which aims to keep inflation in a 2 to 3 per cent band, cautioned that the economy was showing little sign of slowing despite five rate increases since May 2006, with demand remaining healthy and the jobless rate at a near-33-year low.

Some economists argue that the tax cuts and spending will not come all at once, so they might not be as inflationary as feared.

‘Many of the commitments are spread over five years,’ said Craig James, chief equities economist at CommSec. ‘It’s also important to remember that these are just spending commitments; they haven’t been made as yet, and they could be amended down the line. Further, revenue measures haven’t been announced. That’s for later.’ However, Rory Robertson, an interest rate strategist at Macquarie Bank, said the political parties’ priorities were clear.

‘Both sides of politics have agreed their priority was tax cuts and increased spending,’ he said.

Neither was ’showing much interest in providing real support for the RBA’s efforts to slow demand growth and dampen growing inflation pressures’.

 

Source: Reuters (Business Times 23 Nov 07)

US sub-prime woes ’should not deter Asian bond growth’

ASIAN bond markets must continue to grow and develop, even though it was their relative lack of sophistication that spared them from the worst of the United States sub-prime crisis.

A conference on regional bonds in Singapore yesterday heard that the highly complex financial products used by American and European banks are still not that prevalent in the Republic. Yet it is these same products that are at the heart of the credit mess now.

This has led some observers to ask if Asia should slow the pace of innovation in its bond and credit markets.

But Mr Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore, said: ‘It is important to avoid the mistake of planning only based on the last crisis.

‘Each financial crisis or shock will bring with it unique circumstances and lessons. But in and by themselves, they should not become reasons to dampen market development and growth.’

He was echoing Senior Minister Goh Chok Tong’s remarks at the Barclays Asia Forum earlier this month.

Mr Goh had urged Asian institutions to press on with efforts to develop capital markets and create robust and efficient systems.

Developed financial markets across the world have been shaken by problems in the US housing market, with big-name American and European banks reporting billion-dollar losses on investments linked to poor-quality home loans.

By contrast, banks in the region have been largely unscathed as their exposure, if any, to these complex instruments has been small, said Dr Lee Jong Wha, who heads the Asian Development Bank’s (ADB’s) regional economic integration office.

But Mr Ong stressed that bonds and other capital market products are good alternatives to bank loans for firms.

The heads of the fixed-income sections at various banks told the seminar, which was organised by The Asset magazine and the ADB, that growth momentum has eased for more complex instruments but deals have not dried up.

Standard Chartered Bank’s capital markets global head, Mr Brad Levitt, said Asian currency-denominated bonds have outgrown issues in the US dollar, euro and yen.

 

Source: The Straits Times 23 Nov 07

Asia must act quickly on monetary cooperation

TOKYO CORRESPONDENT

THE US dollar is on the skids and it is time for Asia to put on its skates with regard to regional monetary cooperation. The connection between the two things should be obvious, although many Asian policymakers (including those in Japan who see themselves as leaders of the pack) continue to utter facile comments to the effect that it would take ‘40 years’ for Asia to catch up with Europe on monetary affairs.

This is complacent and irresponsible nonsense. The dollar is sliding so far and so fast that its future role as a reserve and transaction currency is being called into question almost daily. The euro is becoming the currency of first choice (if not yet last resort) for official and private investors alike, but it cannot carry the burden of diversification by itself for too long.

Asia has a responsibility not just to itself, but also to the rest of the world, to come up with a new regional currency (be it a composite of the yen, yuan and won plus Asean currencies – or whatever) in order to create a new tri-polar world of global currencies. The euro alone cannot be expected to bear the burden of reserve diversification from the dollar or of becoming the preferred denominator for transactions as the use of the dollar declines.

The question that Asian policymakers should be asking themselves as they bask in the illusion that global currencies are other people’s business is, where would they be now if European leaders had not had the vision to conceive of and create a common currency? The answer is, utterly dependent upon a declining dollar.

The dollar was big enough to take over from the pound when the Sterling Area collapsed, but the euro is less able to assume this role.

The Americas, as well as Europe, are ahead of Asia in thinking about the implications of what is happening to the dollar now. And, for a continent that boasts thousands of years of history as Asia does, this is a sad reflection.

The US, Canada and Mexico have at least begun to talk about the possibility of a common currency – the ‘Amero’ – to succeed the declining dollar, while Asia is content simply to dismiss the idea of a common currency as a pipe dream.

Asean has come up with a formal charter of incorporation, or constitution, if you will. This is a first step along the road to formal integration among the 10 countries, and it is a sad commentary on the lack of leadership in other parts of the region that Japan, China and South Korea at least have as yet not even begun marching down the road towards similar integration, let alone being in the vanguard of the movement.

Utterances from East Asian policymakers about ‘market-led’ integration being preferable to government or institution-led integration are lamentably lame and naive.

Markets or business can create production networks across Asia, as they have done already, but they cannot provide the monetary infrastructure needed to support such networks. Nor can they create the kind of monetary integration needed to underpin the intensity of trade and investment transactions that characterise economic relations among nations of this region.

This is another reason why Asia has to get its act together, and quickly, on monetary cooperation instead of treating the subject as though it were fit only for rarified discussion within academic circles.

Instead of contributing to global monetary cooperation, Asia is creating currency wars through its narrow focus on preserving national currencies instead of thinking about a regional currency.

China often seems to be ahead when it comes to intellectual appreciation (or at least articulation) of such concepts. People’s Bank of China deputy governor Wu Xiaoling has pointed out the fact – which should have been obvious to Japan and other Asian nations (as well as to US Treasury Secretary Henry Paulson) – that the yuan has become a proxy for the yen and other Asian currencies in taking the heat for the ‘underpriced’ exports of Asia Inc.

China is merely the sales department for the Asian factory. If this degree of economic and trade interdependence does not argue in favour of the need for exchange rate coordination among East Asian currencies, and eventually for a common currency, it is difficult to see what could.

It is in Asia’s interest to cooperate on monetary matters in order to ensure burden-sharing on a regional basis. And it is equally in the interest of the wider world for Asia as a bloc to share in the burden of global currency transactions. Time to face up to new responsibilities and not just lament the dollar’s decline.

 

Source: Business Times 22 Nov 07

Asian stocks rebound as US dollar steadies

Hedge funds, traders snap up blue chips, hot China plays across Asia on greenback’s gain

REGIONAL stock markets, including Singapore’s, made startling recoveries in late trading yesterday after nosediving early in response to a big drop on Wall Street.

The Straits Times Index (STI) collapsed by 85 points right after the opening bell but finished in positive territory – up 26.55 points at 3,438.27.

The catalyst for the dramatic comeback was a steadying of the greenback against the Japanese yen, alleviating fears of an exodus of funds and sparking a buying spree in Tokyo that spread to the rest of Asia.

Hedge funds and big-time traders snapped up blue chips and hot China plays across the region.

Some dealers attributed the big shift in mood to a rumour that the United States Federal Reserve might consider another rate cut.

Fears are growing that the US may be tipped into a recession by the worsening mortgage crisis.

Market watchers, however, dismissed the rumour as too far-fetched to explain the region’s strong recovery.

‘It has become a no-brainer trading Asian shares. Prices swing in tandem with the movements of the US dollar against the yen,’ said a dealer.

Traders have been reacting to every tiny movement in the foreign exchange market for any possible unravelling of yen carry trades – massive loans taken out by hedge funds in Japan, where interest rates are low, to make huge bets on higher-yielding assets elsewhere.

The STI’s early plunge came as the US dollar shed almost one yen to 109.63 in early trade. Once the currency bounced back to 110.43 yen after lunch, a rally swept across the region.

Market sentiment also got a boost from a rise in US stock futures in Asian trades, fuelling hopes of a rebound on Wall Street. The Dow Jones Industrial Average plunged by 213 points on Monday.

Other Asian bourses saw similar trading patterns. Hong Kong’s Hang Seng Index closed 311 points higher at 27,771 after losing 1,056 points in the morning, while Tokyo’s Nikkei 225 Index rose 169 points to 15,211.52, recovering from a morning loss of 114 points.

Among the biggest gainers in Singapore were badly battered bank stocks and China plays. DBS Group Holdings closed 20 cents higher at $19.60 after plunging to a four-month low of $18.80, while United Overseas Bank rose 40 cents to $19.60.

China plays mostly ended on the upside, led by gains in giant shipbuilders Cosco Corp, which rose five cents to $6.45, and Yangzijiang, which went up three cents to $2.09.

While the rebound brought cheers to traders glum at recent mounting losses, some felt the rebound was too good to be true.

CIMB-GK research head Song Seng Wun said: ‘The market has been sold so hard and for so long that it doesn’t take much effort to get a rebound. But can this last?’

Many traders now fear yesterday’s rebound may turn out to be a ‘dead cat bounce’ – a small recovery like last Wednesday’s one-day rebound.

Many also worry that foreign funds may have used the rebound as an excellent opportunity to get rid of their investments in the region.

A Citigroup report showed that as turmoil engulfed regional markets last week, about US$5.6 billion (S$8.1 billion) of stocks were sold off by foreign investors. Among the worst-hit markets was China, with US$1.1 billion worth of shares offloaded by foreigners.

Other hard-hit markets included Hong Kong, where US$191.1 million worth of shares were sold by funds investing only in Asian stocks, and Singapore, with US$51 million worth of shares offloaded.

UNITED States stocks rose yesterday, rebounding from three-month lows, after a gain in the price of oil boosted energy companies and Credit Suisse Group said shares of Google may reach US$900 next year.

ExxonMobil and Chevron both climbed the most in three months.

Google rallied after Credit Suisse said the most-popular search engine will expand its share of the mobile advertising market.

Benchmark indexes gained even after Freddie Mac, the second-largest source of money for US home loans, said it may cut its dividend and reported a US$2 billion (S$2.9 billion) loss – three times what some analysts had estimated.

The Dow Jones Industrial Average rose 125.27 points, or 1 per cent, to 13,083.71 after two hours of trading. The Nasdaq Composite Index increased 40.24 points, or 1.6 per cent, to 2,633.62.

Crude oil rose for a third day after the US dollar touched a new record low against the euro. The greenback’s 11 per cent slide this year has made oil, metals and other commodities denominated in the US currency cheaper for foreign investors.

 

Source: BLOOMBERG NEWS (The Straits Times 21 Nov 07)

Asia faces the inflation test

As long as economic policymakers act responsibly and transparently, Asia can avoid excessive price increases

By WILLIAM PESEK JR

ASIANS sure are unique; they don’t eat and they don’t use energy. That’s nonsense, of course, yet it’s how some are viewing Asia. Even as prices rise faster in some places than during the 1990s, investors are pushing the ‘core inflation’ argument.

If you strip out the most volatile items, such as food and energy, the rationale goes, Asian inflation looks pretty tame. Oh, it’s only high pork prices, China bulls say. It’s only because crude oil keeps rising, Asia-market enthusiasts retort.

Yet such arguments are taking on shades of denial as 2008 approaches and inflation accelerates. It’s hard to generalise the price environment. After all, Japan, by far the region’s biggest economy, still faces deflation.

In India, Asia’s No 3 economy, pressures have eased this year. And overall consumer prices are growing at a 3 per cent annual rate, or less, in Hong Kong, Malaysia, the Philippines, Singapore and South Korea.

The data may be masking the inflation already coursing through economies such as Bangladesh, China, Indonesia, Pakistan, Sri Lanka, Taiwan and Vietnam. For example, Singapore’s consumer prices could accelerate from 2.7 per cent now to as much as 5 per cent in the first quarter of next year, says Chua Hak Bin, Singapore-based economist at Citigroup Inc.

It’s also hard to generalise about why Asia is heating up. In some cases, meat or agriculture prices are helping to drive increases. In others, it’s everything from new taxes on goods and services to campaigns to stamp out corruption. Yet there are a few common threads: high oil prices, low short-term interest rates and undervalued currencies.

Asia’s brush with inflation needn’t be a disaster. It’s a natural side effect of strong growth and the increasing amount of foreign capital heading into the region’s markets. So long as central bankers and economic policymakers act responsibly and transparently, Asia can avoid excessive price increases. That’s easier said than done. The costs of inaction will be higher public debt yields, slower growth and less buoyant equity markets.

It may be very difficult for central bankers, for example, to get away with raising interest rates as much as inflation risks warrant. It may be equally hard for politicians and exporters to stomach stronger currencies. All this is a reminder that some Asian capitals may lack the political will to do what’s necessary here.

The World Bank last week said East Asia’s economies will expand at the fastest pace in more than a decade in 2007, even as US import growth slows and the fallout from the sub-prime-loan crisis unfolds. East Asia, which excludes Japan and the Indian subcontinent, is expected to grow 8.4 per cent this year and 8.2 per cent in 2008.

China is a perfect example of the risks that policymakers face. ‘The authorities are rightly aiming at avoiding excess demand and the spillover of high food prices into generalised inflation, and mopping up liquidity and raising interest rates will continue to be needed,’ the World Bank said in a Nov 15 report.

‘However, the main macroeconomic task remains to contain the rising trade surplus, and a stronger real exchange rate is the most obvious tool.’ Obvious, but also politically explosive. China’s consumer prices rose 6.5 per cent in October from a year earlier, matching August’s gain, the biggest in more than a decade.

The news has economists such as Wang Qing of Morgan Stanley concerned that the world’s fourth-biggest economy is on the verge of overheating.

China shows the futility of finding comfort in core inflation figures. Price increases for non-food items were just 1.1 per cent in October, the same as September.

‘Food is still the primary force driving prices upward, although in a poor country where one-third of the CPI basket is food, I would think that rising food prices must affect wages and, through wages, the rest of the economy,’ says Michael Pettis, a finance professor at Peking University.

The same goes for higher oil prices, which can only be dismissed for so long. When crude oil hit US$50 a barrel, analysts told investors not to worry.

Similar noises are being heard as oil approaches US$100 a barrel. How much longer can economists and investors live in denial that commodity prices will eventually filter into economies? Some nations are becoming more serious about inflation.

In Indonesia, prices rose 6.9 per cent in October, near the upper end of the central bank’s range of 5 per cent to 7 per cent.

Deputy central bank governor Hartadi Sarwono says Bank Indonesia wants the currency to be ’stable and strengthen’ to help ‘tame inflation.’

Accelerating inflation may give Asian policymakers their biggest test in a decade. It doesn’t help that the challenge comes amid turmoil in global credit markets, an uncertain outlook for the US and increasing ‘hot money’ capital flows.

Asia really needs to stand and deliver to prove it can handle the investment flowing its way. The region now has the chance to show how far it has come from the dark days of the 1990s – or hasn’t.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own

 

Source: Bloomberg (Business Times 20 Nov 07)

China supports strong US dollar, says official

Beijing hopes for an orderly solution following recent market turbulence

(CAPE TOWN) China supports a ’strong dollar’ because it would be conducive to fostering a healthy global economic system, the country’s central bank governor Zhou Xiaochuan said yesterday.

Speaking to reporters, Mr Zhou said that Beijing hoped for an orderly solution following recent market turbulence stirred by defaults of US mortgages. ‘So in this sense, actually we hope to see a strong dollar,’ he said. ‘We support a strong dollar,’ he added.

The US dollar’s recent slide was a major topic of discussion at a weekend summit of financial leaders of the Group of 20 (G-20) economic powers and is expected to top the agenda at a current meeting of central bank governors in Cape Town.

The opinions of different central banks towards the US dollar were ‘close to each other’ in the context of international gatherings such as the G-20 and the International Monetary Fund (IMF), Mr Zhou said.

Turning to the domestic economy, Mr Zhou said that Beijing need not raise interest rates too frequently given that current inflationary pressures were coming mainly from rising food prices.

But China could not rule out further interest rate rises although none were on the cards ‘next week’.

Given excess liquidity in the economy, however, China would continue to raise banks’ reserve ratios, he said.

China’s central bank has raised interest rates five times this year to curb inflation and prevent real returns on bank deposits from sinking too far into negative territory.

Earlier this month, China announced that it would raise banks’ reserve ratio by 0.5 percentage points to 13.5 per cent, a record high. The central bank said that the move would take effect on Nov 26.

China would also consider letting its currency move more freely if necessary although it is comfortable with current settings, Mr Zhou said. China will gradually widen the band within which the yuan is allowed to trade, he said.

 

Source: Reuters, AFP (Business Times 20 Nov 07)

Howard faces bust despite Aussie boom

(SYDNEY) Australia’s economy is booming, so the question of why the opinion polls show the government heading for defeat in elections on Saturday puzzles Prime Minister John Howard.

The conservative leader has gone from suggesting the electorate must be joking to complaining that Asian growth is getting the credit that is rightfully his for the performance of the economy. ‘I ask myself why is it that the polls are so bad for the government at present,’ he mused aloud recently while talking up his government’s achievements during more than 11 years in power. ‘I think one of the reasons is that the Labor Party has successfully created the impression that it doesn’t matter who is in government, the economy will continue to grow.’

Mr Howard’s ministers have been equally plaintive, with Foreign Minister Alexander Downer likening the government’s economic success to the winning ways of the nation’s world champion cricket team.

‘If the Australian cricket team is winning, which it is at the moment, you don’t go around and sack the whole team,’ he said.

But that, according to the opinion polls, is exactly what the Australian electorate plans to do to the government on Saturday, installing in its place the centre-left Labor Party led by Kevin Rudd.

While the election is about more than the economy, hip-pocket issues have dominated the campaign and analysts say Mr Howard is partly right when he complains that he is not given credit for the economic boom.

‘Most people realise the main strength of the economy comes from overseas factors rather than anything the government has done,’ said Wayne Errington, academic and co-author of a biography on the prime minister.

Rapid growth in Asian countries such as China and India has seen a blow-out in demand for Australia’s vast mineral resources, firing up the economy and cutting unemployment to 30-year lows.

But the very strength of the growth has presented a problem for Mr Howard, Mr Errington told AFP, with inflationary pressures forcing six interest rate hikes since the last election and putting pressure on mortgage-belt home buyers. ‘That in itself wouldn’t be a big problem apart from the fact that Mr Howard made a lot of the promise to keep interest rates low at the last election so it brings up all sorts of credibility problems.’ But Mr Errington and others believe the government has been hurt most on the economic front by its new union-busting labour laws, which critics say erode job security and wages by forcing workers to sign individual contracts.

‘What they’ve done with industrial relations is they’ve found a way to insert a sense of uncertainty into people’s well-being amongst all of this economic prosperity,’ said Monash University’s Nick Economou.

Despite the economic boom ‘there are great disparities in wealth, large numbers of people not doing so well’, he told AFP. Opinion polls show that the government is deeply unpopular even in some of the most affluent parts of Australia, suggesting that the electorate’s gripes go beyond the economy.

 

Source: AFP (Business Times 19 Nov 07)

S’pore, China to jointly develop eco-city

Tianjin Eco-City to be a model of sustainable devt

(SINGAPORE) In a highly anticipated landmark signing at the Istana yesterday, the governments of Singapore and China inked a framework agreement to jointly develop an eco-city in Tianjin, which will deepen cooperation and bring bilateral relations to greater heights.

The vision is for the Sino-Singapore Tianjin Eco-City to be a model of sustainable development that is socially harmonious, environmentally friendly and resource-efficient.

It will be developed by a joint venture between a Singapore consortium led by Keppel Corporation and a PRC consortium comprising Chinese companies such as the Tianjin Binhai New Area Urban Infrastructure Construction Investment Co Ltd, Tianjin TEDA Investment Holdings Co Ltd and the China Development Bank.

Prime Minister Lee Hsien Loong said he was pleased with the decision and was confident the Chinese central government and the Tianjin government will give the project their full support.

This project is yet another flagship of bilateral cooperation between Singapore and China since the 13-year-old Suzhou Industrial Park, visiting Chinese Premier Wen Jiabao said.

‘The Suzhou Industrial Park has become a crystallisation of the friendship between our two countries, and with the eco-city to be built in Tianjin, it will become another highlight in our relations,’ Premier Wen added.

The two leaders signed a framework agreement that set the parameters for collaboration, while a supplementary pact that guide the implementation details was signed by Minister for National Development Mah Bow Tan and China’s Construction Minister Wang Guangtao.

Under the framework agreement, China and Singapore will share their expertise and experiences in the formulation of policies and programmes to engender social harmony, urban planning, environment protection, resource conservation, recycling, ecological infrastructure development, use of renewable resources, reuse of wastewater and sustainable development.

Deputy Prime Minister Wong Kan Seng and Vice- Premier Wu Yi will jointly chair a Singapore-PRC Joint Steering Committee (JSC) to oversee all major issues relating to the development of the eco-city project while a Joint Working Committee (JWC), co-chaired by Mr Mah and Mr Wang will address issues and problems related to the development. The JWC will report to the JSC, which will be under the Joint Council for Bilateral Cooperation (JCBC).

The key outcomes spelt out under the supplementary agreement are a vibrant local economy with good environmental conditions, the formation of socially harmonious and inclusive communities, good environmental technologies and practices, and a reference for other cities in China in the management, technological and policy aspects.

Further details of the eco-city are being finalised.

Earlier on, the leaders met for about an hour, where they reviewed the 17 years of Sino-Singapore bilateral ties and discussed other issues such as Singapore-China free trade agreement, cross-straits situation and Myanmar.

Both leaders expressed confidence in the current state of relationships that are based on mutual interests and respect.

‘Our relations are good because the foundations of the relations are based on compatible strategic views of the way Asia is developing, of China’s development, and peaceful emergence into the world order,’ PM Lee said.

‘Therefore, we believe that there’s room for us to work together for mutual benefit and on the basis of equality and mutual respect.’

Yesterday’s state visit by Premier Wen also saw the official launch of the Singapore China Foundation (SCF) which seeks to strengthen people-to-people ties between Singapore and China through cooperation in education and human resource development.

The SCF currently offers two scholarship schemes to Singaporeans and PRC nationals to pursue Master programmes and executive programmes in Singapore and China and has awarded scholarship schemes to more than 20 Singaporean and Chinese officials since its inception under a memorandum of understanding in 2004.

PM Lee also hosted Premier Wen to an official dinner banquet yesterday at the Istana Banquet Hall.

In the days ahead, Premier Wen will be attending a series of high-level regional summits here, including the 11th Asean Plus Three Summit and the Third East Asia Summit that are held alongside the 13th Asean Summit. He will deliver a keynote speech at the National University of Singapore today.

 

Source: Business Times 19 Nov 07

Inflation rising as Hong Kong looks to grow 6% this year

Govt revises target from 5-6%, but inflation hits 2.5% for first nine months

IN HONG KONG

HONG Kong’s economy is tipped to grow by 6 per cent this year as the city continues to enjoy strong domestic demand and low unemployment, but inflation has hit levels not seen since the 1997 handover.

‘The momentum for economic growth has become more obvious and significant,’ acting government economist Helen Chan announced yesterday, unveiling a revised GDP forecast of 6 per cent for 2007.

The government had previously forecast a rate of between 5 to 6 per cent. In the third quarter of 2007, GDP was up 6.2 per cent in real terms over a year earlier. It marks the 16th consecutive quarter of economic growth in the city.

However, the increase was just 1.7 per cent compared with the previous quarter, marking a small slowdown in the rate. Although domestic demand was strong, exports were seen to suffer amid a slowdown in the US economy.

Private consumption grew 9.7 per cent in real terms in the third quarter, buoyed by a strong labour market and rising household income.

Unemployment in the third quarter was 4.1 per cent, the lowest since mid-1998. Wages also increased by 2.9 per cent during the same period.

Inflation, however, continued its ascent, hitting 2.5 per cent in the first nine months after netting out the effects of a rates concession and public rental waiver introduced in February as part of Budget giveaways.

‘Inflation continued to creep up,’ Ms Chan said. ‘Inflation is not too high but we have to monitor the situation closely.’ The rate for 2007 as a whole is expected to be 2.7 per cent, she said (again after netting out the rates/rental effect).

She added: ‘I don’t think it’s a great problem. The current inflation rate is still quite a modest one.’

Hong Kong is facing a food price hike, partly due to a global trend but also because of its heavy reliance on the mainland for imports. Prices of certain foodstuffs – most notably meat and cooking oil – have surged in China in recent months. The headline inflation rate is expected to go up further in the fourth quarter.

Total exports were up 6.4 per cent in real terms in the third quarter compared with a year earlier. However on a seasonally adjusted quarter-to-quarter comparison, total exports of goods decreased slightly by 0.2 per cent in real terms during the period.

Policy-makers will be watching further developments in the US economy closely, Ms Chan stressed, with Hong Kong relying on the US market for 13 per cent of its exports. China now accounts for 49 per cent of the city’s exports.

‘In a way we have felt the pinch of a slowdown in the US economy,’ Ms Chan explained. ‘In the near term we are cautiously optimistic about the export outlook.’

She stressed: ‘Of course, we have to keep a close eye on changes in the external environment.’

Exports in services were, by contrast, up by 12.3 per cent in real terms during the third quarter, which the government says reflects a strong rise in inbound tourism and the city’s vibrant financial market activities.

Hong Kong’s stock market has been on a rollercoaster ride over the past few weeks, pushing through the 30,000 barrier before suffering sharp corrections. On Friday the benchmark Hang Seng Index closed at 27,614.43, down 1136 points or 3.95 per cent.

 

Source: Business Times 17 Nov 07

Trade among Asean nations drops to 21% of total exports

Fall raises question of whether 2015 target for a unified market can be met

THE 10 Asean economies may be booming, but trade among member countries has fallen as a proportion of their total exports.

This casts a worrying shadow on the region’s long-standing ambitions to become a unified economic market by tearing down trade barriers and cooperating more closely.

The finding, in a new report, provides food for thought for Asean leaders meeting in Singapore from tomorrow to Thursday at the 13th Asean Summit.

The overly slow removal of non-tariff barriers by Asean countries, as well as China’s phenomenal economic growth, are to be blamed for the decline, said the Economist Intelligence Unit (EIU) report.

Last year, exports to other Asean nations by the region’s six biggest economies made up 20.9 per cent of their total exports, down from 22.4 per cent in 2000, the study found, using United Nations data.

In Singapore, the share of exports to other Asean nations fell to 21.2 per cent from 26.7 per cent.

‘This doesn’t augur well for Asean’s aspirations to become a single trading bloc,’ said EIU Asia-Pacific editorial director Charles Goddard.

‘Some non-tariff barriers are still not broken down. There are still significant hurdles to trade within Asean,’ he said at a press conference.

Sponsored by DHL, the report was published yesterday, to coincide with the start of the Asean business and investment summit that the express delivery giant also sponsored.

‘This report makes clear that governments of Asean nations must redouble their effors to reduce trade barriers in their own backyards,’ said DHL Asia-Pacific chief executive Dan McHugh. ‘Intra-Asean trade still has great potential to provide economic opportunity and raise living standards.’

In absolute terms, intra-Asean trade is up, but it has been eclipsed by the even faster growth of exports to China.

Its economic rise and its role as the world’s final assembly centre have made China an increasingly popular destination for Asean component makers. Exports to China account for 7.3 per cent of total Asean exports, up from 3.8 per cent seven years ago.

Citibank economist Chua Hak Bin said: ‘Ultimately, the size of trade flows is dependent on the pace at which external markets grow. The strongest markets have been China and India, which have surpassed Asean in growth.’

Still, Asean can do more to boost a greater exchange of goods within the region, said DHL South-east Asia head Yasmin Khan. While Asean has harmonised customs regulations, she said, differences in implementation still cause delay in some countries.

Asean’s plans to create a single market by 2015 will address some issues, Mr Goddard said. ‘But to be honest, quite a lot more needs to be done – and quickly.’

Economists say the dismantling of trade barriers has been slower than planned.

‘Nationalist sentiment among some Asean members is still strong,’ said Citibank’s Dr Chua. ‘There have been instances where investments from neighbouring countries were viewed with suspicion.’

Asean is unlikely to achieve a European Union-level of integration, as differences in economic development and wealth are too wide, Fortis Bank Asia market strategist Joseph Tan said.

‘I don’t think there’s sufficient political will to push towards the 2015 goal. Many member countries have more immediate domestic challenges to worry about.’

 

Source: The Straits Times 17 Nov 07

US credit woes hurt foreign funds to Asia

While inflow is fast slowing for HK, China and India, S’pore is experiencing outflow

THE flood of foreign funds surging into Asian bourses over the past four weeks has been reversed by the ongoing credit woes in the United States.

Singapore has started experiencing an outflow, with a net sale of US$2.1 million (S$3 million) last week by funds investing exclusively in Asian equities, according to Citigroup Investment Research.

This is a striking contrast to the situation in end-September, when US$110.4 million flowed into local equities in the space of a week.

And in other bullish regional markets such as Hong Kong, China and India, the inflow of foreign funds into equities has slowed down considerably.

Only US$84.3 million was invested in H-shares – shares of China firms listed in Hong Kong – between Nov 1 and Nov 7, compared with US$576.5 million between Sept 27 and Oct 3.

Over the same period, foreign funds spent just US$29.9 million on Hong Kong stocks, excluding H-shares, an 86 per cent plunge from the US$216.5 million they spent in the week of Sept 27 to Oct 3.

The slowdown in fresh investments in Asian equities coincided with the bearish mood in the US, where banks have been writing down billions of dollars in their pool of debts.

That has been coupled with the greenback plunging against regional currencies following two US interest rate cuts.

It raises fears of an unravelling in the carry trade – hedge funds taking out huge yen loans because of Japan’s low interest rates to invest in higher-yielding assets.

Sentiment has also been spooked by perception that H-shares have shot up too fast, fuelled by foreign investors entering Hong Kong and Singapore in anticipation of China allowing domestic funds to invest in overseas equities.

Fund managers’ appetite for risk has also weakened considerably. Merrill Lynch’s latest survey of Pacific Rim fund managers showed that defensive sectors – insurance, retail and consumer products – are now preferred over sexy growth stocks.

And despite oil soaring close to US$100 a barrel, fund managers have started to pare down positions in the energy sector.

Despite the falls in regional markets, the Merrill Lynch report noted that fund managers are still ‘overweight’ on shares, having reduced cash holdings to 2.8 per cent from 3.7 per cent last month.

And even as Hong Kong’s Hang Seng Index has dropped by more than 10 per cent from its record high in September, Merrill Lynch said fund managers continue to favour Hong Kong and ’sharply increase their enthusiasm for frontier markets’.

‘Fund managers have also returned to Singapore and reduced their exposure in other Asean markets,’ it added.

But Morgan Stanley’s head of global emerging markets equity strategy, Mr Jonathan Garner, said that next year may be more difficult than this year.

While the focus is on the impact any slowdown in the US economy could have on emerging markets, Europe is a much bigger export market for developing countries. ‘Weakness in the US economy could spill over to the euro zone. Emerging markets may survive a slowdown in the US, but not the US and Europe combined,’ said Mr Garner.

He expressed particular concern over a possible ‘contraction in valuations’ in China and India, after their exceptional stock market performances this year. ‘H-shares valuations are back at the 1997 and 2000 peak levels.’

Morgan Stanley has adopted a defensive posture, adding Telekom Malaysia and removing China Mobile and Hyundai Heavy from its focus list last week.

 

Source: The Straits Times 17 Nov 07

World Bank sees robust East Asia growth next year

But if oil prices hit new highs, region’s resilience will be tested, it cautions

 

IN TOKYO

THE East Asian economies will continue to see robust growth next year despite a likely US slowdown, but new highs for oil prices will test the region’s resilience, says the World Bank.

 

The bank has, in its latest East Asia & Pacific Update, raised its growth forecasts for emerging East Asian economies in 2007 and next year, despite heightened downside risks to global growth from financial turmoil and soaring oil prices.

 

‘We expect the stronger growth momentum in the region to carry through 2008,’ says Milan Brahmbhatt, principal author of the report. The bank’s optimism stems from a sharp spurt in East Asia’s growth in the first half of this year, and its confidence that the region’s domestic demand is strong enough now to offset a slowdown in exports.

 

Emerging East Asian economies are projected to grow at a robust 8.4 per cent overall in 2007 – the fastest pace in three years – and to moderate only slightly to 8.2 per cent next year. Its forecasts see the Singapore economy growing 7.4 per cent this year, and 6.4 per cent in 2008.

 

Even if the US falls into recession as a result of the sub-prime mortgage crisis and growth there plunges to zero in 2008, that should shave only one percentage point off the median growth of emerging East Asian economies, the bank says.

 

But rising oil prices are a key risk. The bank’s growth forecasts for 2008 are based on an assumption that oil prices will average US$70 a barrel next year. But if they stay at around US$90, this could shave a further one percentage point off growth projections, it says. Thus far, even though oil prices have more than doubled over the last three to four years, the impact on world growth has been fairly muted, the bank notes.

 

One reason is that the surge in prices has come mostly from strong global demand growth rather than a decrease in supply. The bank also cites research suggesting that the sensitivity of growth in developed countries to oil shocks has fallen sharply in the last two decades – with impact for East Asian economies. But further new oil price highs next year will test the robustness of the region’s and global growth, it cautions.

 

Overall, the World Bank is sanguine about the outlook for East Asia, saying that ‘the region’s performance in previous global downturns suggests that the impact on East Asia is unlikely to be especially severe or protracted given the region’s strong macroeconomic fundamentals and in the absence of a major downturn in global high- tech demand such as occurred in 2001′.

 

It ’substantially increased’ its growth forecasts for 2007 and 2008, compared with six months ago, mainly because of the ‘unexpected and large domestic demand-led acceleration of growth in China (which is forecast to grow at 11.3 per cent this year and 10.8 per cent in 2008)’. Growth has also picked up in most of the other larger economies of the region as a result of more buoyant investment and spending on consumption, it adds.

 

Emerging East Asian economies are defined by the World Bank to include those of China, Indonesia, Malaysia, the Philippines, Thailand, Hong Kong, South Korea, Singapore and some unspecified smaller economies in the region. In contrast to its upbeat outlook for East Asia, the bank revised down its growth projections for the US and the OECD area as a whole by one percentage point and one-and-a-half percentage points respectively. Growth across the OECD as a whole is likely to be only 2.2 per cent in 2008, it says, while growth in Japan is expected to fall from 2.2 per cent in 2006 to 2 per cent this year and to 1.8 per cent in 2008.

 

The outbreak of the US sub-prime crisis has had little adverse impact on East Asia so far, the World Bank notes. ‘Preliminary assessments suggest that direct exposures of East Asian financial institutions to sub-prime risks are relatively limited.’ But ‘risks may increase if global instability and tightening of credit markets intensify and lead to further declines of prices of various other structured assets held by banks.’

 

Source: Business Times 16 Nov 07

Credit crisis ‘unlikely to faze East Asia’

World Bank expects region to shrug off sub-prime woes, high oil prices to log in solid growth

THE sub-prime crisis in the United States is not posing a significant risk to East Asia’s rapid growth, according to the latest World Bank forecasts.

 

The region is expected to expand by a solid 8.2 per cent on average next year, shrugging off the subprime fallout and high oil prices, said the bank’s half-yearly report released yesterday.

 

This is slightly lower than the 8.4 per cent growth rate projected for this year, following last year’s 8.3 per cent expansion. ‘The impact of the US sub-prime housing crisis and the renewed surge in oil prices have clearly increased downside risks,’ said Mr Milan Brahmbhatt, the principal author of the report. ‘Nevertheless, we expect that the stronger growth momentum in the region will carry through in 2008.’

 

In fact, the bank’s overall outlook for East Asia – spanning economies from China to Vietnam – has turned rosier over the past six months. This is despite sub-prime woes shaving a projected 1 percentage point off US growth next year, which could lead to waning appetites for East Asian-made imports in America and other rich countries.

 

One reason is that the region’s strong expansion has so far been driven by domestic, not external, demand. This is especially so in countries such as China and Singapore, which are experiencing investment booms. ‘It is worth noting that this year’s pickup in East Asia has occurred despite a substantial decline in US import growth, and some more modest slowing in the region’s own exports,’ said the report.

 

The bank does not believe the US will slide into a recession, but even if that does occur, the impact on East Asia will not be severe, it said. ‘A fall in US growth to, say, zero in 2008 – a 2 percentage point growth decline – might be accompanied by a 1 percentage point fall in median East Asian economic growth from around 6 per cent to 5 per cent – significant but no disaster,’ it said.

 But it did warn about the impact of soaring crude prices: ‘New highs for oil…will test the solidity of the East Asian and global economic expansions in 2008. ‘We calculate that an average oil price of US$90 in 2008 will be associated with an income loss in East Asia

of about 1.1 per cent of gross domestic product.’

 In its latest regional outlook, the International Monetary Fund (IMF) also highlighted the issue of rising food prices in economies such as China. The fund’s resident representative in Singapore, Dr Ranil Salgado, presenting the outlook yesterday, noted that inflation has picked up in Asia’s newly industrialised economies as well as in China.

Furthermore, despite the run-up in global oil prices, China decided to raise its domestic oil prices only recently, with Malaysia and Indonesia likely to follow suit. Consequently, ‘there could be even more inflationary pressures than shown here’, he said.

The IMF predicts that Singapore’s GDP growth this year will hit 7.5 per cent before easing to 5.8 per cent next year. ‘Assuming that credit markets gradually normalise, the fallout from the global financial turmoil should be manageable for emerging Asia owing to strong economic fundamentals and healthy corporate and banking sector balance sheets,’ noted the report.  Source: The Straits Times 16 Nov 07

China’s prosperity a boon for S’pore: MM Lee

Minister Mentor lauds efforts at greening Beijing before Olympics

A GROWING and prosperous China is good for Singapore, Minister Mentor Lee Kuan Yew said yesterday.

 

Mr Lee, who is in Beijing to meet China’s top leaders, made the remarks when he held talks with Chinese Foreign Minister Yang Jiechi. Trade and investment between the two countries have grown significantly over the years.

 

Singapore and China are working to take already close ties even further with the signing of a new flagship collaboration – the eco-city project. The project aims to showcase how China can balance rapid economic growth with environmental protection.

 Achieving this balance is a top priority for the Chinese leadership, which is concerned that continued environmental degradation would eventually hurt the country’s booming economy.

‘A prosperous China is good for Singapore,’ said MM Lee. ‘That is why we want to see China stable and growing.’

 

He also praised the capital city’s successful greening efforts ahead of next year’s Olympics, adding: ‘Whatever China wants to do, it can do better than Singapore.’

 

Mr Yang, who spoke in English throughout the 45-minute meeting, said bilateral ties were ‘very good’ and noted that Chinese Premier Wen Jiabao would be paying an official visit to Singapore this Sunday.

 This is the first visit to Singapore by a Chinese premier in eight years.

During his trip, Mr Wen is expected to sign several bilateral agreements, including a pact on the eco-city project. Mr Yang, who returned from a trip to Iran on Tuesday, will also be part of the Chinese delegation visiting Singapore.

 

Commenting on the Chinese Foreign Minister’s hectic schedule, MM Lee said: ‘(China) is now a very important country’. ‘You are all over the world. Afghanistan, North Korea, and Iran … any trouble spot, (such as) Darfur, you are in.’

 

MM Lee and Mr Yang also discussed regional and international issues of ‘common concern’, the official Xinhua news agency reported without elaborating.

 

Mr Lee was accompanied by Mrs Lee, Minister in the Prime Minister’s Office Lim Swee Say, Senior Parliamentary Secretary for Education Masagos Zulkifli and senior officials during the four-day trip, which began on Wednesday.

 Defence Minister Teo Chee Hean will join the Singapore delegation today. They will meet Chinese President Hu Jintao, as well as Mr Xi Jinping, China’s sixth-ranked leader, and state councillor Tang Jiaxuan today. Source: The Straits Times 16 Nov 07

Credit crisis, inflation threaten world growth, says Fukui

GLOBAL economic growth is under increasing threat from two fronts – the United States sub-prime crisis and soaring commodities prices that may push up inflation.

The warning came from Bank of Japan governor Toshihiko Fukui at a function in Singapore last night. He said the sub-prime turmoil could severely disrupt financial markets, which could then have a ripple effect on economic growth. The risk of inflation is just as potent, presenting a challenge to central bankers who will need to use monetary policy to maintain price stability amid strong growth, added Mr Fukui, who spoke as part of the Monetary Authority of Singapore Lecture series.

 

Inflation expectations have been ‘generally contained’ in many markets. But rising oil prices, driven by high economic growth worldwide, especially in oil-hungry emerging markets, have increased the ‘risk of a rise in inflation expectations in the longer term’, Mr Fukui said.

 

Rising commodity prices will also ‘inevitably impair terms of trade for oil-consuming countries’, he added. Mr Fukui acknowledged that ‘downside risks for the US economy’ persisted, but the risk of stagflation – stagnant growth accompanied by high inflation – in the US and other economies was ‘muted compared to the 1990s’.

 

The credit market turmoil, linked to high-risk sub-prime home loans, was actually the result of many years of favourable growth and benign conditions in the world economy.

 

‘The crux of the problem, as I understand it, is that risk evaluation had become too lax under those benign conditions, and this has led to a correction through market forces,’ said Mr Fukui.

 Financial imbalances were allowed to accumulate that, in turn, triggered corrections and posed a risk to economic stability.

Central bankers, like goalkeepers in football teams, must, therefore, defend against turbulence arising from the increasing complexity in the international flow of funds, he said. They must accurately read the risks of the global economy and financial markets to ’stabilise the market when it is under pressure’. Source: The Straits Times 16 Nov 07

High oil price demands good policies

IT would be a fallacy to imagine that the prospect of a US$100 price tag for a barrel of oil will lead to a push for renewable fuels any time soon. Simply put, there is nothing definitive yet on the horizon offering a reliable, continuous and cheap alternative in the face of mounting energy demand.

Oil prices have remained resilient in their upward trajectory. Producers remain steadfast about the adequacy of supply in the system even as large consumers clamour for more.

Traders focus on the thin inventories to push the price up. When oil was at half the current price level, it was seen as compelling enough for the big competitive initiatives. Yet there is no excited talk of renewable sources of energy or even theories that high prices would yield new oil supplies, driving prices down. Instead we have ever higher-priced oil.

Yes, consumers are in a fix, for which they should share the blame. Have they been willing to make the necessary sacrifices and use pressure to accelerate the shift? In countries that matter to oil consumption, people have not been pushy enough.

Politicians may make noises but will act only if they are convinced that a change – putting at risk trillions of dollars of infrastructure investment and millions of jobs – is politically worth their effort.

Then subsidies and legislation will follow for a meaningful change of direction. Until then, some countries will do their bit but no cohesive global policy or focus on the next big thing will emerge. Big energy companies spend scant sums on research and development on renewable fuels. Independent R&D betting on the new future have surged but their budgets are small beer.

Unless the existing big players like car, energy and power companies as well as governments line up behind a change and consumers show a determination to support the drive, we will continue to grope for good answers for years, if not decades. Not convinced? ExxonMobil has forecast energy demand will grow 1.3 per cent a year, a tad lower than at the current rate, requiring a third more energy by 2030.

It says hydrocarbons would still meet 80 per cent of demand then, though renewable energy supply will grow at a faster clip of 9 per cent a year from now.

Rich nations’ energy adviser, the International Energy Agency, is also equally bleak. Unless governments embark on low-carbon policies, it sees the unprecedented rise in energy demand accelerating climate change, threatening global energy security and possibly creating a supply crunch. By 2030, the world will have to find an additional 30 million barrels per day, equivalent to Opec’s current total daily production.

Such an enormous challenge demands good policies and determined execution. Global R&D cooperation and conservation, not bitter recrimination by rich polluters, should be the way forward.

 

Source: Business Times 15 Nov 07

Japanese banks hit by fresh sub-prime woes

More sub-prime losses ahead for Japan’s banks, say analysts

(TOKYO) Japanese financial firms were hit by fresh sub-prime woes yesterday as several banks posted profit slumps and two securities firms delayed a planned merger due to recent market turmoil.

Japanese banks are also finding conditions increasingly tough at home as hopes of the central bank raising its rock-bottom interest rates fade amid growing uncertainty about the outlook for the global economy.

Mizuho Financial, Japan’s second-largest bank, reported a 16.6 per cent drop in first-half net profits to 327.06 billion yen (S$4.24 billion) as it booked losses of almost 70 billion yen related to the US subprime loan crisis.

Mizuho also slashed its full-year net profit forecast to 650 billion yen from 750 billion, although that would be 4.6 per cent higher than the previous year.

Many major banks have been burnt by rising defaults by American homebuyers on sub-prime mortgages that were often repackaged and sold on financial markets.

Japanese banks have been among those hit by the turmoil although they are believed to be less exposed than many of their foreign rivals. Analysts said there could be more sub-prime losses ahead for Japan’s banks.

‘There’s a bit more to come out of the woodwork yet I suspect,’ said Jason Rogers, a credit analyst at Barclays Capital.

‘If you have exposure it’s very hard to draw a line under the losses. But it is containable and manageable and they (the Japanese banks) are in a far better situation than many of their international peers,’ he added.

Shinsei Bank yesterday reported a 40.3 per cent drop in first-half net profits to 23.19 billion yen amid swelling losses from the sub-prime crisis, roughly in line with a reduced forecast released a day earlier.

Another Japanese mid-size player, Aozora Bank, said its net profit for the fiscal first half to September fell 20 per cent to 42.75 billion yen, hit by losses arising from its investments in mortgage backed securities.

‘Given the sharp declines in markets since mid-October, it may take some time before the sub-prime mortgage lending troubles settle down,’ chairman Kimikazu Noumi told reporters.

Japan’s biggest bank Mitsubishi UFJ Financial Group (MUFG) last month warned it expects a 31.9 per cent drop in net profits to 600 billion yen this year due to weak income, losses on sub-prime loans and problems at its credit card subsidiary. The industry leader is expected to report its interim results next week.

Mizuho Securities and Shinko Securities meanwhile announced a four-month delay to their planned merger until May next year as financial market volatility complicates negotiations on the terms of the deal.

‘The financial market turmoil triggered by the US sub-prime mortgage problem is still showing no sign of resolving, and the situation remains uncertain,’ they said in a statement.

 

Source: AFP (Business Times 15 Nov 07)

Putting Asian markets in perspective

While valuations are no longer cheap, it is not difficult to find stable growth companies with good cash flows and yields, says TAN LYNN DAH

THIS has been a bountiful year for Asian equity markets, with Asian bourses scaling new peaks and regional economies enjoying prodigious growth.

As one of the fastest growing regions in the world, Asia’s growth is underpinned by a confluence of supportive factors such as favourable demographics, structural reforms and moderate inflation. The region is stronger fundamentally and is more resilient, with most Asian countries having less foreign debt and vast current account surpluses to cushion against market turmoil.

The impact of the sub-prime mortgage woes has been limited in Asia because of ample cash in the regions’ banking systems.

As we enter the last lap of the year, the million dollar question on investors’ minds will be: Are there any more investment opportunities for investors in Asia, especially the Greater China region, where China and Hong Kong indices have rocketed?

With long-term fundamentals firmly in place, we believe that the Asia miracle will continue into 2008, offering more investment opportunities. Several drivers such as strengthening Asian currencies, earnings upgrades, increasing flow of private equity into the region and infrastructure investments are impetus for another year of robust growth and are expected to buoy the sustainable performance of Asian markets in 2008. Exceptional performance in the twin engines of China and India is also propelling growth in the region.

Though Asian valuations are no longer cheap, we feel that it is not too difficult to find stable growth companies with good cash flows and yields. In view of current market volatility, we are more focused than ever on companies with strong operating cash flows that are well positioned for less-thanfavourable economic conditions. We like defensive growth stocks with very predictable cash flows.

Within the Greater China region, we have been adding to Chunghwa Telecom (Taiwan), whose yield including specials is nearly 10 per cent, and 13 per cent of its balance sheet is in net cash. Another stock which we have been adding to is Singapore Telecommunications, which has 50 per cent of earnings from emerging markets and 50 per cent from Singapore and Australia, generating 10 per cent sustainable growth in earnings-per-share. The free cash flow yield is 5-6 per cent . These stocks provide both sustainable growth as well as steady dividend streams.

For the past few months, we have seen the negative effects of the sub-prime mortgage woes on established financial institutions like Northern Rock, Merrill Lynch, UBS and Citigroup. We feel that banks with global exposures are most vulnerable in a downturn and we have trimmed our holdings in financial stocks such as Standard Chartered and HSBC.

We think that asset plays will perform better than banks in Asia. Though property prices have run up quite a lot, we remain sanguine on asset reflation in Asia. We think that Asian asset prices will remain on an uptrend in the medium to long term and this is stimulative for Asian property prices.

In the Greater China region, property transactions have picked up considerably in Hong Kong, where real interest are on the decline (in tandem with US interest rates due to the HK dollar currency peg) as inflation increases. This is very positive for Hong Kong property prices. In view of this, we have added to stocks like Cheung Kong Holdings.

Another stock that we like is Jardine Matheson. The company has controlling stakes in a number of businesses, the largest of which is Hong Kong Land, which owns commercial real estate. The company trades at an attractive discount to its assets and has recently embarked on share buybacks.

We have also added to Singapore property plays like Fraser & Neave and CapitaCommercial Trust. The outlook for Asian demand looks promising, and we believe that domestic consumption should remain resilient. China is likely to be a main driver of growth in Asia, with its voracious consumption appetite. Increasingly, we are seeing intra-country travels by the Chinese to Hong Kong and Taiwan, and bourgeois Chinese have been very generous with their spending during such trips.

This synergy between the Greater China region spells investment opportunities. In view of this, we are positive on consumer stocks like Li & Fung (HK), Shinsegae (South Korea) and President Chain Store (Taiwan) for their track record and defensive growth nature.

Being industry leaders with strong management, these Asian consumer companies have the potential for further growth in 2008. For example, Shinsegae, a South Korean department store, has created a successful private label that is allowing it to enjoy attractive profit margins as one of the earliest operators of the discount store concept in Korea. The company has also ventured into the Chinese market successfully, tapping on Chinese consumption demand.

Taiwan has been a laggard this year compared to its thriving neighbours of China and Hong Kong.

Going into 2008, we believe that Taiwan’s economy will pick up after the presidential election in March. Both candidates, Frank Hsieh from the Democratic Progressive Party and Ma Ying-jeou from the Kuomintang, emphasise reconciliation and peaceful co-existence with China, which bodes well for Taiwan.

With the election as a backdrop, we believe that Taiwanese stocks will perform well in 2008. Attractive valuations have led us to buy some technology stocks like TSMC, given its stable growth and very strong cash generation ability. It also has a yield of 5 per cent . As the largest silicon foundry in the world, we believe that TSMC holds significant price potential and is undervalued vis-à-vis its Western peers. Also, TSMC stands to gain from burgeoning IT demand from emerging economies like China and India.

Infrastructure investment is likely to be a key driver of growth in Asia. With infrastructure development in the blueprint of most Asian governments, key beneficiaries are likely to be the engineering, construction and utilities sectors.

The Chinese make up 21 per cent of the world’s population, consume 46 per cent of the world’s iron ore and 25 per cent of the world’s aluminium. These figures are expected to grow exponentially with rapid expansion of China’s economy in the next decade, making China the main driver of the resources and energy sector.

With this in mind, we are invested in Hopewell Highway Infrastructure, where yield is 5 per cent and growth will remain in the low teens while the currency is appreciating. Listed in Hong Kong with strategic operations in China, Hopewell builds and operates strategic expressway infrastructure in the Guangdong Province. The company is also developing a new expressway, tunnel and bridge infrastructure projects, particularly in the thriving economy of the Pearl River Delta region.

Another company that is benefiting from increased infrastructure spending is China Resources Power, also incorporated in Hong Kong. Capacity growth is very strong as the company engages in the investment, development, operation, and management of power plants in China.

Though the Asia of today is more resilient and the region’s economy somewhat decoupled from the US, a faltering US economy could still adversely impact Asia’s growth. With such euphoric sentiment and bullish market run-up in 2007, it is inevitable that Asian markets get jittery on negative news. We view such short term pull-backs as healthy.

With strong liquidity conditions and positive market sentiment in Asia, we believe the region still has potential upside and is better placed to cope with adverse external developments.

Tan Lynn Dah is First State Investments’s marketing research manager

Inflation back to 6.5% in Oct as food prices rise

More monetary tightening, further rate hikes seen to rein in inflation

(BEIJING) China’s consumer prices rose sharply in October, tying a decade- high monthly inflation rate of 6.5 per cent, the government reported yesterday, adding to pressure for measures to cool a politically sensitive surge in food prices.

Food prices jumped 17.6 per cent in October over the same month last year, while the price of pork, China’s staple meat, soared 54.9 per cent, according to the National Bureau of Statistics.

The overall October inflation rate was higher than the 6.2 per cent reported in September and matched August’s 6.5 per cent, the highest rate in 11 years.

‘We expect more monetary tightening to rein in inflation, including further rate hikes,’ Lehman Brothers economist Mingchun Sun said in a report to clients.

Inflation has surged in recent months due to double-digit increases in food prices blamed on shortages of pork and other basic goods.

The food price spike is especially sensitive for the communist government, because China’s poor majority spends as much as one-third of its income on food.

A deputy central bank governor said last month the government expects inflation for the full year to be 4.5 per cent, overshooting the official target of 3 per cent.

Inflation for non-food items in October was just 1.1 per cent, the statistics bureau said.

Beijing froze prices of cooking oil and other basics in September, and is pressing farmers to raise more pigs, promising free vaccinations and other aid. Economists say price pressure should ease when a new grain crop is harvested and more pigs come to market.

Farmers had been reluctant to raise more pigs in part because of an outbreak of blue ear disease, which killed 70,000 animals and prompted the government to destroy thousands more. The government declared last week it had brought the outbreak under control.

An official of China’s top planning agency, the Cabinet’s National Development and Reform Commission, said in October that the government would consider investment curbs and other unspecified ‘measures to adjust prices’.

The government said in October that pork prices fell in August due to increased supplies. There was no immediate explanation yesterday for the sharp price increase in October.

Regulators raised state- set prices for diesel and gasoline by 10 per cent on Nov 1 in an effort to curb demand amid a fuel shortage. But the government said that should add only 0.05 percentage points to the monthly inflation rate.

The government has raised interest rates repeatedly this year to curb a boom in construction and investment that regulators worry could lead to financial problems.

Economists say the recent inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP (Business Times 14 Nov 07)

Still positive on Asian equities

Region will continue to expand at a respectable pace even if below-potential US growth extends into 2008.

DESPITE a credit crisis emanating from the US and fresh highs in oil prices, global stock markets have broken records again this year. In Asia, especially since the August turmoil, investors have experienced impressive returns. Most regional equity indices boast year-to-date gains well above the returns seen in the US or Europe. Economic growth has been strong and regional markets have risen on the back of robust earnings growth, PE multiple re-rating, and strong currencies.

Naturally, the question arises: Can this continue in 2008?

We believe it can. Valuations have increased but do not seem stretched. With the exception of China, PE multiples are not at astronomically high levels. Current PE ratios for the Asian indices (excluding China, India and Japan) range from 14 to 23, which are not a far cry from 18 for the S&P500.

We believe Asia will continue to grow at a respectable pace in 2008, which keeps us positive on Asian equities as an asset class. Asian economies should remain healthy, ie, continue to see more broad-based growth, current account surpluses and lower debt levels. They will also continue to see stronger intra-regional trade – rising dependence on China, in particular, and falling dependence on US demand.

Our central scenario is that Asia will continue to expand at a respectable pace even if below-potential US growth extends into 2008. A gloomier US growth outlook is not good news for Asia, but weak US growth for the past two years has not prevented Asia from accelerating modestly all the while.

Another year of 2 per cent growth in the US, should it be that weak, would make little discernible difference to Asia.

We believe the US economy will avoid a recession as the drag from housing construction fades and core consumption remains resilient. We continue to take confidence from the fact that in the far sharper downturn of 2000-01, when 2.5 million Americans lost their jobs, consumption growth remained above 2 per cent year-on-year.

Major risks

It is true that the balance sheets of Asian corporates, like the economies they operate in, are in much better shape than 10 years ago, before the financial crisis of 1997-1998. But although Asian stock markets are less vulnerable than in the past, they are not insulated from developments in the rest of the world.

There are, as always, a number of risks for Asian markets. What are they?

First, on a PE basis, Asia’s emerging markets no longer trade at a discount to developed markets.

Valuations have been catching up and re-rating (ie, stock price increases per dollar of earnings) over the recent years has helped push many Asian markets to a premium (Table 1). Clearly, investors are seeing better long-term earnings growth potential in Asia.

Second, on a price-to-book basis many Asian markets trade at higher multiples now than in 2004.

China and India, in particular, trade at huge premiums to developed markets. Thailand and Taiwan are the only exceptions, with the SET and the TWSE trading below and near 2004 levels (Table 2).

Third, borrowing costs have risen, as uncertainty has increased and risk has been repriced. This is evidenced by tighter liquidity and wider credit spreads in money markets and steeper yield curves. It has become more difficult for businesses to obtain loans, not only in the US but also in Europe.

Money markets are unlikely to normalise in the near-term but they should function normally again in 2008 after more information on financial sector exposure to certain credit markets has surfaced. If history is any guide, it will take a while before the credit crunch subsides.

Fourth, there is the risk that inflation will eat more aggressively into returns. Markets seem to have forgotten about this amid US growth concerns but policy makers have not. Inflation risk will almost certainly return as a major theme in markets in 2008. Central bankers are sure to remind markets of this.

Bottom line, we remain positive on the outlook for Asian equity markets, but risks surrounding this central scenario have increased slightly in recent months and the earnings outlook has become more cloudy.

Bonds, commodities

The outlook for Asian bond markets is bearish as yields are expected to rise. Inflation risks suggest that central banks will be biased towards tighter monetary policy in 2008. Moreover, inflation expectations, while currently very low, are likely to rise. Sentiment among bond investors is hence likely to be weak and returns in 2008 will be less impressive than in 2007. After a strong showing in 2007 and with slower global growth expected, the outlook for commodities appears less certain now and there are material downside risks in many markets.

Taking all the above into consideration, investors will have to come to terms with the idea that volatility is returning. The recent turmoil in markets likely marks the end of the low-volatility period we have witnessed from 2004 to 2006. But this is not a bad thing. As the swings in financial markets increase, opportunities for investors to achieve high returns increase too. But, as there is no more easy money, it also means that the portfolio approach to investing, ie, risk diversification, is becoming even more important.

The Chicago Board Options Exchange SPX Volatility Index (VIX) reflects a market estimate of future volatility in the S&P 500, based on the weighted average of the implied volatilities for a wide range of options. The Merrill Option Volatility Estimate (MOVE) is a yield curve weighted index of the implied volatility on Treasury options and reflects a market estimate of future Treasury bond yield volatility.

According to modern portfolio theory, investors should assess portfolios based on overall risk-reward characteristics rather than the individual risk-reward characteristics of the constituent securities. Put differently, investors should not assess the risks and rewards of securities individually but in a portfolio context, ie, how they affect the portfolio’s overall risk and return. This is because a portfolio’s risk is not only a function of the individual securities’ risks but also of their correlations.

Exposure to risk is reduced by combining a variety of securities, all of which are unlikely to move in the same direction. Because not all markets move up and down in value at the same time or at the same rate, a portfolio approach promises more consistent performance under a wide range of economic conditions.

Our asset allocation model, which helps us find portfolios that have optimal risk/return characteristics, suggests that for a 12-month allocation horizon 54 per cent of funds should be allocated to equities, 28 per cent to bonds, 18 per cent to cash and zero to commodities (Figure 1). The resulting portfolio has an expected return (annualised hedged return in SGD terms) of 15 per cent and expected risk (annualised standard deviation of daily hedged returns) of 8.4 per cent. It is an optimal portfolio, given our hedged-return expectations, historical risks, and the historical correlations between markets.

Within the portfolio context we favour Singapore, Hong Kong, China, Taiwan, and Malaysia among regional equity markets; and China, the Philippines, Korea, India, and Thailand among regional bond markets. While some markets are not accessible to all investors, we believe that keeping these markets in our framework provides the best summary of our investment outlook.

 

Source: Business Times 14 Nov 07

RESERVE RATIO AT 20-YEAR HIGH – Regional fallout expected as China curbs lending again

BEIJING – ASIA’S financial markets are bracing themselves for the fallout after China ordered banks to put aside more reserves for the ninth time this year to cool a red-hot economy, stock and property markets.

The 0.5 percentage point rise in banks’ reserve ratio will take effect on Nov 26 and bring the ratio for big banks to a record 13.5 per cent, the central bank said last Saturday. The ratio is now the highest since at least 1987.

The hike in the reserve requirement means that commercial banks must retain more of their deposits, rather than lending the funds out in the broader economy.

Along with reserve increases, the central bank has also been notching up deposit and lending rates, with five hikes this year, to discourage lending.

Despite the moves, money is pouring into China, brought in by hugely successful export industries and by Chinese and foreigners hoping to cash in on the boisterous economy, the rising value of the currency and a stock market whose main index has increased six times in value in two years.

For most of the year, China’s banks have largely shrugged off the ordered increases in required reserves. But recent volatility suggests that the latest hike could have a substantial impact on the markets.

China’s main stock index, which more than doubled to last month’s all-time high, plunged 8 per cent last week, its biggest weekly drop this decade.

Short-term interest rates in the money market also jumped to multi-year highs as cash-strapped smaller banks scrambled to raise funds.

Last Saturday’s move came two days after the central bank issued its strongest warning so far this year about rising prices.

Some government officials and economists worry that, if inflation is left unchecked, it could spill over into the wider economy, though it has been largely confined to food prices so far, and hastily-made loans could sour, leaving banks saddled with higher debts.

 

Source: REUTERS, BLOOMBERG NEWS (The Straits Times 12 Nov 07)

HIGH OIL PRICES – A bubble that’s hard to prick

OIL prices are testing US$100 (S$144) a barrel, a key psychological threshold. Once over that hump, how much higher will the price go? Of course, given oil’s limited supply and the world’s expanding appetite, lowpriced oil will never come again.

That, however, is different from another consideration: Whether current high prices are truly reflective of supply and demand, or are prices being pushed up to a significant extent by speculation? And if the latter, is there an ‘oil bubble’?

The answer to that is wrapped up in arcane terms such as ‘backwardation’ and ‘contango’, which affect the prices of commodities, as well as in developments in the American prairie town of Cushing, Oklahoma. But more on this later.

In fact, an oil bubble may not necessarily be bad news. For if current prices reflect a bubble, there is the hope that the market will eventually readjust to equilibrium and there is the possibility of relief; it means the time for US$100 oil has not yet truly arrived. The oil bubble would be one whose pricking would benefit far more people than it would hurt.

The bad news is that if there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

That’s because, unlike equities, oil is a much more complex trading class. Buyers and sellers are users and producers, but also large trading houses, hedge funds and institutional investors like pension funds. Although exchange- traded funds now allow retail investors to diversify into oil, the big moves depend far more on the large players than on the collective calculations of small investors. If this is a bubble, it’s also one with more discipline.

Indeed, over the past three years, any number of analysts and economists have said that oil should be in the US$50 range, the US$60-plus level and so on. Yet it’s remained stubbornly stuck on a steeper trajectory. In fact, here we are today, knocking on US$100.

Those who say oil is priced correctly point to China’s increasing hunger for energy, India’s demand for power and the US dollar’s steep decline. Others might cite the correlation between oil and gold, which in recent periods has seen oil priced at 7.5-8 barrels to an ounce of gold. With oil just under US$100 and gold comfortably above US$800, you might well reckon that oil has legs yet.

But is Chinese and Indian demand, coupled with the weakness of the US dollar, enough to explain a more than threefold rise in oil’s price since 2001? Is this justified under the calculus of demand and value? The week before the Sept 11, 2001, attacks in New York and Washington, oil was trading at US$28.

Terrorism, wars, civil unrest and weather uncertainties – all have been kneaded into prices as well. Yet have these resulted in enough of a consistent constriction in supply to justify prices of nearly US$100?

India’s petroleum secretary, Mr M.S. Srinivasan, isn’t likely to think so. He was reported by the International Herald Tribune last Friday as saying there are ‘no supply constraints right now, and demand has not escalated out of control’. Mr Srinivasan has a suggestion for cooling the market: stop trading crude oil on commodity exchanges, which he believes contributes greatly to high prices. Do this much, and we’d see a ‘drastic reduction’ in the price of oil, Mr Srinivasan said.

His suggestion is unlikely to gain traction. For however much exchange trading contributes to speculative positions, it also provides price transparency. Without this, we’d have backroom brokering instead, which would more likely exacerbate the situation than help.

Yet Mr Srinivasan’s frustration is understandable. And this can be seen in how prices have been bubbling up lately.

Yes, demand is strong. No arguing. But the recent surge is also connected to how the premium in prices has shifted from later to earlier delivery.

Because of a complicated series of events, oil prices in the past several months are in a situation called backwardation. This means prices are higher for oil about to be delivered than for oil for later delivery. The opposite is contango, when prices are higher for future delivery than for supply sooner – reflecting the expense of storage and other carrying costs.

Until the middle of this year, conditions in the market were such that it was more profitable to buy lots of oil and hold it in storage tanks until later. But suddenly, it became more profitable to sell than to hold. The subprime mortgage crisis in the US, for one thing, has also made financing for holding oil more expensive.

So in backwardation, those who hold oil have an incentive to drain their tanks – kept in places like Cushing.

This Oklahoma prairie town is one of the biggest storage sites for oil, with capacity possibly as high as 35 million barrels. Since 1983, Cushing has been the New York Mercantile Exchange’s official delivery point for futures contracts in light, sweet crude, the global benchmark. So the market pays close attention to what happens in Cushing.

Maybe too much.

What the market has noticed is that the tanks in Cushing are down to perhaps 15 million barrels. Attention drawn to this decline in inventory is helping push up prices.

Yet, as Opec’s head of petroleum market analysis, Mr Mohammad Alipour-Jeddi, has said: ‘There is enough crude in the markets.’

Thus, it isn’t a huge mismatch between supply and demand that’s yanking up prices. Instead, backwardation is causing a draw-down of inventory, starting what’s called a ‘backwardation vortex’. By focusing on places like Cushing, the market has worked itself into a frenzy – whatever the real ability at the moment of producers to supply users.

Prices can be high in contango and oil investments profitable; but in backwardation there is an incentive to sell existing stocks, resulting in lowered inventories that spark market anxieties. As a result, some investors are reaping big profits and setting up conditions for even more gains.

Does speculation in oil amount to a bubble, then? Look again at the correlation between oil and gold.

Over a longer period of a half century, oil has been priced at 15 barrels to an ounce of gold. At gold’s current price, that means oil should be in the mid-US$50 level. Sure, there’s some wiggle room on the up side. But even then, there’s going to be enough of a gap between the implied and actual price to suspect that oil’s frothier than natural.

The question, in turn, is how do you prick this bubble?

LOGIC OF ITS OWN

If there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

 

Source: The Straits Times 12 Nov 07

Painful lessons from Asian crisis

MOKHZANI Mahathir surprised everyone when in April 2001 he declared that he was giving up his business interests in a bid to protect the family name in response to people who had accused his father’s administration of nepotism. Mr Mokhzani’s father is Malaysia’s fourth prime minister Mahathir Mohamad, now 82, who stepped down on Oct 31, 2003.

Mr Mokhzani informed the stock exchange that he was selling his interests in two listed concerns – Pantai Holdings and Tongkah Holdings – which were then involved in healthcare, manufacturing, financial services and property development. He sold at a time of depressed stock market prices and couldn’t have made much out of those transactions.

It was clear from his tone during that period that he was tired of repeated attacks from his father’s political opponents that his corporate climb had been due to family ties. ‘I am fed up with all these allegations,’ he told a newspaper then. ‘In this political climate, everything these companies do is construed as favouritism, and it’s unfair to other shareholders.’

The onset of the Asian financial crisis deepened tensions between Dr Mahathir and his deputy Anwar Ibrahim, who was sacked in September, 1998, accused of ‘moral misconduct’. Political temperatures soared and, in the process, the scrutiny over the business interests of Dr Mahathir’s children intensified, hurting the premier’s prestige.

Now Mr Mokhzani is back and enjoying favourable investor attention again through his company Kencana Petroleum which he took public late last year. But he’s not about to forget those dark days. ‘In 1999, the political temperature was quite hot,’ says the businessman. ‘And there was the economic crisis. And so for me, it was one step forward and several steps back.’

Is there anything he will carry over from the Asian crisis? Mr Mokhzani does not hesitate: ‘With 20:20 hindsight, I guess I was far too diversified, I spread myself too thin and geared up too highly.’ The moral for the businessman is simple. ‘Don’t borrow too much,’ he says. ‘I geared up personally so I should know. You know, Pantai Holdings was a gem of a company, it had cash and it had a good, viable business with concessions. But we had to sell, you have to be able to survive so you step away and wait to come back another day.’

At the height of the crisis, Mr Mokhzani was reported to have racked up debts of close to RM200 million.

He sold his interest in hospital specialist Pantai Holdings to Malaysian businessman Lim Tong Yong who controversially sold it to Singapore’s Parkway Holdings last year. That caused a brouhaha as Pantai had two lucrative government concessions. In the end, state investment agency Khazanah Nasional stepped in and took up a majority interest in Pantai.

‘I didn’t have much of a surplus after I sold everything, not at all, just sort of enough to keep the bankers off my back,’ continues Mr Mokhzani. ‘But I did the right thing. Someone once told me never to be emotional about my companies. There should be no sentiment in business.’

He does not state the extent of his debt. ‘Frankly, I’d rather not remember,’ he says, wincing. ‘It pushed me to take drastic action. We were getting letters from the banks with some threatening to take legal action against me. Not all though, one or two stood by us. Now, the bankers who stood by me are happier today than they were five years ago.’

 

Source: Business Times 10 Nov 07

Sub-prime crisis: New push to review rating firms’ role

IN TOKYO

US Securities and Exchange Commission (SEC) chairman Christopher Cox promised yesterday that regulators would ‘aggressively’ pursue the new mandate they have been given to review the role that rating agencies played in the sub-prime mortgage loan crisis.

He was speaking at a briefing in Tokyo as new evidence emerged that the fallout from the crisis is continuing to spread to Japanese financial institutions.

In Tokyo for a meeting of the International Organisation of Securities Commissions (IOSCO), Mr Cox stressed the need to restore faith in ‘honest markets’ following the debacle caused by the collapse of the sub-prime mortgage sector and associated financial derivative products.

He said: ‘I hope that in two or three years’ time we will be able to look back on lessons we have learned’ from the crisis.

This week IOSCO set up a special task force to examine issues facing securities regulators following recent events in the global credit markets. One of its jobs will be to examine the role of credit-rating agencies and how they relate to the sub-prime crisis.

Mr Cox said the task force hopes to produce a report by February as part of wider crisis analysis being conducted by the Financial Stability Forum.

Credit-rating agencies have claimed they have only limited responsibility for the crisis that has resulted in massive losses at leading Wall Street financial institutions. Being responsible only for default risk and not for liquidity risk or other forms of market failure, the agencies cannot be held to account more widely, they have claimed.

Mr Cox said yesterday that he hoped in future it would not be possible to ‘draw distinctions’ which allow certain institutions to minimise blame for the crisis. He suggested that the role of ’structured finance mechanisms’ which have been at the heart of the current financial system crisis and in whose formation rating agencies have played a part would be ‘redefined’ in future.

The ‘transparency’ of these structured finance vehicles, which has enabled banks and others to keep their exposure to sub-prime-related mortgage products off their balance sheets and therefore out of the view of investors and regulators, needs to be improved, Michael Prada, chairman of IOSCO’s technical committee, suggested in a speech to the Tokyo conference. The ‘role of rating agencies with regard to structured products’ needs to be examined, he said.

Meanwhile, reports emerged in Tokyo that Mizuho Securities, the unlisted brokerage arm of Mizuho Financial Group, may post a sub-prime-related loss of over 100 billion yen (S$1.3 billion) and delay a planned merger.

The report in the Nikkei business daily raised fears that more such losses may lie ahead and dragged financial stocks, such as Mizuho Financial, sharply lower. The Nikkei 225 stock average hit a three-month closing low of 15,583.42.

 

Source: Business Times 10 Nov 07

China’s trade surplus may top $43b in October

Figures due soon seen adding fuel to US complaints that yuan is still undervalued

BEIJING – CHINA’S monthly trade surplus probably topped US$30 billion (S$43.3 billion) for the first time, adding fuel to United States complaints that the yuan is undervalued.

The gap widened 29 per cent last month from a year earlier to US$30.8 billion, according to the median estimate of 14 economists surveyed by Bloomberg News.

US Treasury Secretary Henry Paulson said yesterday that China is ‘out of step’ with the rest of the world’s calls to let the yuan appreciate. A plunge in the US dollar to a record low against the euro adds pressure on China to allow faster gain in the yuan to staunch a flood of cash that’s stoking stock and property bubbles.

‘Faster exchange-rate appreciation would be the best way to manage the excess liquidity,’ said Mr Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong. ‘As we move into the US election season, China’s trade surplus will become a more sensitive political issue.’

Exports likely rose 22.8 per cent last month from a year earlier, the same pace as in September, the survey showed. Imports probably increased 19.2 per cent after a 16.1 per cent gain the previous month.

The yuan headed for its biggest weekly advance against the US dollar since 2005 after Mr Paulson made the comments. The currency has gained more than 11 per cent versus the US dollar since a fixed exchange rate ended in July 2005.

‘China is increasingly seen as out of step with international norms and expectations, as evidenced by the growing number of national leaders and multilateral institutions calling for currency appreciation,’ Mr Paulson said in New York.

China needs ‘more flexible prices, including a much more flexible, market-driven exchange rate’, he said.

China’s central bank said last night in a monetary policy report that it will ’strengthen the role of prices in managing the economy’ and improve the coordination of interest and exchange rate policies. It also said moderate currency appreciation may help ease inflation pressures.

Consumer prices rose 6.2 per cent in September from a year earlier, almost the fastest pace in a decade.

French President Nicolas Sarkozy said this week that France and the US agree China should stop depressing the yuan’s value to gain an export advantage.

The predicted October surplus would bring the 10-month total to a record US$216.4 billion, up 62 per cent from a year earlier. Export volumes are biggest in the final quarter because of Christmas shipments.

‘The level of exports is so far above the level of imports that imports would have to grow considerably faster than exports just to stop the surplus growing any more,’ said Mr Mark Williams, an economist at Capital Economics in London.

 

Source: BLOOMBERG NEWS (The Straits Times 10 Nov 07)

Turbulent time for Asian markets next year: S&P

ASIAN stock markets face a difficult 2008 and could slide sharply, ratings agency Standard & Poor’s (S&P) said yesterday, as regional share prices fell heavily.

‘Next year will be a more difficult one for stock-market returns and we would not rule out the risk of a sharp correction,’ Asia-Pacific equity research head Lorraine Tan said in a statement.

Asian equity markets have reached increasingly risky levels and there will be less scope for them to rise after this year’s strong performance, the report added.

‘Markets would be jittery over potential negative news, such as on inflation and further deterioration in the US and European economies,’ said Ms Tan.

The United States is struggling with a credit crunch and housing market slowdown, after record defaults on sub-prime mortgages extended to homebuyers with riskier credit profiles.

The report said markets in Hong Kong, South Korea and Thailand were likely to deliver better relative performances next year, but Japan is set to do less well.

S&P also expects more ratings downgrades for the corporate sector next year due to rising costs and less readily available credit.

Mr Ian Thompson, the firm’s chief credit officer for regional ratings services,  aid casualties were expected, especially outside the financial sector.

‘There may be more ratings downgrades than upgrades among Asia-Pacific companies next year’.

That contrasted sharply with the general improvement in credit quality this year, he said in the statement.

S&P expects South-east Asian economies to grow on average by 6.4 per cent next year, with Indonesia and the Philippines seen as bright spots.

Source: AGENCE FRANCE-PRESSE (The Staits Times 9 Nov 07)

China tightens foreign investment rules

It welcomes funding to help clean up the environment but puts limits on some sectors

SHANGHAI – CHINA has announced new rules to limit foreign investment in key industries, as it seeks to cool its overheated economy and clean up its damaged environment, state press reported yesterday.

In a wide-ranging directive published late on Wednesday, China’s key economic developmental agency identified sectors from real estate and financials to oil and rare metals as restricted or off-limits to foreign capital.

Overseas investments that can help China to protect the environment, cut pollution and develop renewable energy will be encouraged, according to the National Development and Reform Commission statement.

‘It should give a shot in the arm to efforts to save energy and protect the environment by encouraging greener use of foreign investment,’ the official China Daily newspaper said in an editorial.

Investment in high technology and advanced materials and equipment manufacturing will also be welcome, but those in production industries in which China has mature technologies and capacity will not be encouraged, it said.

The directive highlights Beijing’s latest policy initiative to restructure its export-driven economy, whose booming but lopsided growth has for decades relied on government and foreign investment to expand.

Under the guidelines, foreigners will be barred from investing in non-renewable mineral resources, such as tungsten, tin, antimony and molybdenum, as well as in small and mid-sized oil refineries.

Refining of copper, zinc, aluminium and rare earths will be restricted, and so will exploration for gold, silver and platinum.

Limits will also be placed on high-end real estate such as hotels and malls, property agencies and brokerages, as part of efforts to cool soaring real estate prices nationwide.

In the financial industry, the commission confirmed restrictions already in place in life insurance and asset management.

China’s spectacular economic growth of the last three decades has come at a heavy price to its environment, while surging exports have created a huge trade surplus that is at the forefront of trade spats with major economic partners.

BNP Paribas economist Chen Xingdong said the rules reflected a fundamental change in China’s strategies for foreign funds.

‘In the past, there was no control – China just opened the door, the window and let whatever foreign investment come in,’ he said. ‘Now, China doesn’t want just rapid growth; it also wants to pay attention to quality.’

Some analysts expressed concern for what they said looked like a turn towards protectionism.

‘The overall direction should be towards ‘more open’ industries rather than the opposite, ’said Citigroup economist Shen Minggao.

‘The government is worried about resources and the rise in commodity prices, and wants to make sure that scarce resources are under the control of domestic firms, but that’s the direction that we’re worried about.’

Recent policy measures have added to the impression that China is becoming more discerning about investment.

The government has rolled out rules that require state-level approval for mergers and acquisitions. China’s State Council, or Cabinet, has also released a list of strategic sectors of which the state intends to retain control.

Among them are military-related manufacturing, power production and grids, petroleum, gas and petrochemicals, telecoms, coal, civil aviation and shipping.

WHAT’S HOT

• China will encourage overseas investments that can help to protect the environment, cut pollution and develop clean energy.

• Investment in high technology and advanced materials and equipment manufacturing will also be welcome.

WHAT’S NOT

• Foreigners are barred from investing in non-renewable mineral resources, such as tungsten and tin, as well as in small and mid-sized oil refineries.

• Refining of copper, zinc, aluminium and rare earths will be restricted, and so will exploration for gold, silver and platinum.

• Restrictions already in place in life insurance and asset management will remain.

STATUS QUO

• The state intends to keep control of industries such as military-linked manufacturing, power production, petroleum, telecoms and shipping.

    

Source: AGENCE FRANCE-PRESSE (The Straits Times 9 Nov 07)

Regional bourses in disarray as credit woes dog Wall St again

China takes the worst battering as it falls 4.9%; investors fear repeat of market carnage in August

TOKYO – ASIAN markets tumbled yesterday after Wall Street suffered its second-largest drop in a week amid worries about the extent of the fallout from the global credit crisis.

China’s benchmark Shanghai Composite Index fell 4.9 per cent in its biggest one-day decline in four months.

Japan’s benchmark index sank 2 per cent, while the Hang Seng in Hong Kong tumbled 3.2 per cent. Shares also fell in Australia, India, South Korea and the Philippines.

‘There has been renewed concern about the sub-prime loan problem in the United States amid reports that losses at US and European financial institutions are expanding, which increases uncertainty,’ said Mizuho Research Institute senior economist Koji Takeuchi in Tokyo.

Jitters have worsened since Citigroup said on Sunday that it needed to take further write-downs of US$8 billion to US$11 billion (S$11.6 billion to S$15.9 billion).

Additional concerns about weakness in the US dollar, soaring oil prices and a record loss at General Motors following an accounting adjustment, sent the Dow Jones Industrial Average down 360.92 points, or 2.64 per cent, on Wednesday to 13,300.02 points. It was the third time in a month the US blue-chip index had dropped by more than 350 points.

Some investors are worried that global markets could suffer a plunge similar to that seen in August, when subprime woes first came to the attention of the broader market.

‘What happened in August could happen again,’ said Mr Takeuchi.

In Japan, investors dumped financial and real estate shares such as Mizuho Financial and Mitsubishi Estate.

The Nikkei 225 index fell 325.11 points, or 2.02 per cent, to 15,771.57 points.

A steadily strengthening yen against the US dollar also hurt exporters such as Toyota Motor and Sony.

In Hong Kong, the benchmark Hang Seng dropped 948.7 points, or 3.2 per cent, to 28,760.2 points. Property shares, in particular, fell sharply.

Analysts warned that the Hong Kong market, which has surged this year, could fall further.

‘There’s no rush to buy stocks on dips as further downside may be imminent. It’s riskier to buy now,’ said Delta Asia Financial director Conita Hung.

In China, the market was hurt by declines overnight in American depositary receipts of large Chinese stocks traded in New York.

The drop shows how China’s still largely insular market is becoming increasingly linked to overseas markets, despite limits on foreign investment in mainland shares and on overseas stock purchases by citizens.

Source: ASSOCIATED PRESS (The Straits Times 9 Nov 07)

Markets shudder as Citigroup’s profit engine stalls, writedowns rise

CEO steps down; bank’s sub-prime hit may reach US$11b

(NEW YORK) Citigroup Inc, the profit engine built by Sanford ‘Sandy’ Weill, has seized up.

The biggest US bank by assets said yesterday that sub-prime mortgages and related securities lost as much as US $11 billion of their value in the past month, a decline that may wipe out half of the company’s profit so far this year.

The New York-based company also said in a statement that Charles Prince, Mr Weill’s hand-picked successor, has stepped down. Former Treasury Secretary Robert Rubin will become chairman and Citigroup’s most senior executive in Europe, Win Bischoff, will be interim CEO.

Citigroup’s woes left international banks and stock markets reeling yesterday, feeding fears that more banks will have to confess to major losses. British banks Barclays and Royal Bank of Scotland saw their stock shed about 3.0 per cent in value. In Tokyo, Mitsubishi UFJ Financial, Sumitomo Financial and Mizuho Financial fell by a similar amount.

The Morgan Stanley Capital International Asia Pacific Index lost 1.9 per cent to 165.43 as of 5:33 pm in Tokyo, having on Nov 2 slipped 2.2 per cent from a record close. Financial shares were the biggest drag among the benchmark’s 10 industry groups yesterday.

Japan’s Nikkei 225 Stock Average slid 1.5 per cent to 16,268.92 while Hong Kong’s Hang Seng Index slumped 5 per cent. Most South-east Asian stock markets also extended losses on credit fears. The Straits Times Index fell 45.14 points to close at 3,670.18.

Citigroup said that credit-market upheaval in October impaired by as much as a fifth its US$55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets do not recover, add to the almost US$7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co analyst Dick Bove wrote in a Nov 5 report. It would be Citigroup’s first quarterly loss since at least 1998.

Before the announcement, the company was expected to report US$5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

‘Significant uncertainty continues to prevail in financial markets,’ Citigroup said in the statement. The company said that its capital ratios ‘will return within the range of targeted levels by the end of the second quarter of 2008′, allowing it to maintain the current dividend, the company said.

Citigroup is participating in a US$80 billion fund being set up by banks to draw investors back into the market for short-term debt. The fund, also backed by Bank of America and JPMorgan, was announced last month with the encouragement of Treasury Secretary and former Goldman Sachs CEO Henry Paulson.

The performance of remaining sub-prime investments, which totalled US$55 billion as of Sept 30, is partly dependent on ‘the underlying performance of the economy’, chief financial officer Gary Crittenden said in an interview.

Analysts at CIBC World Markets and Morgan Stanley told clients last week to get rid of Citigroup shares. CIBC’s Meredith Whitney said that Citigroup may have to sell assets because it needs to raise US$30 billion of capital.

The combination of US$25 billion of acquisitions in the past 19 months and the lowest cushion for losses ‘in decades’ increases the risk of owning the stock, she said.

Mr Prince, 57, is the third banking chief ousted amid a credit contraction that has saddled the world’s biggest lenders and securities firms with more than US$40 billion of writedowns during the past four months. The worst housing slump in 16 years has led to record US foreclosures and losses in the market for home loans to borrowers with poor credit histories or heavy debts.

Merrill Lynch & Co, the world’s biggest brokerage, ousted Stan O’Neal last week, after the New York-based firm disclosed US$8.4 billion of writedowns. UBS AG, the largest Swiss bank, fired CEO Peter Wuffli in July.

While the writedowns at Citigroup finally brought Mr Prince down, he had been under pressure for years because Citigroup’s performance under his leadership did not match what investors came to expect from Mr Weill, who demanded 15 per cent annual profit increases during his 17 years as CEO of Citigroup, Travelers Group and their predecessors. Powered by a series of blockbuster deals, climaxing with Travelers’ US$36 billion acquisition of Citicorp in 1998, Mr Weill delivered a 160 per cent stock gain during his last five years as CEO.

Mr Prince spent most of his career as Mr Weill’s top lawyer, advising on acquisitions. It was he who untangled Citigroup and Mr Weill from the federal and state probes of analysts who had allegedly talked up stocks to win underwriting business.

Mr Prince’s own stint has been hobbled by the sub-prime crisis. This year, he vowed to eliminate or reassign more than 26,500 jobs. Citigroup’s quarterly profit meanwhile has sunk to its lowest level in three years and the stock has plunged 32 per cent in 2007, twice as much as Bank of America and JPMorgan Chase.

‘I don’t think that all of a sudden, because of the credit crisis, the Citigroup model is broken,’ said Tim Ghriskey, cofounder of Solaris Asset Management in New York. ‘This isn’t a broken machine at all. It just needs some leadership that really understands the business.’

 

Bloomberg, Reuters, AFP (Business Times 6 Nov 07)

Asian bourses hit by fresh fears of US credit crunch

Investors spooked by concerns that big Western banks may face losses; STI down 2.3%

ASIAN markets fell into a tailspin yesterday, a day after renewed fears over the health of the United States economy sparked a swoon on Wall Street.

Hong Kong led the falls, tumbling 1,024 points, or 3.25 per cent. Taiwan fell 3.39 per cent, while South Korea dropped 2.12 per cent.

Singapore managed to escape with flesh wounds. The Straits Times Index lost 88.24 points, or 2.3 per cent, to 3,715.32 – its biggest one-day fall in two weeks. About $11.7 billion was wiped off the value of shares.

The spark for Wall Street’s 364-point plunge on Thursday was a renewed worry that more credit-market turmoil was on the horizon.

That fear, plus the increasingly likely prospect of US$100-a-barrel oil, led to new concerns about the health of the American economy, and sent stocks diving.

Another factor: The US Federal Reserve’s signal on Wednesday – after it shaved interest rates by 0.25 percentage point – that it had no further rate cuts in mind to help ease the credit crunch.

The worries were eased somewhat late last night with the release of better-than-expected employment figures, but Wall St remained wary, losing over 100 points at press-time to reverse early gains from an upbeat start.

In Asia, investors were rattled by concerns that big Western banks have huge losses lurking on their balance sheets.

Singapore remisier Paul Lee said: ‘Share prices were still holding up pretty well at opening bell. Then all hell broke loose, and it was like knives falling all over the place, with nowhere to hide.’

Traders were taken aback by the sudden change in sentiment, given the optimism that infected the market after the Fed’s rate cut.

Market experts are divided over whether shares are headed for a further thrashing, given the mixed bag of data coming out of the US.

Phillip Securities’ managing director, Mr Loh Hoon Sun, said: ‘Because prices have gone up so much already, investors are very sensitive to any bad news, so this type of volatility will persist.’

The ignition for yesterday’s Wall Street sell-down was a 7 per cent plunge in Citigroup after an analyst warned that the banking giant might have to cut dividend or sell assets to raise capital.

That revived worries that US and European banks may have to unveil further write-offs linked to the US mortgage markets.

Asian banks felt the collateral damage. Some do have exposure to risky financial instruments known as collateralised debt obligations, but it is more the fear of the unknown that is spooking investors.

Local banks felt the pain, with DBS down 4.4 per cent and United Overseas Bank off 1.9 per cent.

Elsewhere, Japan’s Mitsubishi UFJ Financial Group lost 6 per cent, while in Hong Kong, Bank of China was down 2.5 per cent.

Given the heavy weightage given to financial stocks in most regional indexes, analysts warn that investors should brace themselves for more turmoil.

One concern expressed by many dealers is the large operations that these banks run in major financial centres such as Singapore and Hong Kong.

Said one analyst: ‘The fear is that they may stop enlarging operations in Asia and sound the retreat to cope with problems back home. This may cause our real estate prices to feel the pinch if they start chopping heads and cutting prime office space.’

JP Morgan Private Bank’s senior portfolio manager, Mr Elan Cohen, believes that while share prices will be ‘volatile for the next couple of days, it is not the beginning of a bear market’.

‘For regional markets that have risen so sharply this year, a 2 to 3 per cent correction is common.’

 

Source: The Straits Times 3 Nov 07

US rate cuts won’t defuse sub-prime mess: ‘Mr Yen’

Asia, though not much affected so far, must be vigilant

(SINGAPORE) Interest rate cuts by the US Federal Reserve – which have amounted to 75 basis points since Sept 18 – are unlikely to defuse the US sub-prime mortgage crisis, according to the influential economist Eisuke Sakakibara.

Mr Sakakibara, formerly Japan’s vice-minister for finance and international affairs and now a professor at Tokyo’s Waseda University, also warned that global financial markets are likely to face further bouts of volatility. What we have seen thus far ‘is only the tip of the iceberg’, he said, adding that the problem will probably linger for 6-18 months.

Speaking at a lunchtime forum organised by newly listed Uni-Asia Finance Corporation, Mr Sakakibara pointed out that interest rate cuts by the Fed were likely to be ineffective in addressing the problems emanating from the US sub-prime mortgage sector because the cost of funding is not the key issue; rather it is the uncertainty surrounding the valuations of sub-prime assets and other structured products held by many financial institutions.

He indicated, however, that the ’superfund’ proposed by some major American banks (including Citigroup, Bank of America and JPMorgan) to buy sub-prime assets could be helpful, as might a move to provide government financial support to distressed borrowers, which is being discussed in the US Congress. But such initiatives would take time to work.

Mr Sakakibara, who was Japan’s vice-minister for finance during the Asian crisis of 1997/98, cautioned that although Asia has been relatively unaffected by the US sub-prime woes thus far, it needs to be vigilant. He recalled that during the Asian crisis, US policymakers thought that the American economy would be relatively insulated – until they were shocked by the Russian bond default of 1998 and the ensuing collapse of a large hedge fund.

The world economy is highly integrated now, he said, and it is highly possible that the US – still its primary engine – will slow down sharply or even go into recession. In such an event, Asia cannot be unaffected.

While Asian economies are doing well and will account for an increasing share of the global economy, right now, Asian asset markets are ’somewhat bubbly’, Mr Sakakibara said. ‘The situation in Asia seems too good, and usually a ‘too good’ situation doesn’t last.’

When it does turn, the decline could happen ‘very abruptly’.

Of all the Asian markets, China is ‘the biggest bubble’, Mr Sakakibara added, with both investment and GDP growth expanding at breakneck speed.

Chinese policymakers know they have to tighten monetary policies sooner or later, and a major adjustment in China’s asset markets is inevitable, perhaps in 2008, after the Olympics. If China’s economy slows down in tandem with the US, that would exacerbate the problems for the global economy, Mr Sakakibara warned.

The economist – who was known as ‘Mr Yen’ when he was a policymaker because his statements were viewed as affecting currency markets – said that as long as the Bank of Japan is unable to raise interest rates, the Japanese yen will remain undervalued. The bank actually did want to raise rates in September, he added, but refrained from doing so on account of the US sub-prime mortgage problem.

With near-zero interest rates at home, Japanese investors are continuing to seek higher-yielding investments overseas, and while this trend persists the yen will probably continue to trade within the range of 110-115 to the US dollar, he said. But if, owing to some trigger such as a dramatic US slowdown, the outflows from Japan dry up or reverse, the yen would rebound sharply from its ‘really cheap’ current level, he said.

 

Source: Business Times 2 Nov 07

Credit crisis has lessons for Asia: SM Goh

Region can learn about risk and crisis management from recent US sub-prime turmoil

ASIA has escaped relatively unscathed from the recent global credit crisis, as it has not yet developed newfangled complex financial instruments, said Senior Minister Goh Chok Tong yesterday.

But Asia can glean some lessons about risk and crisis management from the recent credit market turmoil, he said.

He was giving the keynote address at the one-day inaugural Barclays Asia Forum at the Shangri-La Hotel yesterday, attended by almost 400 Barclays clients from institutions and corporations across the region.

‘The current sub-prime crisis shows that we cannot afford to be less than vigilant in the financial industry.

There are some lessons we can learn here,’ said Mr Goh.

Asia was relatively shielded from so-called sub-prime crisis, which involves United States housing loans with relatively high risks of default – which were rolled into complex financial instruments.

The main reason for this is that Asia has yet to move into sophisticated structured credit financing in a big way, said Mr Goh.

But rather than shy away from such instruments, Asia should ‘press on with its efforts to develop the capital markets’ and create robust and efficient systems, he said.

Asia will inevitably see more sophisticated products coming to the fore, he said.

‘So market players and regulators alike must refine their understanding of the attendant risks,’ he said.

They need to understand how shocks can be transmitted through these products and develop tools to deal with these risks.

The central bank, the financial regulator and the guardian of the public purse must also work closely together to set up frameworks that minimise damage to the system in case financial institutions run into trouble.

Mr Goh said Asia’s growth is unlikely to be derailed by ‘potential wild cards in the region’ such as North Korea’s nuclear programme, tense cross-strait relations between Taiwan and mainland China, and instability in Myanmar.

Indeed, Asia’s share of the world’s economy has been rising steadily, increasing from 19 per cent in 1980 to 36 per cent today, and is expected to reach 45 per cent by 2010.

But Asia faces key challenges to its growth, such as global financial imbalances arising from large capital inflows to Asia, noted Mr Goh. This has created inflationary pressures and asset bubbles in the stock and housing markets.

He also noted that Asean countries will get a competitive boost when Asean evolves into a single market and production base with free flow of goods, services, investment and skilled labour by 2015.

‘Challenges remain but I see none which are insurmountable,’ concluded Mr Goh.

 

Source: The Straits Times 2 Nov 07

Sovereign funds pose little risk to the world

UK Chancellor Alistair Darling doesn’t like them.

Italian Prime Minister Romano Prodi and European Union Trade Commissioner Peter Mandelson don’t either.

Sovereign wealth funds, the huge pools of capital built up by a small group of mainly oil-rich nations to invest their assets around the world, are becoming very unpopular. As the funds grow in power and wealth, the clamour for more regulation of their investments will only get louder.

It’s all nonsense. The funds don’t pose a threat to anyone. There is no coherent case to be made against them. And any cure is likely to be worse than the problem it is trying to fix.

That won’t stop the politicians from trying. Mr Darling said in October the UK government would protect strategic industries from takeovers by foreign state-controlled investment funds, such as those run by Kuwait, Saudi Arabia and China. ‘Sovereign wealth funds or companies owned by governments need to play by the rules,’ he said.

Juergen Stark, a board member of the European Central Bank, has called for a code of conduct for the funds. And in July, Mr Mandelson said the EU may need to take a golden share in strategic industries to prevent companies falling into the hands of the funds, according to the Italian newspaper Il Sole 24 Ore.

In fairness, you can see why there is a debate. Sovereign wealth funds, which invest currency reserves in foreign assets, control an estimated US$2.5 trillion, more than all the world’s hedge funds combined. With high commodity prices translating into surging reserves in emerging economies, their stockpiles of cash will only get bigger. Russia said this month it may get in on the act by investing some of the US$141.1 billion in its Stabilisation Fund in major foreign companies. If Putin Inc starts buying German airports or French motorways, watch the sparks fly.

‘There has been much political angst about SWFs,’ Morgan Stanley economist Stephen Jen said in an analysis, referring to the funds. ‘It does not seem to make sense for regulatory authorities and politicians to single out SWFs.’

It is hypocritical to attack the funds. Nobody minded when emerging economies recycled all those dollars, pounds and euros by putting cash on deposit in our banks, or buying bonds issued by our governments. So why should we mind when they start buying companies? They are just diversifying their holdings, like any prudent investor would. If we don’t like them purchasing our equities, shouldn’t we tell them to stop buying our bonds and currencies as well?

In a global economy, few companies are owned domestically. Stocks are traded across frontiers. It doesn’t make much difference whether your local supermarket or service station is owned by a hedge-fund manager in Zurich, a pension fund in California or an investment firm in Dubai. What counts is whether there is enough competition to make sure it offers good service and fair prices. So long as it does, there is no problem.

Lastly, the only way to protect against the funds, as Mr Mandelson realises, would be through some kind of golden share held by the government.

Businesses would then be shielded from takeovers that their governments don’t want. But what kind of impact would that have? Management would become idle and inept as they realise they couldn’t be challenged or kicked out. The damage that would do to the performance of your economy would far outweigh any danger posed by the funds.

The funds are no more of a threat than any other investment vehicle. They aren’t making the economy more volatile. By buying whole companies, they are committing themselves to long-term investment.

They are no more secretive than many hedge or private-equity funds, or big private companies. Nor does their ownership by foreign governments override the laws applicable in the countries where they are investing. If they break UK or German laws, they will be in trouble, just like anyone else.

There may be some limits. You might not want a defence manufacturer owned by a foreign power. But there are very few of those companies. In reality, all the evidence suggests the more open your economy is, the better you do – and sovereign wealth funds are no exception to that rule.

 

Source: Bloomberg (Business Times 1 Nov 07)

Won, pound latest stars of US$ slide

IT WAS the turn of the British pound and the Korean won to stand out in Asian currency trading yesterday, as the US dollar continued its slide to new multi-year lows in anticipation of another US interest rate cut. After the sharper-than-expected fall in US consumer confidence for October reported overnight, traders are fearful that more weak US data this week will further damage the already weak greenback. US jobs data for October are due out tomorrow evening.

The US currency eventually ended the day close to the day’s fresh post-depeg low of just above 7.46 yuan.

According to reports, this obliged the Hong Kong Monetary Authority to buy at least half a billion US dollars yesterday to stop the greenback from falling through the base of its allowed HK$7.75 to HK$7.85 range. Closer to home, meanwhile, the greenback was forced to fresh 10-year lows of S$1.4477 and 3.3375 Malaysian ringgit.

It was the Korean won which recorded the day’s largest 0.7 per cent gain versus the falling US dollar. It ended the day at 900.7 won per US dollar despite warning grumbles from the Korean central bank – just about recovering all of the losses it has suffered versus the latter since the 1997-98 Asian crisis.

More sharp gains could now be in store for the won, suggested DBS researchers yesterday, citing its tendency to make periodic spurts to the upside, and other supporting statistics by way of strong surpluses, a red-hot stock market, and interest rates higher than that for the US dollar. ‘Taking a conservative stance, we estimate the present period of won appreciation (which began with the US dollar at 950 won on Aug 17) could amount to 10 per cent or more, still less than the 13-15 per cent gains seen in previous episodes,’ they said. ‘This would put the won at around 850 per dollar by end-08.’

On our charts, that forecast is supported by the breakdown of what chartists would call a double-top formation, formed by the US dollar’s two 752 won peaks in March and August this year. For as long as the US currency is capped below the 912 to 913 won area, this opens up an eventual downside objective of at least 870 won.

Elsewhere in Asian trading, a trio of European favourites also probed fresh highs. A stronger-thanexpected spurt in October house prices in the UK propelled the pound to a 23-year high of US$2.0743 yesterday. Likewise, hawkish remarks from the European front overnight boosted the euro to a fresh postlaunch high of US$1.4467 yesterday, and pressed the greenback half a per cent lower even against the lowyield Swiss franc, to end at 1.1598 francs – its weakest showing since March 2005.

Down Under, traders reported fresh interest to sell the yen versus the Australian dollar in preference to the higher-yielding New Zealand dollar – citing more strong housing and credit data out of Australia, and the possibility of a larger than expected US interest rate cut overnight.

By the Asian close, the Australian dollar had advanced a further 0.2, 0.3 and 0.6 per cent to finish at S $1.3363, 92.27 US cents and 106.25 yen respectively.

 

Source: Business Times 1 Nov 07

An age of market resilience?

BIOLOGISTS believe that diversity increases stability and resilience in an ecosystem – a complex system where participants go about looking out for their own interest with the ultimate goal of surviving and thriving. What is true of a biological ecosystem may also hold good for the financial system, which, too, is complex. In which case, there are grounds to believe that the financial system of today is more stable and resilient than before.

The stock market crash of 1987, while its real cause is still being debated, can be said to have been exacerbated by the widespread use of portfolio insurance at that time. In theory, portfolio insurance sounded like a superb idea. Just by giving up a bit of the upside – premium for buying the insurance – a portfolio can be protected on the downside. The simplest form of insurance is to buy a put option which gives a portfolio manager the right to sell stocks or an index at a fixed price. So the floor that the portfolio value can fall to is that fixed price on its put option. Other forms of portfolio insurance involve the use of index futures or dynamic trading. A dynamic portfolio trading strategy, also called program trading, allows investors to replicate the payoff from derivatives. It basically triggers sell orders as stock prices fall, so that the portfolio value does not fall below the floor. By 1987, about US$60 billion – a significant sum at that time – in equity assets were covered by different varieties of portfolio insurance. What happened was, in the three days prior to Oct 19, Wall Street had corrected by some 10 per cent as investors became more risk averse. That fall triggered the sell programs in the numerous insured portfolios. Everybody rushed for the exit at the same time, and there was nary a buy order.

As the story goes, some professional traders who were not portfolio insurers had anticipated this pent-up selling demand and sold in advance. As the day unwound, other investors who had never heard of portfolio insurance may have misinterpreted the price changes as conveying something fundamental about the market and may have sold in a mistaken response. So, at a time when all participants were making similar kinds of bets, the market could not be trusted to provide diversification and liquidity.

How have things changed today? For one thing, there are a lot more players with more diverse views of the markets. And many have the liberty to act on those views. A hedge fund which thinks a market or a stock is overvalued has the option to short sell it, in a way keeping a check on the price. The securitisation of risks – a much vilified practice in the current sub-prime mortgage crisis – has the effect of spreading the risks to many players. This reduces the systemic risk to the global markets.

Meanwhile, the emergence of sovereign funds with typically very long investment horizons, in contrast to most commercial funds, adds another level of diversity.

The fact that markets globally have repeatedly been able to find their feet, despite numerous bouts of ‘risk aversion’ attacks in the last two years, is perhaps testament to what may be a new age of resilience – or at least greater resilience than before – that we are now entering.

 

Source: Business Times 31 Oct 07

Indonesian firm to list retail Reit on SGX

Venture with M’sian firm to have 7 malls worth US$250m

INDONESIA’S eighth largest real estate developer, PT Perdana Gapuraprima, part of the Gapuraprima Group, is looking to list a retail real estate investment trust (Reit) on the Singapore Exchange in early 2008.

Speaking at a press conference here yesterday, president director Rudy Margono said that the Reit will be a joint venture with Amanah Raya Berhad, a company owned by the Malaysian government.

Mr Margono said that Gapuraprima is expected to inject five malls into the Reit, and Amanah Raya two. He also revealed that the assets have an estimated value of US$250 million. He expects the retail Reit to offer a yield of between 9-10 per cent. PT Perdana Gapuraprima’s real estate assets are worth about US$500 million, he added.

Mr Margono also revealed that the three-to- five-year-old malls outside Jakarta are in cities like Solo and Bandung.

In August, Amanah Raya, together with Kuwait Finance House, acquired two villa apartment blocks in Reflections at Keppel Bay for about S$286 million. For Gapuraprima, Mr Margono said the retail Reit is largely a way for the group to divest its properties and use the capital for further expansion in the real estate business in the region.

Mr Margono said: ‘Our vision is to be one of Asia’s largest property developers, with property development projects in various countries around the region.’

PT Perdana Gapuraprima was listed on the Jakarta Stock Exchange last week and shares last traded at around 345 rupiah, up 11.3 per cent on its IPO offer price of 310 rupiah a share. The new share issue forms about 30 per cent of PT Perdana Gapuraprima’s paid-in capital after the IPO.

Mr Margono said that in FY07, the group achieved a net profit of 46.9 billion rupiah (S$7.5 million) and 514 billion rupiah in revenue. He expects the yield of its Indonesian properties to be 8-9 per cent.

He added: ‘We have also seen a capital gain of 15-20 per cent for our properties in Jakarta annually in the past 10 years, which we hope will instil more confidence in our investors investing in the group.’

 

Source: Business Times 30 Oct 07

HK wage rise expected to top 4% next year

Recent civil service pay hike puts pressure on bosses

IN HONG KONG

HONG Kong salaries are tipped to rise by 4 per cent next year as the city benefits from robust economic growth and rising consumer confidence.

According to a joint survey by the Hong Kong People Management Association and Hong Kong Baptist University, workers are in line for pay rises of between 4.3 per cent and 4.7 per cent.

Their findings are based on a poll of 95 small and medium-sized firms employing more than 66,000 people. The survey was conducted between June 2006 and June this year.

Bank of East Asia chief economist Paul Tang Sai-on dubbed the figure as fair and realistic, given Hong Kong’s stellar economic growth which has been around 7 per cent over the last few years.

‘Wage performance has lagged behind economic growth in the past few years,’ he explained. ‘Consumer confidence has built up to a level where it puts pressure on the domestic sector,’ he said, citing robust trade in the retail and restaurant sectors as an example.

‘Everyone benefits from an economic upturn,’ he noted. ‘And inflation is still pretty moderate.’ He expects inflation to hover in the 3 per cent to 4 per cent range next year.

There has also been pressure on bosses to increase wages in the wake of a civil service pay rise, which saw salaries rise by as much as 4.96 per cent in the public sector.

In June, the Executive Council approved the increment for the city’s 150,000 civil servants, costing the government HK$5.29 billion (S$990 million) this year.

The government defended the rise as a reflection of the city’s improved economy, the city’s general fiscal health, and as a boost to civil service morale.

The increments were the first for the civil service in five years.

Some employers have, however, been reluctant to follow suit. Earlier this month, a prominent employers’ group urged bosses to cap pay rises at 2.5 per cent next year, a suggestion that was met with a swift rebuke by labour unions in the city.

The Employers’ Federation of Hong Kong – which has 550 members – defended the 2.5 per cent figure as a reference index and urged employers to be more generous with other incentives such as bonuses, to avoid higher recurrent costs.

In contrast, the Federation of Trade Unions is pressing for increases of up to 6 per cent.

Hong Kong was the epicentre of a summer of discontent among workers as a wide spectrum of professions lobbied for higher wages: from teachers and nurses to construction workers and social workers.

In one of the most high profile protests, hundreds of metal workers staged a 36-day strike to secure a pay rise, delaying a slew of government projects.

The workers eventually accepted a 14 per cent pay rise in mid-September along with slightly reduced working hours. It was one of Hong Kong’s longest-running industrial strikes on record.

Separately, around 4,000 social workers and employees from non-governmental organisations also took industrial action for half a day recently to secure increased subsidies and grants.

Doctors and nurses were also protesting outside the Hospital Authority headquarters to demand better salaries and working conditions.

 

Source: Business Times 30 Oct 07

Inflation fears mar Vietnam’s economic boom

(HANOI) Vietnam’s blistering economic growth is attracting foreign investors, but the boom is proving costly for households, which face big rises in the price of basic products such as rice.

Consumer prices rose 9.34 per cent year-on-year in October, after an 8.8 per cent increase in September, according to the General Statistics Office.

Inflation is worrying Hanoi, which aims to keep the rate below the growth in gross domestic product.

Vietnam’s economy grew by 8.16 per cent in the first nine months of the year.

The alarm bells grew louder last week as the national assembly seized on the issue, with Prime Minister Nguyen Tan Dung saying: ‘We want a higher economic growth and a lower inflation rate.’

The price of food, which forms more than 40 per cent of the basket of goods used to calculate Vietnam’s inflation rate, rose 13.94 per cent in October. The cost of rice and other grains alone increased by 15.98 per cent.

‘Global rice prices are high and global rice prices stay high as long as oil prices are high, because farmers need to buy fertiliser and fertiliser is a by-product of natural gas,’ said Jonathan Pincus, economist with the UN Development Programme (UNDP).

Vietnam joined the World Trade Organisation in January, and is opening its markets up to the world.

Dao Viet Dung of the Asian Development Bank warned this means ‘it is also more open to external shocks like the increase in oil prices…resulting in the increase of pressure on prices.’

He also pointed to the property fever gripping Vietnam, from northern Hanoi to the southern economic centre of Ho Chi Minh City, the former Saigon.

The price of construction materials such as steel and cement rose by 11.72 per cent in October.

Economists say pressure is increased by the huge inflow of foreign direct investment and the increasing use of credit (up 25 per cent in 2006 and 35 per cent by mid-2007, according to the World Bank), both for consumption and business lending.

‘It’s not good for the poor at all and it’s probably one of the reasons why the government is so keen to keep inflation under control,’ said Mr Pincus.

He added that while there was no immediate problem for investors, there was a risk that inflation would give rise to concern about Vietnam’s competitiveness.

‘If inflation is going up, people will demand higher wages, it’s natural,’ he added.

Hanoi has taken measures to curb price pressures, selling bonds and increasing bank reserves to mop up liquidity.But Mr Pincus said it would have to go further and increase interest rates to encourage saving.

 

Source: AFP (Business Times 29 Oct 07)

HK monetary chief warns of bubble

He urges investors to act with caution as Hang Seng surges over 40% in 2 mths

IN HONG KONG

HONG Kong’s monetary chief Joseph Yam has added a cautionary voice to a growing chorus of warnings in the city by observers who fear a bubble market has formed as stocks remain at giddy highs.

The Hang Seng Index has surged more than 40 per cent in just two months, reflecting a stellar appetite for China focused firms as China’s markets trade at new highs, and an expectation that mainland investors will soon be able to invest in the city’s market.

Some, however, fear that valuations are overstretched, with an asset bubble forming. And as punters continue to wade into the China boom story, they worry a serious correction could have a potent effect.

The bull run first started gathering pace on the heels of an Aug 20 announcement from Beijing that it would allow mainlanders to invest directly in Hong Kong stocks. This prompted an expectation of a fierce flow of cash from across the border.

In his weekly Viewpoint column on the Hong Kong Monetary Authority’s website, Mr Yam warns of ‘risks ahead’, particularly given the uncertain economic and financial outlooks for both China and the United States.

‘A sharp spike in the delinquency rate of sub-prime mortgages in the US has led to great tension in the money markets of Europe and the US, and a general credit tightening,’ Mr Yam notes.

He warned the possibility of a recession in the US cannot be ruled out, with adverse implications for cities such as Hong Kong.

Mr Yam also points to China’s macro monetary conditions as a cause for concern. With large foreign reserves, cooling down measures have been implemented by the Chinese central bank. At the same time, inflation is climbing to ‘uncomfortable levels’, he stresses.

Although China has announced it will allow residents to invest outside China, this has not yet happened and a heightened demand for stocks has pushed prices higher, ‘causing concerns about the possibility of a stock market bubble’.

Any market adjustment would have serious implications for financial stability in Hong Kong, he notes.

Against this backdrop, he urged Hong Kong to be cautious ‘despite the different and bullish signals that our financial markets are sending us’, Mr Yam says.

‘Irrational exuberance or not, investors should act with caution.’

Corporate governance activist David Webb has also sounded a note of caution, arguing that the mainland stock bubble is sure to burst. When it does, it will ‘certainly take the Hong Kong market down with it, since most of the market capitalisation is now either mainland stocks or stocks with a large component of mainland business’, he says on his website.

‘It would not be at all unreasonable to visit 15,000 or even 12,000 again on the Hang Seng Index, despite the depreciation of the dollar and the time value of money since we were last at those levels,’ he notes.

He says Hong Kong will be able to sustain any bursting of the bubble, ‘and mainland companies will still come here to list’. He urged Hong Kong policy-makers to shift their attention to improving the city’s competitive advantage in the meantime, by beefing up the regulatory framework.

 

Source: Business Times 29 Oct 07

Central bank unlikely to change interest rates

But RBI may raise lenders’ reserve requirement again

(MUMBAI) India’s central bank is expected to maintain steady interest rates in a quarterly review this week, but may ask lenders to set aside more cash as reserve to cut a surge in money supply, economists say.

They said the Reserve Bank of India (RBI), slated to announce its latest stand on interest rates this Tuesday at 0630 GMT, will likely sound less ‘hawkish’ on prices with inflation at a five-year low.

But economists say the central bank may act to ease the impact of billions of dollars from abroad flowing into the stock market and other investments in the fast-growing economy to ensure a slowdown in lending and a recent move to limit overseas fund stock market purchases takes effect.

‘Moderating inflation, easing credit growth and a slowdown in global growth will likely make the RBI less hawkish in its policy pronouncements,’ said Rajeev Malik, Asia economist with JP Morgan Chase bank, based in Singapore.

In July this year, the central bank kept its benchmark rate at a four-year high of 7.75 per cent in an effort to tame inflation.

The tight policy stance has had an impact with annual price rises now at 3.07 per cent, compared to 6.7 per cent in February, well below the 5 per cent upper limit targeted by the central bank.

‘We expect the RBI to keep key rates unchanged on Tuesday, with inflation and credit growth tapering,’ said Manika Premsingh, an economist with brokerage Edelweiss Capital.

Loans by banks have grown about 23 per cent in the current year ending March 2008, a slowdown from 30 per cent in the previous year as consumers shied away from higher interest rates for car, home and personal credit.

But analysts said despite that, a hike in the amount of money commercial banks must set aside as reserves – or the cash reserve ratio (CRR), currently 7 per cent – is likely as it would help cut the potential impact of a record of nearly US$18 billion invested in stocks by overseas funds this year.

‘I expect a CRR hike of about 35 basis points in the coming weeks,’ said housing lender HDFC Bank’s chief economist Abheek Barua.

Mr Barua said that a move by the Securities and Exchange Board of India (SEBI) last week to phase out the anonymous buying of shares by foreign investors would reduce some of the cash flowing into India, but the central bank may want to limit money supply aggressively.

JP Morgan’s Malik also expects a higher cash reserve requirement.

‘A hike in the cash reserve ratio cannot be totally ruled out if capital inflows continue to overwhelm the central bank,’ he adds.

 

Source: AFP (Business Times 29 Oct 07)

Australia faces turbulence from US meltdown: PM

(SYDNEY) Australia, one of the best-performing advanced economies, faces looming economic turbulence from the sub-prime lending meltdown in the United States, Prime Minister John Howard warned yesterday.

Last Friday, Australian Treasurer Peter Costello had warned of an approaching international financial ‘tsunami’, with China at its epicentre.

‘We are entering a more difficult time of economic management. There are storm clouds on the international economic horizon,’ Mr Howard told Channel 9 television yesterday.

He was speaking on the campaign trail for Australia’s federal election on Nov 24, which the coalition government is fighting largely on its economic credentials.

Battling poor opinion polls, Mr Howard faces the prospect of an official interest rate increase by the Reserve Bank on Nov 6, during the election campaign.

‘I don’t think it’s panicking anybody to say that the sub-prime meltdown in the United States, which has already had an impact on market interest rates, because of the globalised nature of our economy, is going to have an effect,’ he said.

In an interview with the Sydney Morning Herald last Friday, Mr Costello said global financial markets face a ‘huge tsunami’.

The US economy would weaken in the wake of its sub-prime mortgage meltdown, and the breakneck pace of Chinese growth also could not continue, Mr Costello said.

At some stage, likely to coincide with a move to a floating of the Chinese currency, China would unleash greater instability on global markets than the United States had, he said.

‘That will be a wild ride when it happens. That will set off a huge tsunami that will go through world financial markets,’ said Mr Costello, one of Australia’s longest-serving treasurers.

Yesterday, Mr Howard pledged to keep interest rates down in Australia, but admitted that rates could rise.

‘The (Reserve) Bank will make a decision on interest rates . . . Interest rate changes happen, they go up and they go down, according to economic circumstances,’ he said.

 

Source: Reuters (Business Times 29 Oct 07)

Malaysia forecaster trims 2008 growth outlook

(KUALA LUMPUR) Malaysia’s leading forecaster cut its 2008 growth estimate to 5.4 per cent from 5.8 per cent yesterday, citing a shaky outlook for the United States and the global economy.

The independent Malaysian Institute of Economic Research (MIER) maintained its forecast of 5.7 per cent expansion in 2007, but predicted a downturn the following year.

‘This forecast is made on the assumption that there would be no recession in the US. However … there is the 30 to 35 per cent chance that a recession will happen in the US,’ said MIER chief Mohamed Ariff Abdul Kareem.

‘Figures indicate that Malaysia’s growth in the second half is not going to get any better,’ Mr Mohamed Ariff said.

 

Source: AFP (Business Times 25 Oct 07)

NZ home prices slow, inflation fears ease

Central bank likely to keep key rate at record 8.25%, highest in developed world

(WELLINGTON) It has taken four consecutive interest rate increases to record high levels but New Zealand’s central bank looks to have finally taken the heat out of its biggest inflation worry – the housing market.

Still, the Reserve Bank of New Zealand is unlikely to let its guard down any time soon because other pockets of the economy, including a tight labour market and a booming dairy sector, are putting upward pressure on consumer prices.

That is likely to keep the central bank’s cash rate of 8.25 per cent, the highest in the industrialised world and a major draw for investors seeking high yields, at current levels well into 2008, economists say.

‘The Reserve Bank is having success in the housing arena, but the problem is that the slowdown in the housing sector is just not diffusing through to the rest of the economy,’ said Cameron Bagrie, chief economist at ANZNational Bank.

‘Realistically, we’re going to have to see house prices fall.’ A house has long been the main investment asset for New Zealanders and so a key factor for the central bank in deciding monetary policy.

Government agency Quotable Value says residential house prices have climbed steadily for nearly 20 years, barring a slight dip in 1998.

The absence of a capital gains tax, an immigration-driven population expansion and consumer-friendly lending practices have all contributed to property prices nearly doubling between 2001 and 2007.

The property market cooled briefly last year but regained strength earlier this year, prompting the central bank to resume tightening monetary policy by lifting interest rates by a total of one percentage point.

‘The slowing housing market is core to RBNZ view of the economy slowing,’ said Shamubeel Eaqub, director of investment research at Goldman Sachs JBWere. ‘This has been a major source of inflation and activity and a major amplifier of the economic cycle. They need this housing market to slow and slow for a prolonged period of time.’

Housing data, showing median house prices levelling off and sales coming down sharply, suggest a slowdown has already begun.

The Real Estate Institute of New Zealand said annual price gains eased to 12.3 per cent in September from 12.9 per cent in August. Its figures show monthly sales have fallen for four straight months.

With lenders more risk averse following the global credit squeeze, growth in net migration easing and longer-term mortgage rates remaining elevated, many analysts think the current slowdown is here to stay.

Finance Minister Michael Cullen told Reuters in an interview last week he was also seeing appropriate signs of a slowdown in the housing market though inflation remained a concern.

The central bank forecast in September that annual house price inflation, currently around 13 per cent, would slow to around 10 per cent by the end of the year and would then continue easing through 2008. It expects prices to start falling in 2009.

The RBNZ will review its policy today, although all 17 economists in a Reuters poll predicted interest rates would remain at 8.25 per cent.

Most of the 17 economists expect the central bank to stay put at least until mid-2008 because record low unemployment, rising wages and the prospects of higher farmers’ income from the global dairy boom will provide fuel for inflation.

 

Soure: Reuters (Business Times 25 Oct 07)

Japan’s trade surplus surges 63% to record

US business lobbies stepping up push to accelerate yen’s appreciation

IN TOKYO

JAPAN’S trade surplus surged by a much sharper than expected 63 per cent to a record 1.64 trillion yen (S$21 billion) in September, and although this came despite an export decline to the United States, it is certain to add to a growing clamour among business lobbies there for yen appreciation, analysts said yesterday.

With a slowing US economy, ‘currency wars’ could be rekindled, some fear. News of the record Japanese surplus came just one day after three leading US motor giants – Chrysler, Ford and General Motors – called on the Bush administration and on the IMF to press Japan to raise the value of the yen by 20 to 25 per cent to address an ‘unfair trade advantage’. The yen is hovering close to a 20-year low in trade- weighted terms.

G-7 finance ministers meeting in Washington last Friday called upon China to ‘allow an accelerated appreciation’ of the yuan exchange rate but made no mention of the yen. Japan kept a low profile during the IMF and World Bank meetings where the G-7 met but the issue of an ‘undervalued’ yen is increasingly being raised by US and also European lobbies.

‘We think now is the time for the US to encourage the IMF to act (on the yen),’ Van Jolissaint, chief economist for Chrysler, said at a news conference with counterparts from General Motors and Ford. ‘To me, there’s absolutely no doubt that Japan has been managing its currency,’ added Mustafa Mohatarem, chief economist at General Motors.

Japan’s exports to the US fell by 9.2 per cent in value during September compared with a year earlier, but this was compensated for by a 19 per cent jump in exports to China. Wu Xiao- ling, deputy governor of the People’s Bank of China, complained in Washington last week that China is having to take the heat for ‘other Asian countries’ that are effectively exporting to the US via China.

Even though Japan’s direct exports to the US are expected to continue declining in coming months, as the impact of the sub-prime mortgage market crisis there works its way through the economy, indirect Japanese exports via China are likely to hold up well because of the ‘cheap yuan’, some economists say. Japan’s overall exports rose by 6.5 per cent in September from a year earlier while imports fell 3.2 per cent.

Another impact of a slowdown in the US economy is likely to be growing calls for protectionism there, not only against imports from China but increasingly against goods from Japan, some economists and officials said in Washington last week. But the Bush administration is likely to keep pressure on Beijing rather than Tokyo to bring about currency appreciation, they said.

‘Although the yen is undervalued relative to its medium-term fundamentals, it is appropriate for monetary policy (in Japan) to continue to focus on overcoming deflation and sustaining growth rather than on the level of the (yen) exchange rate,’ the IMF said in its latest World Economic Outlook published last week.

Some officials also argued that a rise in the yuan would help to pull other Asian currencies, including the yen, up with it.

Even so, if Japan is to avoid becoming a target of increasing protectionist sentiment in the US and elsewhere, Japanese authorities may be forced to intervene in foreign exchange markets in order to bring about at least some rise in the value of the yen against the dollar and the euro, some officials said. Intervention is likely to be more effective if it is made in concert with the US and Europe, they added.

 

Source: Business Times 25 Oct 07

Buffet wary of bubble in China stock market

(DALIAN) Billionaire Warren Buffett said that investors should be ‘cautious’ about China’s stocks after its benchmark index more than doubled this year.

‘We never buy stocks when we see prices soaring,’ Mr Buffett said yesterday in Dalian, north-eastern China, where he is visiting a subsidiary of his Berkshire Hathaway Inc. ‘We buy stocks because we’re confident of the company’s growth. People should be cautious when they see prices rising.’

Mr Buffett has sold shares of PetroChina Co, which has risen 76 per cent this year to become the world’s second-biggest company by market value. The CSI 300 stock index has climbed 48 per cent since May 17, when Li Ka-shing, Asia’s richest man, said that there ‘must be a bubble.’

‘Buffett is right about China stocks, whose valuations are too high,’ said Wang Zheng, who manages the equivalent of US$500 million at the asset management unit of Everbright Securities Co in Shanghai. ‘It doesn’t make sense any more to still play in such a market. It’s about time to pull out of it.’

Mr Buffett said that he was ‘appreciative’ of PetroChina’s performance and that he is doubtful that he can find another stock like it. Berkshire owned more than 10 per cent of PetroChina’s publicly held shares as of the end of last year. It owned 3.1 percent of the publicly held shares as of Sept 30, according to disclosures. The company has sold all of its holding, Mr Buffett said in an interview on Oct 18.

Source: Bloomberg (Business Times 25 Oct 07)

Japan’s export growth slows to two-year low

TOKYO – JAPAN’S exports grew at the slowest pace in two years last month as shipments to the United States fell, a signal that the nation’s economic expansion may cool because of waning demand in its largest market.

Exports rose by 6.5 per cent from a year earlier, according to government data released yesterday, less than the 8.1 per cent median forecast of 10 economists surveyed by Bloomberg News and 14.5 per cent in August.

Imports declined for the first time in more than three years, helping the trade surplus to widen to a record.

Shipments to the US fell by 9.2 per cent, the biggest drop in four years, the Japan’s Finance Ministry said, as a housing recession led to a fall in demand for construction equipment.

In the US last week, Caterpillar, the world’s largest maker of earth-moving equipment, lowered its full-year profit forecast because the housing recession reduced sales in North America.

That could also affect earnings at Tokyo-based Komatsu, the second-biggest such company, which gets about a quarter of its sales in the Americas.

Shipments to China, Europe and Asia, which propped up export growth in the past six months, expanded at a slower pace.

‘The outlook for exports to Asia warrants caution’ because the US slowdown may reduce demand for Japanese goods shipped within the region that are destined for the US, said Mr Yoshimasa Maruyama, senior economist at BNP Paribas Securities Japan.

‘Recent gains in the yen are also bad news for Japanese exporters,’he added.

Japan’s currency has gained more than 2 per cent against the US dollar in the past two weeks on renewed concern that the American housing slump will slow global growth.

Japan needs export growth to ensure that the economy rebounds from a second-quarter contraction as falling wages keep the lid on spending by consumers at home.

Source: BLOOMBERG NEWS (The Straits Times 25 Oct 07)

Sub-prime crisis negligible: Infosys CEO

The challenge to the company was the sudden appreciation of the rupee

(NEW YORK) India’s No 2 software services exporter, Infosys Technologies Ltd, has felt a ‘negligible’ impact on its business from the US sub-prime mortgage crisis, its chief executive said on Monday. ‘Given our size, impact has been negligible,’ S Gopalakrishnan said in an interview.

US clients, who account for more than half of the company’s business, have not pulled back on information technology (IT) spending or cancelled projects with it, Mr Gopalakrishnan said, despite the sub-prime mortgage crisis that has sparked fears of an economic downturn in the US.

Adding to those worries is the rupee’s steep appreciation – it has gained up to 12.5 per cent against the US dollar this year. ‘What challenged Infosys was this sudden appreciation,’ Mr Gopalakrishnan said. He added that he expects the rupee, which has hit 91/2-year highs against the US dollar, to be very volatile in the short term.

Infosys, which has about 80,000 employees, has previously said that margins may fall by 50 to 100 basis points in the fiscal year that ends in March.

The company has also said that it will lose about 20 billion rupees (S$734 million) in revenue in the year, given the rupee’s strength against the US dollar.

But Infosys, whose clients include ABN AMRO, Goldman Sachs and Royal Philips Electronics, would be able to cope if the rupee appreciates gradually in the medium to long-term, Mr Gopalakrishnan said.

‘If the appreciation is gradual, we are able to grow our business, sustaining margins,’ he said.

The company was in deal talks with 14 to 15 companies in Europe and the US at any given time, for an aggregate value of about US$1 billion, he said, but declined to elaborate.

 

Source: Reuters (Business Times 24 Oct 07)

Emerging Asia: positive outlook despite pitfalls

Beware uncertain global economy and riskier financial environment

EMERGING Asia’s economies have been among the most dynamic in the world in the last decade. Today, the region accounts for almost half of global economic growth. Much of this success stems from broad reforms by these countries in the last 10 years.

These reforms have led to healthier financial and corporate sectors and more robust macroeconomic policy across the region. But the recent financial turbulence, still playing out across the globe, highlights the question of just how vulnerable the region remains to developments in the United States and other industrialised countries.

What, therefore, are the key strengths and vulnerabilities for the region today? And what challenges are Asia’s policymakers likely to face in the period ahead?

The International Monetary Fund’s (IMF) Asia and Pacific Department addresses these issues in detail in its Fall 2007 Regional Economic Outlook (www.imf.org).

The year 2007 has been another good one for the region so far. Economic growth has exceeded expectations. China and India have led the way, with growth rates in the first half of the year of 11.5 and 9.25 per cent respectively.

The trend has been positive for others as well. Exports remain buoyant and growth is becoming somewhat better balanced in many countries, with private consumption and investment making an increasing contribution.

For the year as a whole, we project that emerging Asia will achieve economic growth of nearly 9.5 per cent.

Moreover, inflation continues to remain in check. While a recent modest pick-up in headline inflation in the region requires close monitoring, this rise mainly reflects higher food prices, especially in China, and is not expected to generate large second-round effects.

The region weathered well the recent global financial turbulence, when concerns over rising defaults in the US subprime market led to increased volatility in equity and credit markets worldwide.

Emerging Asia’s equity markets did initially decline along with other emerging markets, Asian currencies did experience downward pressure, and financial conditions did tighten. However, what is striking is the speed with which emerging Asia recovered from this initial shock.

Capital inflows to the region have returned, and its equity markets are now about 10 per cent higher than before the summer’s turbulence. Reflecting this resilience, the IMF foresees only a modest slowdown in 2008, to about 8.5 per cent, resulting from lower external demand for Asia’s exports, and an assumed effective policy tightening in China.

The sub-prime crisis has, however, increased uncertainty about the outlook for the global economy – and for emerging Asia. First, it remains uncertain whether we have seen the worst of the global financial turbulence or if there are additional shocks ahead. The region’s apparently small exposure to sub-prime mortgages and structured products more generally has helped moderate the impact of the sub-prime crisis on Asia. This in itself reflects the relatively unsophisticated nature of the financial sector in much of the region.

But another bout of global financial volatility could have significant spillovers for the region. It could reverse recent inflows and make financing more difficult for a number of sovereign and corporate borrowers.

But perhaps the main risk to the region is that of a sharp slowdown in the US and the euro area, resulting from the persistent US housing doldrums and associated global financial problems.

Despite the view being expressed that Asia has ‘delinked’ from the US and other industrialised countries, the truth is that the region remains significantly dependent on exports to the rest of the world. While an increasing share of exports are within the region, much of this still reflects the integrated production processes within Asia, with much of the final demand still in the industrialised world.

So, how big an impact would a US or global slowdown have on Asia? It would likely not be as big as during the dotcom bust of 2001-02. Then, the decline centred on information technology products, which are of particular importance for emerging Asia.

Nevertheless, IMF staff estimates that a one percentage point decline in US economic growth could reduce growth in emerging Asia, through lower exports, by up to 0.4 percentage point. While sizeable, this would, however, not have a dramatic impact on emerging Asia’s economies.

Overall, then, the outlook for emerging Asia remains positive, but the economic environment will, as always, present a number of policy challenges.

First, policymakers need to be ready to respond to a slowdown in the global economy including – in countries where inflation expectations are low and well-anchored – through more accommodative monetary policy.

Second, the volatile global environment has raised uncertainty regarding capital flows to the region. Countries will need to continue to be pragmatic and allow for greater exchange rate flexibility to create two-way risk in foreign currency markets and promote a rebalancing of growth where necessary. This is especially pertinent in China, where the current account surplus has continued to grow and the currency remains considerably undervalued relative to medium-term fundamentals.

Finally, the sub-prime crisis, while so far largely skirting the region, will provide a number of lessons for Asia, as its financial systems become more sophisticated. This is likely to include the need for enhanced financial supervision.

At the same time, countries will also likely need to strengthen reporting and disclosure requirements, and pricing and provisioning rules to deal effectively with complex financial products, and the cascading system of risks they imply.

 

Source: Business Times 23 Oct 07

Sub-prime rescue bid will do more harm than good

By PAUL KRUGMAN

IT pains me to say this, but this time former Federal Reserve chairman Alan Greenspan is right about US housing. Mr Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some ‘froth’ in the market. He was wrong last autumn, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 per cent since then.) But his latest pronouncement – that the market rescue plan being pushed by US Treasury Secretary Henry Paulson is likely to make things worse rather than better – looks all too accurate.

To understand why, we need to talk about the nature of the mess. First of all, there was indeed a huge national housing bubble. What even those of us who realised that there was a bubble didn’t appreciate, however, was how much of a threat the bursting of that bubble would pose to financial markets. Today, when a bank makes a home loan, it doesn’t hold on to it. Instead, it quickly sells the mortgage off to financial engineers, who chop up, repackage and resell home loans pretty much the way supermarkets chop up, repackage and resell meat. It’s a business model that depends on trust. You don’t know anything about the cows that contributed body parts to your package of ground beef, so you have to trust the supermarket when it assures you that the beef is USDA prime.

You don’t know anything about the sub-prime mortgage loans that were sliced, diced and pureed to produce that mortgage-backed security, so you have to trust the seller – and the rating agency – when they assure you that it’s an AAA investment. But in the case of housing-related investments, investors’ trust was betrayed. Supposedly safe investments suddenly turned into junk bonds when the housing bubble burst. High profits reported by hedge funds – profits that were reflected in huge payments to the fund managers – turn out to have been based on wishful thinking.

Thus, when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last summer, it came as a huge shock to many investors, and helped trigger a market panic. But a recent BusinessWeek report shows that the funds were a disaster waiting to happen. The funds borrowed huge amounts, and invested the proceeds in questionable mortgage-backed securities. Even worse, ‘more than 60 per cent of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi’s own team’. We’re profitable because we say we are – just trust us.

That hasn’t ever caused problems, has it? Stories like this have led to a crisis of confidence. The current yield on one-month US government bills is only 3.41 per cent, an amazingly low number, and a sign that people are parking their money in government debt because they don’t trust private borrowers. And the result is a shortage of liquidity that is greatly damaging the economy.

Which brings us to the rescue plan proposed by a group of large banks, with Mr Paulson’s backing. Right now, the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called ’structured investment vehicles’ – basically hedge funds that borrow from the public and invest the proceeds in mortgage-backed securities.

The new plan would create a ’super-fund’, the Master Liquidity Enhancement Conduit, which would seek to restore confidence by, um, borrowing from the public and investing the proceeds in mortgage-backed securities. The plan, in other words, looks like an attempt to solve the problem with smoke and mirrors.

That might work if there was no good reason for investors to be worried. But in this case, investors have very good reasons to worry: the bursting of the housing bubble means that someone, somewhere, has to accept several trillion dollars in losses. A significant part of these losses will fall on mortgage-backed securities. And given this reality, the ‘conduit’ looks like a really bad idea.

I’d put it like this: Investors aren’t putting their money to work because they don’t know where the bad debts are. And when investors need clarity, the last thing you want to be doing is pumping out more smoke. Mr Greenspan’s take, expressed in an interview with the magazine Emerging Markets, seems broadly similar. ‘If you believe some form of artificial non-market force is propping up the market,’ he said, ‘you don’t believe the market price has exhausted itself.’ Translated: This rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets.

Alan Greenspan is making sense.

The writer is a professor of economics at Princeton University

 

Source: Business Times 23 Oct 07

Credit crunch puts global growth at risk: IMF chief

Champions of super fund to rescue mortgage market seen losing case

(WASHINGTON/ZURICH) World credit markets ‘have lived through an earthquake’ and the question is now whether the global economy has reached a turning point after five years of strong growth, the head of the International Monetary Fund said yesterday.

Addressing the IMF’s 185 member countries, IMF managing director Rodrigo Rato warned of aftershocks in markets, saying the full effects of the credit crunch, which began in the US sub-prime mortgage market, were still not fully understood.

‘We already know that we should not try to regulate crises out of existence: that would be like trying to ban earthquakes,’ he said. ‘But the weaknesses in our infrastructure that have been exposed need to be addressed.’ Mr Rato added: ‘The question is now whether the global economy is at an inflection point.’

The outgoing IMF chief noted that in developed countries, corporate balance sheets were strong and labour markets generally healthy.

‘For these reasons, we expect a slowdown in growth but not a recession in the United States, and a smaller slowdown in other advanced countries,’ Mr Rato said, adding that emerging economies had become a source of stability in the global economy.

Mr Rato said risks to global growth were higher than just six months ago and the market turmoil was a warning that good times may not last forever.

Further disruption in financial markets and falls in housing prices could lead to a steeper global downturn, he warned.

So far, movements in exchange rates have been orderly and in line with fundamentals, Mr Rato said, further warning that if the dollar should abruptly fall, it could provoke a loss of confidence in dollar assets.

There was also a risk that the rise of other currencies, such as the euro, could hurt those regions’ growth prospects, he added.

Furthermore, there was a risk that emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions.

Meanwhile, whether a US$75 billion fund to rescue the battered mortgage-backed securities market takes off or not, its sponsor US Treasury Secretary Henry Paulson seems to be losing the argument over its merits, strategists and economists said.

The fund, announced recently by Citigroup, Bank of America and JP Morgan with Mr Paulson’s support, aims to prevent structured investment vehicles (SIVs) from making panic sales of bonds linked to US sub-prime mortgages.

Many of the SIVs – off-balance sheet vehicles holding some US$370 billion in assets that rely on short-term financing to make a return – are struggling to stay afloat as investors shy away from buying their commercial paper.

The plan has faced a rising tide of criticism, not least from former Federal Reserve chairman Alan Greenspan, who said last Friday the super fund may do more harm than good.

Financial strategists contacted by Reuters said time is running out for the plan’s champions to regain the initiative and the fund risks being still-born.

‘I think they are losing the intellectual argument,’ Ian Harnett, a director at financial consultancy Absolute Strategy in London said yesterday.

The fund was nevertheless more likely than not to go ahead because of the potential embarrassment for the three US banks and for Mr Paulson himself if the idea is scrapped, said Mr Harnett.

‘I would still put it at 70 to 30 that it does happen because of the reputational risk,’ he said.

A global credit crunch, originating from huge losses in US sub-prime mortgage lending, has put acute pressure on SIVs, as demand dried up among investors for the short-term paper SIVs issue to fund investments in high-yielding asset-backed securities with longer maturities.

A fire-sale of assets by the SIVs, set up mainly by banks, would force banks into a fresh round of writedowns of securities held on their balance sheets and result in them granting fewer of the loans that are the life-blood of the global economy.

 

Source: Reuters (Business Times 23 Oct 07)

Developing markets little hit by turmoil: World Bank

Central bankers see need for multilateral talks to strengthen risk management

(WASHINGTON) The impact of recent turbulence in financial markets on developing countries has been limited, and global economic growth remains strong, the World Bank said on Sunday.

Finance ministers and central bankers agreed at weekend meetings that while the global economy was on the mend after recent turbulence, they will need to pay close attention to prevent future crises from erupting.

They also said the turmoil demonstrated how interconnected economies across the world are and the need for multilateral discussions to strengthen risk management.

‘The consensus was that markets are better than in August,’ US Treasury Secretary Henry Paulson told reporters. ‘It has been slowly improving, but it is going to take awhile.’

The World Bank called on donor governments to meet their commitments to boost aid for development and said countries with fast-growing economies and mounting currency reserves could bring new resources to the effort.

In a statement, the bank’s policy-setting Development Committee said its members agreed that more support for the inclusion and empowerment of the poorest countries, especially in sub-Saharan Africa, and more engagement in conflict-afflicted countries are key.

The bank also should help developing countries deal with the causes and impacts of climate change, it said.

The committee session followed a meeting of the bank’s sister institution, the International Monetary Fund. In a lecture sponsored by the IMF, former US Federal Reserve chairman Alan Greenspan warned that rising protectionism could undermine the ability of the US to deal with large deficits.

‘If the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalisation, the current account deficit adjustment process could be quite painful for the United States and our trading partners,’ he said.

Committee members welcomed the commitment by the bank’s new president, Robert Zoellick, to develop a new strategy for the bank. Mr Zoellick, who took over on July 1, has called on the developed countries to ‘translate their words from summit declarations into serious numbers’ and contribute to the bank branch that makes low-interest loans to poor countries. He hopes to raise US$33 billion by early 2008.

He said South Africa had already set a good standard by pledging a 30 per cent boost in its contribution to the loan facility.

At a news conference, Mr Zoellick and the head of the IMF, Rodrigo de Rato, said they were exploring ways the fund could work on reducing debt for Liberia. ‘This is a country that is helping itself and deserves to be helped by the international community,’ Mr de Rato said.

In February, the US forgave US$358 million that West African country emerging from civil war owed it and pushed for further action at the IMF-World Bank meetings.

Liberia’s inherited debt to international institutions totals US$1.6 billion, including US$740 million to the IMF. Its total international debt is US$3.7 billion.

Mr Zoellick’s strategy faces a stiff challenge because in recent years, wealthier countries have preferred to channel their aid to poor countries directly through their development agencies or through foundations that specialise on issues such as malaria.

South African Finance Minister Trevor Manuel welcomed Mr Zoellick’s emphasis on helping to overcome poverty and promote sustainable growth in poor countries, particularly those in sub-Saharan Africa.

The strategy would have the bank fight poverty, especially in Africa, help countries emerging from wars and promote regional cooperation to combat disease and climate change.

Based in Washington, the 185-nation World Bank lends US$24 billion a year for projects in the developing world such as building roads, schools and health clinics. But its role as a lender has been declining as middle-income countries have access to financing from other sources.

 

Source: AP (Business Times 23 Oct 07)

Widen moves to calm markets: global finance chiefs

Steps include tighter IMF scrutiny of state investment funds

(WASHINGTON) Global finance chiefs on Saturday called for a more broad-based effort to calm financial markets, including tighter scrutiny by the International Monetary Fund and other institutions of increasingly powerful state-owned investment funds.

This year’s fall meetings of the International Monetary Fund and World Bank come amid a slowing pace of global growth and heightened risk from recent turbulence in world credit markets and soaring oil prices.

That has particularly affected Group of Seven rich nations whose finance ministers and central bankers met on Friday and concluded that their growth will suffer because of ongoing turmoil in markets.

By contrast, developing countries that are well represented among IMF members have been emboldened at these meetings by the fact that their growth rates are thriving and have used the opportunity to flex their economic muscle.

‘The irony of this situation: countries that were references of good governance, of standards and codes for the financial system, these are the very countries that are facing serious problems of financial fragility putting at risk the prosperity of the world economy,’ said Brazilian Finance Minister Guido Mantega.

After years of hearing from developed countries about the importance of prudent economic policies, developing nations felt they clearly had the upper hand, with China and India leading world growth and rich countries’ economies slowing.

Meanwhile, developed countries called on the IMF to increase its monitoring of growing state-backed wealth funds that hold surplus reserves mainly from oil exporters and China.

Those funds are investing amounts which cause some nervousness among rich members of the Group of Seven industrial nations, which want to ensure the investments are for profit-making reasons only and are not politically motivated.

US Treasury Secretary Henry Paulson said he considered the IMF ‘uniquely positioned’ to identify model behaviour for these Sovereign Wealth Funds.

His point man for international matters, Under Secretary David McCormick, told Reuters there was general agreement that some code of principles was needed to ensure the funds did not rouse such resentment that countries put up barriers to stop the funds from investing.

Belgian Finance Minister Didier Reynders said it was too early to know how the financial sector difficulties would affect economies in the end, saying central banks should stand ready to lower interest rates, or to postpone rate increases, without damaging inflation.

Developing countries also took the opportunity to push for a greater say in the voting power of institutions like the IMF.

Brazil warned bluntly that under-represented countries were likely to ‘go their own way’ unless they get a greater stake. ‘Developing countries, or many among them, would go their own way, were the perception to arise that reform will not happen or that we will be left with a purely cosmetic form,’ Brazil’s Mr Mantega said.

Some countries saw signs of progress in negotiations among IMF members on how to increase the voting powers of the developing world but others were far from optimistic.

German Finance Minister Peer Steinbrueck said no progress had been made by countries trying to agree on a formula that would rebalance the voting system to reflect the rise of countries like China or India.

Intense political sensitivities are involved in trying to divvy up voting power more frequently. Some old powers like Britain and France potentially could see China move past them in voting status if an intensely negotiated formula truly acknowledges China’s fast-growing economic might.

Also, developing countries insist any overhaul in votes must be large enough to transfer significant additional power to them and to make clear they are not simply being given a pat on the head.

 

Source: Reuters (Business Times 22 Oct 07)

MALAYSIA INSIGHT – When prices go up, spirits come down

Inflation is becoming a thornier problem than volatile stock markets and rising oil prices

CONSIDERING Wall Street’s massive 2.64 per cent sell-off last Friday, Asian and European markets can count on a torrid week ahead.

Before the US’s humongous sub-prime issues could be tackled, crude oil futures breaching US$90 a barrel – with talk of it soaring to over US$100 by year-end – had stoked inflationary and earnings fears, and worries of a general slowdown in the economy.

Despite local firms continuing to show better corporate earnings growth and little, if any, exposure to the US’s subprime problems, the impact on the Malaysian market appears inevitable.

External volatility is beyond one’s control. Where the stock market is concerned, any sharp tumbles would be unfortunate given that Malaysia was very late, years behind other markets in fact, getting onto the bull. Those who remember the days what the ringgit was worth often observe that in ringgit terms, the benchmark KL Composite Index (KLCI) is still nowhere near its peak of the early 1990s. If one considers the KLCI’s 1994 high of 1,332 was achieved when the local unit was about RM2.50 to the US dollar, its present day level of 1,376 at RM3.36 to the US dollar isn’t too much to shout about.

Nonetheless, compared to its moribund years after currency controls were imposed in 1998, there is much to be thankful for.

On the economic front, hefty expansionary budgets will likely result in the projected 5-6 per cent growth over the next two years, albeit slightly weaker if global growth slows.

The greater concern is inflation. Despite government assertions that inflation is a mere 2-plus per cent – many items in the basket of goods by which inflation is measured is price controlled – the average Joe Blow is far from convinced.

Many expenses such as tolled roads which are an essential feature of city life, particularly in the Klang Valley, are not included in the basket. Even attempts to curb the cost of items in the basket are beginning to backfire. In the past years, commodity prices have soared on the back of expanding global demand.

Malaysian builders have screamed about the shortage of steel bars and billets, fingering steel millers who, they claim, prefer to export them if builders do not pay above ceiling prices.

Because of the expansive drought in Australia, the price of wheat flour has also shot up by an enormous 80 per cent since April. If the government does not give flour millers a price increase, millers warn that there is little incentive to import the wheat, which is a main ingredient in bread, noodles and Indian rotis.

The price increase in innocuous items such as corrugated cartons has been surprising. In January, the Malaysian Corrugated Carton Manufacturers’ Association (MCCMA) raised prices of corrugated carton and its related products by 15 per cent. Last month, it announced another 15 per cent hike, adding that paper costs had spiked, as had production costs, ‘due to the rise in prices of fuel (up 70 per cent), electricity (13 per cent), transportation (30 per cent) and labour cost (5 per cent)’. MCCMA has warned of another hike as paper prices are likely to spiral further in the next six months.

On a more ‘essential’ front, Malaysia’s public transport operators have submitted proposals to the government for fee hikes of 100-600 per cent next year, saying that they can no longer bear the burden of higher operating costs.

Toll increases are scheduled for a number of operators next year.

The government gave the country’s one million-odd civil service a pay rise of between 7.5 and 42 per cent in July – the first since 1992 – but with inflationary forces so unrelenting, it will be interesting to see how Malaysia deals with a problem that, falling markets aside, is a thornier problem and one that is unlikely to go away anytime soon.

 

Source: Business Times 22 Oct 07

A confused message from the G-7?

WHAT are we to make of it when spokesmen for the world’s most powerful economies and financial institutions begin to contradict each other in public – or make remarks which appear less than consistent with reality?

Today, the finance ministers and central bankers of the G-7 – namely the countries of the US, Britain, Canada, France, Germany, Italy and Japan – hold their semi-annual get-together in Washington, in the runup to this weekend’s International Monetary Fund and World Bank meetings.

Very public attempts to influence today’s agenda were already taking place early last week, with the leaders of France and Italy appearing to have become particularly vociferous this time. Grumbling that a too-strong euro hurts Europe’s growth and exports, they have tried to lead joint European demands for the US to reiterate its ’strong’ US dollar policy.

In short, the Europeans are getting annoyed that the euro has once again scaled fresh post-launch highs versus the US dollar over the past week, but the yen and yuan have not been contributing their fair share of upside adjustment in response to the fast-falling greenback.

They do have a point. Since the end of last year, the euro has risen some 17 per cent versus the US dollar, while the yuan has only strengthened 7 per cent, and the yen has actually weakened by 5 per cent. Yet, even within Europe, not all appear as flustered on this currency issue. North Europeans like the Germans and the Dutch, for example, have been far less vocal or upset, at least in public, on the subject.

To be sure, it does get a little surreal when the US is asked to reiterate a strong US dollar policy at a time when the US dollar is sliding across a broad front in the real world – and when economic logic suggests that more US dollar downside is needed to correct its record current account deficit with the rest of the world. Over the past fortnight, we have in fact seen the US currency slide to lows not seen in 10, 23 and 31 years versus currencies like the Singapore, Australian and Canadian dollars – on top of recording fresh post-launch lows versus the euro.

To calm jittery financial markets, US Treasury Secretary Henry Paulson has deemed it necessary to come out and help out the Europeans by reiterating – both last week and this – that a strong US dollar is indeed in his country’s interest.

Yet, even as he tried to carry that message across, the International Monetary Fund’s managing director Rodrigo Rato decided to warn this week that the US dollar is in fact still overvalued – despite trading at near record lows. And that it needs to fall even further.

The key message here is that all involved stand to lose out if the US dollar should suddenly collapse; there is a need to manage its fall. When you stop to think about it, isn’t that exactly what Asian countries like China have been trying to do in terms of the US dollar’s slide against their own currencies over the course of 2007?

 

Source: Business Times 19 Oct 07

Greenspan: No $ plunge if China offloads Treasuries

Markets are clever enough not to over- react, he says

(SEOUL) Alan Greenspan doesn’t expect a rapid decline in the dollar should China sell more of its holdings of US Treasuries, according to people attending a forum here yesterday.

‘When asked whether there will be a plunge in the dollar in case China offloads its US Treasury holdings, Mr Greenspan said it’s already-known information that won’t trigger any rapid drop in the US dollar,’ according to Kong Dong Rak, an analyst with Hana Daetoo Securities. ‘His view is that markets are clever enough not to overreact.’

The former Federal Reserve chairman was speaking via satellite from Washington and media were excluded from his presentation. The conference was hosted by Maeil Business Newspaper.

Japan, China and Taiwan sold US Treasuries at the fastest pace in at least five years in August as losses linked to US sub-prime mortgages sparked a slump in the dollar.

Japan cut its holdings by 4 per cent in August to US$586 billion, Treasury Department figures showed. China’s holdings fell by 2.2 per cent to US$400 billion and Taiwan’s slid 8.9 per cent to US$52 billion.

Kim Gyung Rok of Mirae Asset Investment Management, confirmed Mr Greenspan’s remarks on the dollar.

‘Foreign exchange markets have already priced in bit by bit’ the possibility of an unloading of US Treasuries, he said.

Mr Greenspan is ‘of the opinion that holdings of foreign exchange reserves tend not to be moved easily’, Mr Kim said.

The dollar has fallen 7.5 per cent against the euro this year after the Fed cut interest rates last month to support the housing market, reducing the yield advantage of US fixed-income assets.

The US currency slumped to a record low against the euro on speculation that the growth outlook in the US will push the Fed to make another reduction at the end of the month.

The dollar declined 0.6 per cent to US$1.4294 per euro, after earlier reaching an all-time low of US$1.4305 in early New York trading. It fell one per cent to 115.46 yen. It earlier reached 115.29, the lowest since Oct 2.

The New York Board of Trade’s dollar index touched 77.5, the weakest since the index began in 1973.

Eisuke Sakakibara, Japan’s former top currency official, said that the US currency may ‘plunge’ in 2008 should US economic growth ‘fall below one per cent’. He spoke in an interview yesterday in Tokyo.

On Wednesday, the International Monetary Fund cut its forecast for US growth next year to 1.9 per cent. IMF officials said the dollar is overvalued compared with its medium-term fundamentals. According to the Financial Times, Simon Johnson, chief economist of the Fund, said the weakening dollar was part of a normal process of economic rebalancing and was positive for the global economy provided that other currencies also adjust.

However, Mr Greenspan said the slowdown is unlikely to lead to a US recession, though it will still have a negative effect on Asia’s economies, according to Maeng Young Jae of Samsung Securities. ‘Greenspan seems more optimistic about the US economy than pessimistic.’

Mr Greenspan said China’s policy on the yuan ‘could cause long-term instability in the Chinese economy’, according to Ben Arber, head of global payments and cash management at HSBC Holdings in Seoul.

 

Source: Bloomberg (Business Times 19 Oct 07)

Japan Reit to test sub-prime impact

Industrial & Infrastructure Fund is first to list in eight months

(TOKYO) Industrial & Infrastructure Fund Investment Corp may find its upside potential capped by US sub-primerelated concerns after it goes public today in the first Japanese Reit listing in eight months.

The new real estate investment trust (Reit) is the first to own infrastructure assets and will serve as a touchstone for the six-year-old market, which is the world’s fifth-largest and is struggling to move up in rank.

Industrial & Infrastructure Fund will be offering 76,000 units in the fund at 480,000 yen apiece, with a greenshoe option to offer a further 4,000 units.

It will have initial assets of 66 billion yen (S$825 million), 75 per cent of which comprises distribution centres, and 25 per cent of which is accounted for by one infrastructure facility – a centre controlling building heating and airconditioning in a commercial area of Kobe, western Japan.

Most tenants at such facilities have leasing contracts of up to 20 years, compared with two years for regular offices, so the fund may see slow rent growth but steady cash flows.

‘You can’t expect rent increases, but at a time like this when the market is in a downturn trend, some investors may like stability,’ said Hiroshi Torii, a Reit analyst at Daiwa Institute of Research Ltd.

The last Reit listing was in February when Nomura Real Estate Residential Fund went public, and the market looks ready for a new offering after an eight-month break.

‘The stock will likely rise at first, and once the dust settles yields and rents will come under scrutiny,’ Mr Torii added.

The Japanese Reit market is still reeling from the US sub-prime mortgage crisis. The Tokyo Stock Exchange Reit index has dropped 27 per cent since touching a life-time high in May. For the year-to-date, it is down 3 per cent, compared with a fall of 3.3 per cent in the Topix index. Still, foreign investors, who account for about a quarter of Japan’s five trillion yen Reit market, have become net buyers since August following sharp sell-offs in June and July.

The new fund’s pricing seems to be fair, one analyst said.

Industrial & Infrastructure Fund plans to pay a dividend of 9,461 yen per unit for the six months to June 2008.

Based on the IPO price, that means a dividend yield of 3.9 per cent, higher than about 3 per cent at Japan Logistics Fund, which owns warehouses, and an average weighted yield of 3.3 per cent for all Japanese Reits.

The average yield’s spread over 10-year Japanese government bonds (JGB) has widened from less than 100 basis points in June, when interest rate-hike expectations pushed up JGB yields, to 200 basis points, so Reits offer decent premiums at the moment.

As Industrial & Infrastructure Fund cannot count on rent growth, analysts say its external growth strategy will be key.

Some are optimistic that many Japanese firms are overhauling their businesses and offloading distribution centres and other non-core assets.

‘They can grow faster than Japan Logistics because the targeted assets are not only warehouses but other industrial properties,’ said Deutsche Securities analyst Machio Honda.

But then again, Japanese property prices have already gone up and the market for quality assets has grown competitive.

Furthermore, the low returns on infrastructure assets is also a concern. The tenant at the new Reit’s Kobe site is a local gas company, but this facility has a cap rate – a rate of return on property investment – of around 4 per cent, compared with 5-6 per cent on other warehouses, dragging down overall returns.

‘The financial risks may be low, but when you look at it as a property investment, you will wonder about the returns,’ said Mototsugu Ota, chief fund manager at STB Asset Management Co.

The Reit’s asset management company, Mitsubishi Corp-UBS Realty Inc, a joint venture between trading firm Mitsubishi Corp and UBS AG, aims to buy a range of facilities from factories to airports to research and development centres.

In addition, investor risk aversion stemming from the US sub-prime crisis could limit the upside potential for the Reit market as a whole.

Goldman Sachs analyst Sachiko Okada, who gives the Reit sector a neutral rating, said investor appetite for Reits remains subdued.

‘I would think the Reit index can only go up to 2,200 at best’, which is 14 per cent above Tuesday’s close.

‘It all depends on if foreign investors’ money will flow back into the Japanese property market after the sub-prime woes,’ Ms Okada said.

 

Source: Reuters (Business Times 18 Oct 07)

Japan Reit to test sub-prime impact

Industrial & Infrastructure Fund is first to list in eight months

(TOKYO) Industrial & Infrastructure Fund Investment Corp may find its upside potential capped by US sub-primerelated concerns after it goes public today in the first Japanese Reit listing in eight months.

The new real estate investment trust (Reit) is the first to own infrastructure assets and will serve as a touchstone for the six-year-old market, which is the world’s fifth-largest and is struggling to move up in rank.

Industrial & Infrastructure Fund will be offering 76,000 units in the fund at 480,000 yen apiece, with a greenshoe option to offer a further 4,000 units.

It will have initial assets of 66 billion yen (S$825 million), 75 per cent of which comprises distribution centres, and 25 per cent of which is accounted for by one infrastructure facility – a centre controlling building heating and airconditioning in a commercial area of Kobe, western Japan.

Most tenants at such facilities have leasing contracts of up to 20 years, compared with two years for regular offices, so the fund may see slow rent growth but steady cash flows.

‘You can’t expect rent increases, but at a time like this when the market is in a downturn trend, some investors may like stability,’ said Hiroshi Torii, a Reit analyst at Daiwa Institute of Research Ltd.

The last Reit listing was in February when Nomura Real Estate Residential Fund went public, and the market looks ready for a new offering after an eight-month break.

‘The stock will likely rise at first, and once the dust settles yields and rents will come under scrutiny,’ Mr Torii added.

The Japanese Reit market is still reeling from the US sub-prime mortgage crisis. The Tokyo Stock Exchange Reit index has dropped 27 per cent since touching a life-time high in May. For the year-to-date, it is down 3 per cent, compared with a fall of 3.3 per cent in the Topix index. Still, foreign investors, who account for about a quarter of Japan’s five trillion yen Reit market, have become net buyers since August following sharp sell-offs in June and July.

The new fund’s pricing seems to be fair, one analyst said.

Industrial & Infrastructure Fund plans to pay a dividend of 9,461 yen per unit for the six months to June 2008.

Based on the IPO price, that means a dividend yield of 3.9 per cent, higher than about 3 per cent at Japan Logistics Fund, which owns warehouses, and an average weighted yield of 3.3 per cent for all Japanese Reits.

The average yield’s spread over 10-year Japanese government bonds (JGB) has widened from less than 100 basis points in June, when interest rate-hike expectations pushed up JGB yields, to 200 basis points, so Reits offer decent premiums at the moment.

As Industrial & Infrastructure Fund cannot count on rent growth, analysts say its external growth strategy will be key.

Some are optimistic that many Japanese firms are overhauling their businesses and offloading distribution centres and other non-core assets.

‘They can grow faster than Japan Logistics because the targeted assets are not only warehouses but other industrial properties,’ said Deutsche Securities analyst Machio Honda.

But then again, Japanese property prices have already gone up and the market for quality assets has grown competitive.

Furthermore, the low returns on infrastructure assets is also a concern. The tenant at the new Reit’s Kobe site is a local gas company, but this facility has a cap rate – a rate of return on property investment – of around 4 per cent, compared with 5-6 per cent on other warehouses, dragging down overall returns.

‘The financial risks may be low, but when you look at it as a property investment, you will wonder about the returns,’ said Mototsugu Ota, chief fund manager at STB Asset Management Co.

The Reit’s asset management company, Mitsubishi Corp-UBS Realty Inc, a joint venture between trading firm Mitsubishi Corp and UBS AG, aims to buy a range of facilities from factories to airports to research and development centres.

In addition, investor risk aversion stemming from the US sub-prime crisis could limit the upside potential for the Reit market as a whole.

Goldman Sachs analyst Sachiko Okada, who gives the Reit sector a neutral rating, said investor appetite for Reits remains subdued.

‘I would think the Reit index can only go up to 2,200 at best’, which is 14 per cent above Tuesday’s close.

‘It all depends on if foreign investors’ money will flow back into the Japanese property market after the sub-prime woes,’ Ms Okada said.

 

Source: Reuters (Business Times 18 Oct 07)

Possible 2008 recession in US will hit Asia: Stephen Roach

Asia needs to take events in US more seriously, he says

IN SEOUL

THE United States could face a consumer-induced recession next year, which will also hit Asian economies, said Morgan Stanley’s chairman for Asia, Stephen Roach.

Speaking at the World Knowledge Forum in Seoul, Mr Roach – well known for his bearish views – presented what he called a ‘decidedly sub-prime outlook’ for the US economy.

The so-called sub-prime mortgage crisis is ‘the tip of a much bigger iceberg’, he said. It has started to hit the American consumer.

Mr Roach, who has long predicted a US economic slowdown, pointed out that the US consumer is facing the toughest times in 30 years, and the impact on the economy could be acute.

He noted that in the first half of this year, US consumption accounted for a record 72 per cent of GDP, or about US $9.5 trillion.

‘The US consumer is about to take a long rest,’ he said, ‘and if the US consumer goes, there’s nobody on the demand side who can fill the void.’ Even China’s total consumption is only about one-ninth that of the US, he noted.

Mr Roach suggested that the US consumer is at risk because the consumption binge of the last seven years has been underpinned, not so much by rising incomes but by a wealth effect which has, in turn, been driven by ‘an extraordinary property market’.

In short, ‘the US consumer has turned his home into an ATM machine’, he added.

But now, with the US property bubble deflating, the wealth effect, based on rising home values, ‘is over, is done, is finished’.

In fact, next year, home prices for the whole of the US could decline for the first time in history, he predicted, which would severely diminish US consumers’ ability to extract equity from their homes.

In the face of this, Mr Roach said that the risk of recession ‘is quite high’.

Although sub-prime mortgage assets account for only 14 per cent of all securitised assets, the sub-prime crisis has already spread.

Moreover, ‘the big story gets written in the real economy, not in the financial markets’, he said.

And worth noting here, he added, is that US consumption is about five times the size of US capital spending, which triggered the US recession of 2001.

Mr Roach, who is based in Hong Kong, said that Asia needs to take developments in the US more seriously.

‘What’s worrying is a complacency in Asian markets, based on a belief that Asia has ‘decoupled’ from the US,’ he pointed out.

But the decoupling thesis is fanciful, he said, noting that the US absorbs 21 per cent of China’s exports, 22.5 per cent of Japan’s and about 14 per cent of Asean’s. ‘If the US consumer goes down, Asia will feel it,’ he said.

 

Source: Business Times 18 Oct 07

CEO survey finds 37% chance of US recession

(WASHINGTON) Leading Wall Street chief executives predicted a 37 per cent chance of a US economic recession in the next 12 months, according to a Financial Services Forum survey released yesterday.

The forum is a policy group made up of the chief executives of 20 of the world’s largest financial institutions, including Citigroup Inc, Morgan Stanley, Goldman Sachs and MetLife.

The executives said they expect slower US economic growth over the next year due to the housing slowdown, credit market turmoil and higher energy prices, according to the survey.

In predicting a 37 per cent chance of a US recession in the coming 12 months, the executives also cut their expectations of economic growth.

The forum’s US economic growth index fell from 2.03 in April, when the last bi-annual survey was taken, to 1.27 in October. The growth survey represents sentiment on a scale ranging from -5 for strongly negative growth to 0 being no growth and 5 being robust growth.

Former Federal Reserve chairman Alan Greenspan this month put the odds of a recession at less than 50 per cent. A Reuters survey of 56 private economists earlier this week found the majority saw the chance of a US recession at somewhere between 21 per cent and 30 per cent.

The Financial Services Forum executives also indicated that the credit market problems are not finished.

On a scale of 1 to 5, with 5 being significant turmoil still to come, the chief executives on average answered 2.9, according to the survey.

The survey found the executives expect a Federal Reserve interest rate cut of 25 basis points before the end of the year.

In September, the Fed cut benchmark rates by a hefty half-percentage point to 4.75 per cent amid concerns about increasing mortgage delinquencies and financial market disarray.

In assessing the stock market, the executives predicted the Dow Jones Industrial Average (DJIA) would finish the year at 14,137, according to the survey. On Tuesday, the DJIA closed at 13,912.9.

 

Source: Reuters (Business Times 18 Oct 07)

Investors’ short memory is worrying

Granted, the sub-prime crisis has passed. But the US economy has other major problems. So it’s advisable to be prudent

By WONG SUI JAU

WHAT a difference two months makes. In mid-August, the sub-prime loans scare had just rocked markets around the world, causing them to fall for two weeks. The air was heavy with gloom. But now, it seems as if the sub-prime problem never happened. Many markets are back to their pre-crash levels and, indeed, some – including the US market as represented by the S&P 500 index – have recently hit record highs. As the accompanying table shows, many Asian markets have done very well from the start of the year up to end-September. There is reason for much cheer among investors.

While I was one of those urging calm at the time the sub-prime issue blew up, I find the short memory of many investors worrying. Before the sub-prime issue flared in the US, there was hardly anything to worry about; Asian economies were growing strongly and the rest of the world was doing decently too.

But in the aftermath of the sub-prime crash, some things are now different. Investors need to pay close attention to these developments – not just focus on the happy reality of rising markets. The most significant thing is that the US economy has turned. As recently as the second quarter, US GDP was still accelerating in terms of growth, growing at an annualised rate of 3.8 per cent in Q2, compared with an annualised 0.6 per cent in Q1.

However, the sub-prime issue has exposed weaknesses in the US economy that are not going to go away, rising markets notwithstanding. First, the US property cycle is on a clear downward trend – and this is accelerating rather than slowing. The supply of homes has almost doubled since end-December 2005. A large number of unsold homes will put further downward pressure on prices. The sub-prime fright has also made investors much more cautious about entering an already falling market. After all, if home prices are dropping, there is no hurry to buy, because it is better to wait for prices to fall further. Thus, we may see an even steeper decline in US home prices going forward (see chart).

Second, the woes in the US property market will affect many American consumers. Americans have been consuming ever more each year, and accordingly, their debt levels have risen. The ratio of household debt to disposable income was at a high of 2.29 in March 2007, compared with 0.82 in December 1990. This means that for every dollar of income earned, the average US household has $2.30 of debt.

Previously, the rising housing market enabled Americans to take out reverse mortgages and get money from the houses they stayed in. But with prices now falling, this will dry up. Some households may even run into problems paying off their home loans. Certainly, this will affect household spending going forward. Any weakness in consumer spending – which underpins so much of what drives the US economy – will put a question mark over growth next year.

Continued volatility

Third, the US continues to do things like reduce interest rates and deflate the dollar. This may work in the short term. But over the long term, it does not solve the fundamental problem that the US economy faces – which is that it spends far more than what it generates in income, resulting in its huge twin deficits. For now, since it is the sole superpower and with the US dollar still the most important and most used currency in the world, cutting interest rates and allowing the dollar to weaken may work in the short term. But eventually the US will have to face up to its problems – and when it does, its economy is likely to be affected. A recession is quite possible.

So while the recent recovery in markets has brought much cheer and relief to investors. I would urge people not to get too greedy and overexpose themselves to risk. While we believe that, ultimately, Asian economies with their many drivers will continue to grow even amid a US recession, their growth will ultimately be affected to some extent. And certainly, markets will continue to be volatile.

As data is released in the coming months, we expect that some of it relating to the US economy will not be rosy.

Companies at the epicentre of the sub-prime loans issue have had to close down entire divisions, and many banks are expected to report large provisions for loans made, which will certainly affect their earnings. For example, just recently, Bank of America, JP Morgan Chase & Co and Wachovia Corp posted profit declines as they wrote down more than US$3.4 billion. They will not be the last to report earnings hits.

In the midst of record-breaking markets, investors may have forgotten just how bleak the situation seemed just a couple of months ago. But they must be conscious of the risks they are taking in their portfolios. Try to stay diversified and not overly exposed to any particular sector or area, no matter how attractive it seems. With many investors already sitting on profits this year, it would be advisable to be prudent at this stage. Don’t let short memories and greed lead to overly aggressive risk-taking.

 

Source: Business Times 17 Oct 07

Making that next crash insignificant

Shield your money to ensure that you won’t be devastated by what markets do in any particular time period

WHAT were you doing and feeling during the 1987 stockmarket crash, which will be 20 years ago this week?

Having married just two weeks before the crash, I was about a year into a great new job. When I saw the biggest one-day percentage loss in the Dow Jones Industrial Average on Oct 19 and near-meltdown that followed, I froze. I didn’t call my mutual-fund companies or broker. I stayed in stocks, where almost all of my meagre wealth  was invested.

It turns out my passivity was the best course. I didn’t need that money for a while and knew the economy was basically solid. Yet I’m not confusing mettle with foresight. I had no idea what was going to happen after the Dow took a 508-point free-fall and about US$1 trillion evaporated in a single day.

Various malefactors have been blamed from a ballooning trade deficit to program trading. To understand the lessons of 1987, you need to dispense with the mountains of studies that have been done over the past two decades.

What’s most important is how focusing on building personal prosperity will keep you in the eye of any market storm. To get an idea of how to survive a panic, you need to know what didn’t happen.

While the end of October 1987 was a stunning glimpse into the abyss of fear, the Standard & Poor’s 500 Index was up 2 per cent for the year.

Did a long-term bear market ensue? The following year, the S&P rose more than 16 per cent, if you include reinvested dividends. From the end of 1987 through 1993, the index more than doubled in value.

The blip of Black Monday did little to slow down the US economy. Banks didn’t close. No depression followed.

Businesses invested in new technologies that would increase productivity and create jobs. The cyber-tech age was in full bloom.

That was then

The difference between 1987 and today is that many institutional safeguards are in place that will curb market freefalls and ensure liquidity. Yet it’s never enough with little-monitored hedge funds playing a large part in trading.

There also still needs to be a single agency policing securities, futures and options markets.

No regulator will be able to prevent crashes or prolonged declines. Yet there’s much you can do to shield your money.

When noting the role of the individual investor in market sell-offs, William Brodsky, the chief executive officer of the Chicago Board Options Exchange, said individuals may think: ‘I’m in for five to 10 years and I’m not going to sell my index mutual funds or IRAs.’

Mr Brodsky described my mindset 20 years ago – and today. As president of the Chicago Mercantile Exchange at the time of the 1987 meltdown, he said the week following Black Monday was ‘analogous to a tornado. We saw it coming.’ Mr Brodsky was speaking at a symposium on Oct 9 in Chicago.

There will be more crashes and bear markets. That’s the nature of capitalism. The question is: How do you keep your cool? When do you stay in and when do you bail?

Whatever happens, the chances are good that you will time any exit or entrance poorly. What if you stayed out of the market in 1988 or the half-decade following the crash? Look at the returns you would have missed.

Personal time-horizon planning is critical. If you can afford to take a 20 per cent loss, how much time would you have to make up the shortfall?

Fear of loss is a powerful motivator in investing, although investors often focus too much on returns and don’t pay enough attention to managing risk.

Let’s say you learned well from the crash of 1987 and decided to invest across three different asset classes that typically don’t move in lockstep with each other.

When the dot-com bubble burst, for example, you would have fared better if you followed this strategy. From March 24, 2000, to Oct 9, 2002, your big-stock stake would have been down about 47 per cent in the Vanguard 500 Index Fund, which tracks the S&P index.

Had you diversified, your stock losses would have been offset by a 26 per cent return from US bonds, using the Vanguard Total Bond Market Index Fund as a proxy.

Adding icing to the cake would be a 32 per cent gain in real estate investment trusts (Reits), as represented by the Vanguard Reit Index Fund. I use these funds because they are low-cost, diversified ways of investing in these asset classes. I own the Reit and bond funds in my retirement accounts.

Even if you put all of your money on large companies – and stayed invested from the beginning of the Internet crash in March 2000 through Oct 5 this year – your holdings would have grown 12 per cent over that period in the Vanguard 500 fund.

You can torture yourself trying to explain why markets rise and fall every day. Don’t trouble yourself. It’s mostly noise.

Instead concentrate on your life plan. Are you saving for a home downpayment? Do you need money for college?

Will a parent need your financial support? Are you planning to leave the workforce part-time or permanently soon?

What if you are disabled and can’t work?

You need to weigh your own life needs to ensure that you won’t be devastated by what markets do in any particular time period. That means protecting against inflation, loss of future income and the ravages of bear markets.

Where are you now and how do you get to where you want to be? It may not matter where you were or what you did 20 years ago. The past is always prologue, yet you need to create your own portfolio insurance to make that next crash insignificant.

 

Source: Bloomberg (Business Times 17 Oct 07)

Expected volatility may hit investors: Principal Global CEO

They should diversify portfolios in this period of increased volatility, he says

JIM McCaughan, chief executive of US asset manager Principal Global, has turned cautious on the market, warning that expected volatility could cause worried investors to exit at a loss.

His broad market outlook, however, is for a number of interest rate cuts which could boost equity markets.

Still, poor economic data, pressure on US consumer spending and continued uncertainty over credit markets will dog investors.

‘The housing market in the US is in a bit of a mess,’ he says. ‘There is excess inventory quite apart from the fact that the mortgage market has seen a much tighter supply of mortgages . . . The situation is bad enough to put continued pressure on consumer spending for the next year or two.’

A weak US dollar, however, has begun to spur exports.

‘We’re in a period of increased volatility. There will be some pretty bad days that will frighten people, but I don’t expect a big setback in the US market,’ Mr McCaughan says.

He urges investors to diversify their portfolios. ‘Volatility is not necessarily a bad thing. It allows you to get in at good prices from time to time. The main strategy should be to diversify and take a long-term view.

‘Those are the ways to protect the investor against the short-term vagaries of the market. The investor who panics and sells low is the one whose return is hurt.’

Principal Global itself manages a diversified range of assets – equities, fixed income and real estate. It currently manages some US$220 billion in assets, compared to US$80 billion in 1999.

According to an article on its website, the group is gunning for US$500 billion in assets under management, and headcount is expected to rise by 25 per cent over the next few years. Singapore is its base for the Asia ex-Japan region.

The group has a partnership with China Construction Bank to market mutual funds in China. Over a period of about two years, assets have grown to between US$5 billion and US$6 billion. It also has a partnership in Malaysia.

Mr McCaughan says concern over inflation is overdone. ‘In the US, companies’ pricing power is limited; real inflation is limited. We’re not fearful of inflation . . . We think there are more rate cuts to come. That will create a fairly good backdrop for markets.

‘We think there may be 50 to 75 basis points in cuts over the next six to nine months. We think that’s probably about right. Fed funds rate at 4 per cent may well be the case in six to 12 months.’

The group sees opportunities in global real estate. It manages some US$40 billion in real estate assets, making it the fourth-largest institutional real estate manager in the United States as at 2006.

‘There are opportunities particularly in US Reits that have been held back by changes in the credit market . . . The fundamentals of commercial real estate are encouraging.’

 

Souce: Business Times 17 Oct 07

US credit crunch may test global economic growth

Broader slowdown cannot be ruled out after sub-prime fallout: IMF

(WASHINGTON) The recent global credit squeeze caused by the meltdown of risky US mortgage loans may test the ability of the world’s economy to keep expanding as it has over the past several years, the International Monetary Fund (IMF) said on Wednesday.

The IMF also said government policymakers would be confronted with new problems from the continuing process of globalisation and warned against overconfidence that economic stability would continue indefinitely.

In the analytical chapters of its World Economic Outlook released in advance of the Oct 17 publication of the forecast, the IMF said the durability of the global economic expansion is likely to persist.

‘Nevertheless, with financial markets around the world now being affected by the fallout from the US sub-prime mortgage difficulties, a broader economic slowdown cannot be ruled out,’ the IMF said.

Commenting on the released chapters, Simon Johnson, the IMF’s chief economist, said at a news conference that financial globalisation ‘is beginning to enter territory we have not seen before’.

He said the rapidity with which the credit crunch in the US spread to other countries demonstrates that ‘the interconnections between different kinds of financial institutions and between countries are becoming more complex and when sparks fly, they fly quite a long way and they jump over firebreaks’.

The IMF report is issued in advance of meetings of the Group of Seven major industrialised nations and the annual meetings of the IMF and its sister organisation, the World Bank, on Oct 20-22. The IMF warned against overstating prospects for future stability.

‘The process of globalisation continues to present policymakers with new challenges as reflected in the difficulties in managing volatile capital flows, increasing exposure of investors to developments in overseas financial markets and the uncertainties associated with large current account imbalances.’ The IMF said interest rates had returned to more neutral levels in most major advanced economies.

But the 185-nation lending organisation said, ‘The correction of asset prices in some countries and the current rise in risk premiums and tightening credit market conditions may also test the strength of the current expansion.’

 

Source: AP (Business Times 12 Oct 07)

HK cutting taxes to shore up financial centre status

Income tax dips to 15%, corporate tax, 16.5%; gap with S’pore rates widens

(HONG KONG) Hong Kong’s government will cut income and corporate taxes by one percentage point to help protect the city’s position as an Asian financial centre in its high-stakes race with Singapore.

Salaries tax will be cut to 15 per cent and profits tax to 16.5 per cent in 2008-2009, chief executive Donald Tsang said in his annual policy address yesterday, his first since being elected to a five-year term in March.

The reduction will widen the gap with Singapore, which in February announced a cut in its corporate tax rate to 18 per cent from 20 per cent to lure more financial-services and technology companies. Singapore’s top income tax rate is currently 20 per cent.

Mr Tsang had pledged in his election campaign to cut the standard rate of salaries tax and profit tax to 15 per cent within five years.

‘We will consider further profits tax relief if our economy remains robust and our public finances stay sound,’ Mr Tsang said yesterday.

Hong Kong’s corporate tax rate is currently 17.5 per cent, while its salaries tax is 16 per cent. The city’s economy in the three months ended June 30 climbed 6.9 per cent from a year earlier after gaining a revised 5.7 per cent in the previous quarter.

Mr Tsang, who has said that his long-term goal is to preserve Hong Kong’s status as Asia’s top financial centre, also said that the government plans 10 major infrastructure projects in the next five years that will create 250,000 jobs and add HK$100 billion (S$18.9 billion) to the economy annually.

The plans include building an expressway linking Hong Kong with the southern Chinese cities of Guangzhou and Shenzhen, Mr Tsang said. Financing arrangements for a bridge linking Zhuhai city with Hong Kong and Macau are also being finalised, he added.

The city will also spend HK$20 billion to complete a direct road link between Shenzhen and Hong Kong’s airport.

Traffic growth at Hong Kong’s port, the world’s second busiest container port last year, has slowed because of competition from mainland ports.

The Hong Kong government also plans to build a new rail line in southern Hong Kong Island. The line, which will cost more than HK$7 billion, is scheduled to begin operations before 2015.

Mr Tsang said that the city may also start building a line linking Shatin in the New Territories to Central, the downtown business district, in 2010.

In addition, Mr Tsang said that rates for property owners totalling some HK$2.6 billion would be waived for the final quarter of the fiscal year.

 

Source: Bloomberg (Business Times 11 Oct 07)

Hong Kong cuts corporate tax rate to 16.5%

HONG Kong will trim corporate and salary tax rates by one percentage point next year to 16.5 per cent and 15 per cent, respectively, as it moves to stay competitive against cities like Singapore.

The tax cuts will cost the Hong Kong government HK$5 billion (S$951 million) annually.

With the corporate tax rate expected to be cut further to 15 per cent in the years ahead, analysts believe that Hong Kong will remain attractive to investors as a gateway to the giant mainland market.

The new cuts will bring taxes closer to pre-2003 levels. Hong Kong raised corporate and individual tax rates, which were 16 per cent and 15 per cent, respectively, in 2003, when the government ran a deficit amid a poor economy.

The cuts were announced by Chief Executive Donald Tsang in his first policy address since he was re-elected to a five-year term in March.

In his speech, Mr Tsang also announced plans to roll out 10 mega infrastructure projects and relax the criteria for schemes to attract more talent to the city.

The moves were aimed squarely at promoting economic development in the territory.

Mr Tsang said as much in his speech, emphasising economic development as the territory’s ‘primary goal’.

He added: ‘The reason is simple. Without economic prosperity, people cannot make a decent living, and all visions are just empty talk.’

Analysts, however, were less willing to bet on this strategy.

They said concerns such as pollution and the higher cost of living meant that the tax cuts would not pose an immediate threat to Singapore, which cut its corporate tax rate from 20 per cent to 18 per cent in February.

On the competition between Hong Kong and Singapore, one analyst said the global investment pie was big enough for both cities.

But Singapore will remain the focus of South-east Asian investment, said Mr Paul Chow, a tax partner at Grant Thornton.

He added that Singapore has an edge over Hong Kong in some aspects. ‘The cost of living is higher in Hong Kong – and not getting cheaper. Singapore has a better education system and, so, is more conducive to families with school-going children,’ he said.

However, others pointed out that a comparison could be skewed because Singapore implements a goods and services tax while Hong Kong does not.

Yesterday, when asked by reporters whether the annual HK$5 billion tax giveaway would adversely affect the government, the 63-year-old leader said: ‘I have confidence in Hong Kong, and its future as a part of China.’

The reductions will kick in in the 2008/09 financial year.

Calls for tax cuts have been growing on the back of healthy budget surpluses, which are forecast to exceed HK $55 billion this fiscal year. Hong Kong posted a surplus of HK$1.2 billion for the first five months of the 2007/08 financial year – overturning a deficit of HK$21.1 billion in the same period last year.

Mr Tsang also said property tariffs will be waived up to HK$5,000, for the final quarter of the 2006/07 year.

These details, analysts noted, highlighted the importance of his address yesterday, given that these are typically announced only in the Financial Secretary’s budget speech early in the year.

 

Source: The Straits Times 11 Oct 07

IMF cuts growth forecasts, warns of downside risks

World growth seen at 4.8% next year, driven mainly by emerging economies

ROME – THE International Monetary Fund (IMF) has slashed its forecast for growth in the United States next year and made more modest downward revisions to its outlook for the euro zone and Japan, Italian news agency Ansa reported yesterday.

Citing a draft version of the IMF’s World Economic Outlook to be issued next week, Ansa said the IMF now sees US growth next year at 1.9 per cent, compared with a 2.8 per cent projection made by the fund on July 25.

The IMF has cut its forecast for world growth next year to 4.8 per cent from 5.2 per cent, with emerging economies, rather than developed countries, being the main driver, Ansa said.

The fund only marginally trimmed its forecast for next year’s growth in China to 10 per cent from 10.5 per cent, Ansa reported, and left its forecast for the Indian economy unchanged at 8.4 per cent.

The IMF’s forecast for euro zone growth was cut to 2.1 per cent from 2.5 per cent, while the outlook for Japan was lowered to 1.7 per cent from 2 per cent, Ansa reported.

‘The risks are firmly on the downside, based on the fear that the tensions on financial markets could increase and cause an even more marked global slowdown,’ Ansa quoted the IMF as saying.

The European Central Bank ‘can keep rates on hold in the short term as a result of the downside risks to growth and inflation stemming from the turbulence on markets’, Ansa reported the IMF as saying.

‘However, when these risks subside, further monetary tightening may be necessary,’ the IMF said.

Source: REUTERS (The Straits Times 10 Oct 07)

Is the sub-prime crisis really behind us?

TOKYO CORRESPONDENT

THE fact that the world – its richer countries at least – has been living through a bubble economy period financed by junk (sub-prime) mortgages and funny money (carry trade) borrowing should be obvious enough to anyone observing events over the past few weeks.

But anyone who doubts it need only consider the startling fact that the number of millionaire families in the world grew by no less than 14 per cent to 9.6 million in the space of last year alone. These super-rich individuals now control one third of the estimated US$100 trillion in global financial wealth, according to the Boston Consulting Group in a new study on the subject this week. This is obviously a massive indictment of the failure to distribute wealth more evenly. But the way in which the stunning jump in the number of millionaire families came about is also something that should set alarm bells ringing.

Most of the new wealth came about through increases in the value of stocks, bonds and other financial instruments as global stock markets rose in value on average by 20 per cent, with the strongest wealth gains accruing in America where the equity cult is most entrenched. Not only the super-rich but also the merely ‘better off’ had a ball in 2006, as total assets held by households with US$100,000 or more leapt from US$51 trillion to near US$85 trillion.

If all this isn’t evidence of a bubble, then it is hard to know just what is. But what goes up must come down, and bubbles burst as surely as they form. Or have we discovered some new form of gravity-defying wealth creation mechanism now – an infinitely inflatable bubble?

Looking at the behaviour of markets this week, it appears that the more credulous among investors are being lulled into believing that we have. In this promised land of milk and honey there is no such thing as a financial burst or bust. Descending bubbles simply float down to earth, bounce lightly off the ground and soar skywards again like hot-air balloons being given a fresh charge from the gas jet. Only in this case, the hot air is replaced by financial liquidity supplied in abundant quantity by kindly central bankers who never want to see a hard landing.

Markets are climbing again, as though the sub- prime mortgage market crisis and all its attendant horrors – in the shape of seized- up money markets, runs on banks or other financial institutions, massive markdowns of un-tradeable financial assets and balance sheet damage all round – had suddenly become a thing of the past. Central banks have taken care of things by covering the ugly debris in a sea of fresh liquidity.

Time to party again.

Amidst this new euphoria, an odd and rather worrying thing happened the other day when no fewer that three Japanese government ministers all warned at the same time that fallout from the sub-prime mortgage market debacle might not be over yet. It was not so much what they said as the fact that they said it. Such people usually see it as their job to utter bland, confidence-boosting statements, so when they do say what others of a sane turn of mind already suspect, something clearly is afoot.

It seems likely that the trio – Finance Minister Fukushiro Nukaga, Financial Services Minister Yoshimi Watanabe and Economics Minister Hiroko Ota – were flagging concerns that there may be more nasties yet to come for Japanese banks and other financial institutions, in the shape of write-downs from the subprime fiasco.

If there is one thing more risky, or plain daft, for investors to do than to pile back into equities as if there were no yesterday and no tomorrow, it is to build fresh speculative positions by shorting the yen against other currencies (the carry trades). The yen has nowhere to go but up in the medium term, while the US dollar is already on the skids and the Australian and New Zealand dollars favoured by carry trade enthusiasts will slide again against the yen.

Meanwhile, back in the never-never land of sub-prime mortgages, things are not looking good. Sales of second-hand homes dropped by a surprisingly large (to some) 6.5 per cent in August. Morgan Stanley has announced that it will cut 600 jobs in its residential mortgage division, a quarter of the workforce. Anyone who thinks that is a detail should note that two million of the seven million new US jobs created in recent years were connected with real estate.

As the housing sector turns down, along with consumption-financing equity withdrawal by US home owners, the danger of a US recession will grow and with it a slowdown in the world economy and in global capital flows. Irrational exuberance will evaporate in stock markets around the world and liquidity will drain away like so much milk and honey. The only consolation is that a lot of those new paper millionaires will find themselves joining the world or ordinary mortals once more at the new dawn of reality.

 

Source: Business Times 4 Oct 07

Wise not to ignore market risks

SINCE the US Federal Reserve’s somewhat surprising 50-basis points interest rate cut on Sept 18, investors all over the world have piled back into stocks with much gusto. Wall Street on Monday rose to a new all-time high while most Asian markets continue to set records of their own.

The mood is once again bullish, restored by a seemingly unshakeable confidence that the Fed can be relied upon to cut rates further to keep the ball rolling. While the momentum is clearly positive however, over-eager investors have to be mindful of making the same mistake as before – ignoring risks while focusing solely on returns.

Although the Federal funds futures market is pricing in a further 25 basis points cut at the end of this month, this is by no means a certainty. September’s rate lowering has seriously undermined an already weak US dollar – which has now declined even against currencies such as the Turkish lira, Saudi rial and Canadian dollar – and over time, this cannot be good for an-already slowing economy labouring under the burden of a crashing housing market. Moreover, various Fed governors warned this week that more rate cuts can only be justified if the economy shows signs of very drastic weakness, which means that perversely, investors are buying stocks today in the hope that growth worsens significantly tomorrow – Monday’s Wall St record for example, was set after release of a weak manufacturing report that showed new orders dropping for the third consecutive month. This is an anomalous state of affairs. While it might last for a while, eventually reality will prevail.

Speaking of reality, the full extent of the sub-prime mess may not have been revealed yet. US and European banks have only just started to show alarming profit weakness stemming from sub-prime losses and there is doubt over whether rate cuts are sufficient to reverse losses.

That said, markets could continue to rally in the short term. One likely explanation for the strong bounces seen over the past fortnight is that they have come from widespread programme trading – with markets as interconnected as they are today, the big money has to employ sophisticated computer-driven trading strategies in order to react quickly enough and capitalise on shifts in economic and sentiment indicators.

As such, once certain parameters are met, powerful momentum forces take over and markets move almost as one. Invariably, the targets are always the largest stocks – that is why in Singapore at least, while the Straits Times Index has very rapidly regained new ground, the broad market has lagged.

The real danger however, is that the same momentum shifts work equally effectively on the downside.

Given that volatility has not subsided over the past few months – it has in fact increased – and given that the chances of a US recession are quite real, it would be wise for investors to be as cognisant of risks as they are of returns.

 

Source: Business Times 4 Oct 07

US spending slowdown won’t hit Asia hard

But risk from China equity correction is a threat: economist

THE threat to Asian economic growth from a slowdown in US consumer spending may not be as great as widely feared, said a senior HSBC economist last week.

Economic growth in Asia is increasingly driven by domestic demand, while the historical relationship between US consumer spending and Asian export growth is quite weak, said Robert Prior-Wandesforde, senior Asian economist at HSBC.

‘We think generally growth in Asia will hold up very well,’ he said. He was speaking to members of the British Chamber of Commerce at the Raffles Hotel.

Overall US economic growth has already been slowing in recent months, but Asian economies have survived this ‘incredibly well’, he said.

And in the last two years, consensus forecasts of Asian economic growth a year ahead have shown an ‘unprecedented divergence’ from similar forecasts for US growth, as economists downgraded their outlook for the US while simultaneously becoming more optimistic about Asia.

He noted that in Malaysia, overall exports have not slowed as much as exports to the US alone, which suggested its exports were increasingly fuelled by demand from Europe, China, India, and other Asian countries.

In Singapore, overall economic growth accelerated in the first six months of the year even as export growth has been slowing, he noted. ‘The domestic economy has managed to shake off the downturn in exports.’

‘There are good chances that it will continue.’ HSBC now predicts 8.5 per cent growth for Singapore this year, higher than the 7 to 8 per cent official growth forecast.

The other main fear – that a slowdown in US consumer spending triggered by falling house prices there would hobble Asian growth – may not be fully justified either, he said.

An analysis of nine major Asian economies including Singapore suggested that total export growth since 1995 was more closely linked to the amount of investment on equipment and software in the US than with American consumer spending.

‘The point is that US tech spending has already slowed pretty dramatically. I think the worst is either close at hand or we may even be past the worst in the US tech cycle, and that is the more important driver of what happens to Asian exports.’

But there remained other risks to his relatively rosy outlook for Asia, including the risk of a correction in the Chinese equity market, where share indices have soared to five times what they were two years ago, he said.

‘The danger is we focus too much on the US and forget about the bigger picture.’

‘There are vulnerabilities in a lot of housing markets around the world, not just in Europe or the US,’ he said.

 

Source: Business Times 3 Oct 07

Emerging-market stocks: views divided

Speculators turn bearish, but bulls are even more confident rally will persist

(NEW YORK) Speculators are increasing their bearish bets against two-thirds of the 50 largest emerging-markets companies. That’s making the bulls even more confident stocks will keep rising from Brazil to China.

Short sales on Brazilian oil company Petroleo Brasileiro SA’s US-traded shares climbed in September to the highest since July 2006, data compiled by Bloomberg show. Wagers against Woori Finance Holdings, South Korea’s third-biggest financial services company, jumped to a four-year high. Options to sell China Mobile Ltd, the world’s largest wireless phone company by users, exceeded those to buy by the most since 2000.

Bears say the five-year rally that lifted the Morgan Stanley Capital International Emerging Markets Index more than 300 per cent to a record last week is over. They’ve got it wrong, say DWS Scudder, Credit Suisse Group and Fisher Investments Inc, which oversee US$1.7 trillion and expect faster economic growth to help developing nations avoid the stock tumbles of 1998 and 2000. Rather than causing declines, the bears will fuel gains by covering their positions, says DWS.

‘To me, it’s a more bullish sign,’ said Robert Froehlich, Chicago-based chairman of the investor strategy committee at DWS Scudder, which helps oversee US$333 billion as the US mutual fund unit of Frankfurt-based Deutsche Bank AG. ‘You’ve got a group of people that says, ‘Just because it’s gone up more than the rest of the market, just because it’s a high flyer, it means it has to go down.’ I don’t think that’s the way to make money.’

Developing markets are Mr Froehlich’s favourite pick and he expects their shares to gain as much as 8 per cent this quarter. His firm added to its stock positions in China, Taiwan, South Korea and Poland when the MSCI Emerging Markets Index fell 18 per cent in the 18 days ended Aug 16. The measure has since climbed 26 per cent to a record.

During the market’s rebound, short sales – where traders sell borrowed shares on expectations prices will fall – climbed for 36 American depositary receipts in the Bank of New York Emerging Markets 50 ADR Index in the month ended Sept 14, Bloomberg data showed. They fell or were unchanged for 14 stocks.

Among the 10 biggest companies, short interest increased for seven, including Rio de Janeiro-based Petrobras, Brazil’s state- owned oil company. Short sellers upped their bets against the ADRs to 13.6 million shares in mid-September, the highest since July last year and a jump of 8.4 per cent from a month earlier.

Buying insurance

Wagers against Seoul-based Woori Finance’s ADRs increased to 120,295 shares in mid-September, the highest since they were listed in 2003 and almost three times more than in mid-July.

In the options market, the ‘put-call ratio’ on China Mobile jumped to 2.07 times in September, the highest since the same month in 2000. Higher ratios indicate investors are buying more insurance against price declines. Puts give the right to sell a security for a certain amount, called the strike price, by a given date. Calls convey the right to buy.

The MSCI Emerging Markets Index plunged 54 per cent from its peak on Feb 10, 2000, after a global sell-off in technology stocks caused investors to abandon riskier assets. The measure has since climbed almost fivefold from its low on Sept 21, 2001, as growth in the US and China spurred demand for everything from mobile phones to oil and iron ore.

The MSCI Emerging Markets Index climbed 14 per cent in the third quarter, beating a 2 per cent gain in developed markets.

Developing nations posted nine of the 10 biggest advances last quarter, led by a 48 per cent surge in China’s CSI 300 Index. Bulgaria’s Sofix index rose 31 per cent after economic growth got a boost from the nation’s integration in January with the European Union. Turkey’s ISE National 100 Index added 15 per cent, helped by the re-election of Prime Minister Recep Tayyip Erdogan that gave him a mandate to proceed with EU membership talks.

Emerging-market stocks have become victims of their own success and are now too expensive relative to earnings, according to Fifth Third Asset Management’s Keith Wirtz.

The MSCI Emerging Markets Index is valued at 17.20 times companies’ profit, compared with a ratio of 16.34 for the MSCI World Index. That’s the biggest discount that developed nations have traded at versus emerging markets since February 2000, according to weekly data compiled by Bloomberg.

‘There seems to be better relative valuations in the developed world,’ said Mr Wirtz, who oversees US$22 billion as Fifth Third’s chief investment officer in Cincinnati. He’s been selling shares in China, the Philippines, and Malaysia and adding technology, industrial and energy stocks in the US and Japan.

Adrian Mowat, chief Asian and emerging-market strategist for New York-based JPMorgan Chase & Co, wrote in a note last week that developing nations’ stocks may be dragged down by a global slowdown and that investors are in ’state of denial’ about the threats to economic and profit growth.

Favourite regions

Credit Suisse’s Robert Weissenstein is more sanguine. He said companies in developing countries will profit the most because their economies are growing the fastest.

Developing countries are forecast to expand 8 per cent this year, compared with 2.6 per cent for advanced economies, according to the Washington-based International Monetary Fund. China, India and Russia will account for half of the world’s growth.

‘Favourite regions? I’d go with the emerging markets,’ said Mr Weissenstein, New York-based chief investment officer for private banking in the Americas at Credit Suisse, which oversees US$1.33 trillion. ‘They offer a tremendous value in terms of earnings growth. For three times the growth, you bet I’d pay more.’

China Mobile’s Hong Kong-listed shares have tripled in the last two years, making it the world’s fourth-largest company by market value. The Beijing-based company, whose 343.6 million customers outnumber the US population, said profit surged 29 per cent last quarter after adding a record number of users.

For Kenneth Fisher of Fisher Investments, the largest shareholder of China Mobile’s ADRs, that means the bears will ultimately capitulate and help fuel further gains.

‘They’re spitting into the wind,’ said Mr Fisher, who oversees about US$42 billion at Fisher Investments in Woodside, California. ‘It tends to make me more bullish.’ 

 

Source: Bloomberg (Business Times 3 Oct 07)

Is the worst over?

Investors and analysts clash over whether the global sub-prime mortgage crisis has turned the corner

Yes, say investors

POSITIVE OUTLOOK

• Banking giants disclose sub-prime related losses on Monday but investors take the disclosures as a sign that the worst may be over.

DOW’S RECORD CLOSE

• Investors push US stocks to its highest-ever close on optimism that the sub-prime crisis is nearing its end.

• Key index ends Monday up 1.4 per cent at 14,087.55.

• Stocks recover all of the nearly US$2 trillion (S$2.98 trillion) lost in July-August rout.

CITIGROUP AND UBS DISCLOSURES BRING RELIEF

• Bad news from two banking giants but investors choose to focus on the positives.

• Citigroup to write off US$5.9 billion (S$8.8 billion) in third quarter. Profit to drop 60 per cent. Citi chief executive Charles Prince says profits will return to normal in fourth quarter. Investors choose to focus on this healthy forecast.

• UBS to write off US$3.4 billion and suffer a loss in the same quarter. But it indicated that the current period might see a return to normal earnings levels.

GREENSPAN UPBEAT

• ‘Is this August-September credit crisis about to be over? Possibly,’ says former US Federal Reserve chairman Alan Greenspan. He cites signs that lenders are seeking to buy longer-term assets of lower quality.

ANOTHER RATE CUT

• Investors still expect another rate cut from the Fed to boost the US economy.

Maybe not, say analysts

NOT ENOUGH ASSURANCE

• Conditions in the credit market are still fragile. Many problems remain for the United States economy, especially in the housing sector.

• ‘The question really is, ‘Is this the end of it or not?” Mr Axel Merk, portfolio manager of the Merk Hard Currency Fund told the Washington Post. ‘For whatever reason, the market wants to see the glass as half full. I just think we need to see more,’ he said.

MORE PAIN FOR BANKS

• Banks cleaning up their balance sheets only solves half the problem. Going ahead, they are likely to generate less income as the buyout boom slows.

• Banks must find ways to replace the income from sub-prime mortgages, a market that could take years to recover.

HOUSING RECESSION NOT OVER

• The US consumer spending is being hit by falling home prices, higher mortgage rates and foreclosures. Thus lower spending will adversely affect the economy in the long run.

• Most US adjustable-rate home loans will reset over the next several years at higher rates. This could lead to more foreclosures and a fall in home prices.

FALSE RALLY?

• Analysts caution: Do not read too much into the Dow’s rally.

• This is because the rally was achieved on low trading volumes.

• Shares of large companies recovered because of investments in strong economies overseas and a weak US dollar.

• Many mortgage companies, banks and home builders are still trading far below their highs.

 

Source: The Straits Times 3 Oct 07

China’s central bank raises growth forecast for 2008

Economy may grow 11.6%; inflation seen rising by 5%

(SHANGHAI) The People’s Bank of China’s research department raised its economic growth forecast and said inflation will probably accelerate.

The economy may grow 11.6 per cent this year, according to the report published in the China Securities Journal, faster than the agency’s June estimate for a 10.8 per cent expansion. Inflation this year will rise by 5 per cent, up from 3.2 per cent forecast previously, and the trade surplus will widen to about US$250 billion this year, from US $177.5 billion in 2006.

The forecasts puts pressure on People’s Bank of China governor Zhou Xiaochuan to raise lending and deposit rates for the sixth time this year to cap surging asset prices and cool the overheating economy. The bank on Thursday raised interest rates on some home mortgages and increased minimum down payments in an effort to cool property prices gains.

The government is concerned that a surge in lending is creating a bubble, which would drive up bad loans should it collapse. Investment in real-estate development jumped 29 per cent in the first eight months of this year. The statement also said the maximum mortgage for commercial property is half of its value, and the term can’t exceed 10 years.

The decision by the central bank and the China Banking Regulatory Commission is ‘to prevent credit risks and protect the borrower’s repayment ability’, according to the statement on the People’s Bank of China website.

‘It’s clear they know they’re behind the curve, in a hole, at risk of people taking more of their money out of bank deposits and going into other assets where there is already frothiness,’ said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington.

Until now, banks were barred from charging less than 90 per cent of the benchmark rates for mortgages. Interest rates on loans for first homes are unchanged.

China raised its one-year lending rate for the fifth time this year on Sept 14, to 7.29 per cent. Those increases have failed to damp demand for property as China’s economic growth raises incomes and people prefer fixed assets amid inflation at a 10-year high of 6.5 per cent.

China’s economy, the world’s fourth largest, expanded 11.9 per cent in the second quarter from a year earlier, the fastest pace in more than 12 years.

The World Bank on Sept 12 raised its 2007 China growth forecast to 11.3 per cent from a May forecast of 10.4 percent.

 

Source: Bloomberg (Business Times 29 Sept 07)

Fed rate cut a blessing and a curse for China

AS THE Federal Reserve cut interest rates by half a point this week, it is doubtful much thought went into what it would mean for China.

And that is fine. The Fed has 12 districts around the United States, and it acts to influence the domestic economy. Globalisation has globalised the Fed, though. It is hardly far-fetched to think of Latin America as the Fed’s 13th district, Russia the 14th, Asia the 15th and so on.

Not surprisingly, this week’s Fed decision was the most anticipated by Asia in many a year. Nowhere were officials watching closer than in Beijing.

It is not just that China’s currency is still effectively pegged to the US dollar. It is more about what Mr Donald Straszheim, vice-chairman of Newport Beach, California-based Roth Capital Partners, calls the Group of Two.

The G-2 – the US and China – is rapidly becoming the most important economic relationship.

It is getting harder and harder to discern where one economy ends and the other begins. China cannot live without US demand for exports and the vital role the American consumer plays in its poverty-reduction efforts. The US cannot survive without China’s money, much of which is parked in reasuries and enables the US to finance its excesses.

Yet the Fed’s cut highlighted the extent to which US and Chinese monetary policies are moving in opposite directions. The Fed lowered its benchmark interest rate for the first time in more than four years to 4.75 per cent, while China is still working to tighten credit.

More liquidity

THE US’ adding of liquidity – and the sub-prime loan crisis forcing Fed chairman Ben Bernanke’s hand – is both a blessing and a curse for Asia’s second-biggest economy.

First, the curse angle. China has been shielded from much of the fallout of the credit-market problems that began in the US and spread around the globe. A largely closed capital account and a stable currency protected China from the 1997 Asian crisis and the approach has paid off again in recent months.

As the Fed lowers rates, though, it is providing liquidity to a global system that seems to find no shortage of ways to channel it to China. That creates a paradox.

The People’s Bank of China can sit back and see if its five rate increases this year curb the fastest inflation since 1996 and damp down speculation in stocks and real estate. That is not a wise choice, given a global increase in price pressures.

The other choice may make matters worse. Higher borrowing costs at this point will serve as a more powerful magnet for the so-called hot money that officials in Beijing are trying to contain. And so there you have it: China’s monetary choices range from bad to worse. China must do much more than just raise rates.

Mr Bernanke is less to blame for this predicament than his predecessor, Mr Alan Greenspan. As Mr Greenspan cut short-term rates to 1 per cent in 2003, speculative flows rushed to Asia, and China especially. It seeped into all types of Chinese assets, including stocks and real estate. Now that the Fed is cutting rates again, China finds itself in a difficult position.

Looked at another way, the sub-prime mess that spooked the Fed enough to move could be a blessing for China in the long run.

A hard landing in the US cannot be ruled out, and that would hurt export-dependent China. There is much chatter about Asia decoupling from the US, yet the region is still highly reliant on the world’s biggest economy.

A couple of rate cuts, meanwhile, will not get US households out of debt. Asia should not assume the US is about to boom just because the Fed loosens credit. While such a dynamic would be a blow in the short run, it might prompt China to work harder to create a thriving domestic economy.

As global investors tighten risk-management guidelines following recent mortgage-market woes, China’s financial system may be forced to grow up.

For example, increased risk aversion – if markets get antsy again – could let some air out of China’s stock bubble, reducing risks to the broader financial system.

Also, given the lack of transparency, investors know little about the true magnitude of China’s bad-loan challenge. Throughout the nation, there are many cities that want to be the next Shanghai or Dalian with massive skyscrapers, five-star hotels, six-lane highways, international airports, world-class universities and cultural centres.

Those efforts are taking place largely beyond the control of Beijing and financed with easy credit extended by banks. When China does slow, the debt hangover will be quite painful.

High stakes

THE upside is that the subprime problems in the US may have Chinese creditors working harder to scrutinise borrowers’ ability to repay loans. That would mean fewer bad loans to clean up if China’s 11.9 per cent growth slows to 5 per cent. The nation would be better off in the decades ahead.

In the short run, though, China’s challenges are increasing as the Fed acts to calm markets. Balancing the need to raise hundreds of millions out of poverty, while also avoiding an overheated economy, just got a little harder – thanks to the Fed.

NO MAGIC BULLET

A couple of rate cuts will not get US households out of debt. Asia should not assume that the US is about to boom just because the Fed loosens credit. While such a dynamic would be a blow in the short run, it might prompt China to work harder to create a thriving domestic economy.

 

Source: Bloomberg (The Straits Times 22 Sept 07)

Asian stocks surge on Wall St gains

S’pore market scores 3.4% rise, led by banks and property stocks

(SINGAPORE) Asian stocks surged yesterday in tandem with Wall Street, following Tuesday’s move by the US Federal Reserve to slash its funds rate 50 basis points from 5.25 to 4.75 per cent.

Japan’s Nikkei 225 and Hong Kong’s Hang Seng Index led the way, rocketing 3.7 and 4 per cent respectively to 16,381 and 25,554 points. In the United States, the Dow Jones Industrial Average gained 2.5 per cent on Tuesday.

Here, the Straits Times Index (STI) jumped 116.61 points or 3.4 per cent to 3,594.36 yesterday, led by the banks, property stocks and the Singapore Exchange. Elsewhere in the region, Australia’s ASX 200 rose 2.6 per cent and Malaysia’s KLCI added 1.6 per cent.

The trigger for the gains was the outcome of the most eagerly awaited Federal Open Market Committee (FOMC) meeting of the year on Tuesday, at which the US central bank had been widely expected to lower its short-term lending rate to ease mounting pressure in credit markets created by a crashing housing mortgage market.

Analysts unanimously described the Fed’s rate cut as welcome. Canadian research house BCA Research called it a ‘bold start to a new Fed easing cycle’ and pointed out that although 39 per cent of respondents in an informal poll were against Fed action of any kind as it would constitute a bailout of speculators and hedge funds, the Fed’s motive was clearly to revive flagging US economic growth.

‘Although the economy has not fallen off a cliff, it seems clear that continued sub-par growth lies ahead,’ BCA said. ‘Against that background, 4.75 per cent is still too high.’

DBS Group Research also believes more rate cuts are justified as the US has been slowing for some time. ‘(US) growth has run at a paltry 2.2 per cent for full two years,’ it said. ‘Fed funds should have been cut to 4.75 per cent even before the recent blowout in credit markets.’

DBS expects a further 25 basis-point reduction at the Oct 30 FOMC meeting and possibly one more in December.

Bank of America economist Peter Kretzmer, on the other hand, said the Fed’s statement accompanying Tuesday’s meeting said it has no plans at this time to ease further.

‘We concur with the FOMC that there is more than the usual uncertainty surrounding the current economic outlook,’ Mr Kretzmer said. ‘Our presumption at this point is that the FOMC may well stay on hold for a time to assess the impact of its actions on the financial markets and US economy. We anticipate a year-end funds rate target of 4.5 per cent.’

Nomura Asia Pacific strategist Sean Darby said that in contrast to other big central banks, the Fed has chosen to ignore latent inflationary concerns to ease the credit crunch afflicting the interbank markets.

With central banks already running loose monetary policies, Nomura said the US move will exacerbate inflationary problems.

‘While domestic credit conditions have marginally improved, sentiment remains fragile,’ Mr Darby said. ‘We expect other global central banks to remain much more hawkish and refrain from rate cutting.’

 

Source: Business Times 20 Sept 07

Asia-Pac real wages seen climbing further next year

Singapore salaries to go up a ‘very healthy’ 3.8%, says HR consultancy Hays

SALARIES in the Asia-Pacific will keep rising in 2008 as companies remain confident about business prospects and growth for next year, despite market talk of a post-Olympics slowdown, according to a report from a human resources consultancy released yesterday.

The Hay Group’s Compensation Report projects base salary increases, then compares the data to expected inflation for 2008 to estimate how much real wages will grow.

Developed economies like Singapore, Hong Kong and Australia will see ‘modest’ real salary increases of 3.8 per cent, 0.4 per cent and 2.6 per cent respectively, the report says.

‘Among all developed economies in Asia-Pacific, Singapore’s real pay increase of 3.8 per cent is very healthy due to positive business outlook and low inflation,’ says Christian Vo Phuoc, country manager for Reward Information Services at Hay Group Singapore.

But he warns that ‘in the short-term, foreign talent may find their increases eroded by the spiking housing rentals especially if their companies do not provide full housing allowances’.

Companies in developing economies like China, India, Indonesia and Vietnam are expected to hand out high base wage increases ranging from 9 to 13 per cent, although the impact on real wages will be moderated by high inflation.

In India, for example, Hay expects base salaries to rise 13.1 per cent, but with inflation at 5.2 per cent, real wages are expected to rise by 7.9 per cent.

In China, 3.2 per cent inflation will take real wage hikes down to 6.2 per cent, while in Indonesia, inflation of 6.2 per cent – the highest forecast among Asia-Pacific countries – will reduce real wage gains to 5.6 per cent.

Hay reports that blue collar employees in China are for the first time in three years expected to receive ‘almost as much increase as their white-collar counterparts’, thanks to the ‘impact from higher consumption price inflation and fierce market competition for skilled workers’.

Previously, blue collar workers saw their wages rise less than 8 per cent, compared to nearly 10 per cent for managers. For 2008, Hay expects blue collar wages to rise 9.1 per cent in China, though this is still a slower rate than that for managers.

Unsurprisingly, China’s financial services sector is expected to dish out the strongest wage rises, over 50 per cent in some cases to retain key people, Hay says.

And wages will rise faster than the national average in developing second-tier cities, such as in Tianjin, where multinational corporations like Airbus and Alcan have committed to large-scale investments and will compete for skilled labour and management talent.

Meanwhile, workers in Vietnam – ‘the second fastest growing economy in Asia-Pacific’ – will see real wages rise by 3.4 per cent, comparable to Singapore and Malaysia. But ’since Vietnamese salaries are starting at the groundfloor level, we can expect healthy and sustainable increases in the coming years’, says Connie Ma, manager of Emerging Markets at Hay.

Source: Business Times 20 Sept 07

Fed’s aggressive rate cut sparks global markets

A BIGGER-THAN-EXPECTED interest rate cut by the United States central bank sent global bourses sprinting ahead yesterday.

The half-percentage point cut by the US Federal Reserve was double the quarter-percentage point cut that most analysts expected – and immediately caused a surge in US stocks.

Last night, the optimism continued on Wall Street, with the Dow Jones Industrial Average up 97.30 points, or 0.71 per cent, to 13,836.69 at press time.

Asian markets were equally thrilled at the Fed’s move to restore confidence in global financial markets and head off the risk of a US recession after weeks of market volatility.

It was the Fed’s first cut of the benchmark Fed Funds rate in four years, and is set to relieve a credit crunch in the global financial system, sparked by a US mortgage market crisis, by flooding it with cheaper funds.

In a statement, the Fed said the ‘action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time’.

At home, the benchmark Straits Times Index registered its second biggest one-day gain in history when it soared 116.61 points to 3,594.36 yesterday – just 70.77 points shy of the record high of 3,665.13 hit on July 24.

Tokyo’s Nikkei-225 Index shot up 3.67 per cent, and Hong Kong’s Hang Seng Index soared 3.98 per cent to a record high.

Across Asia, lower interest rates are expected to give a fillip to the housing market and stimulate spending in big-ticket items such as cars.

This gave a big boost to real estate developers and banks, which were among the biggest gainers in the various regional bourses yesterday.

Analysts said the Fed’s move should also help to restore confidence in the troubled global credit markets, where international banks have been hoarding cash and refusing to lend to each other.

But they warned that the surge on Wall Street and other global bourses was fuelled by hopes of further interest rates cuts later on.

These cuts would, how- ever, depend on US economic data to be released over the next month, they said.

They warn that, going by the wording in the statement issued, the Fed might have been uneasy cutting interest rates with crude oil prices hitting record highs, fuelling fresh inflation fears.

The cut in the widely watched Fed Funds rate – which sets the pace for US interest rates – to 4.75 per cent came early yesterday morning Singapore time.

Wall Street immediately notched up its best one-day gain in four years as the Dow Jones shot up 335.97 points, or 2.51 per cent.

The size of the cut was a major surprise. It was correctly forecast by only 23 of 134 economists surveyed by Bloomberg News, while 105 predicted a quarter-percentage point cut; six forecast no change.

 

Source: The Straits Times 20 Sept 07

US is the No 1 risk to world economy: US prof

Other sources of political threats are China, Iraq and oil prices: US economist

(SINGAPORE) By far the greatest risk to the global economy is the United States – not least because some of its foreign policy decisions could well drive oil prices past US$125 a barrel, says an American political economist.

Marvin Zonis, a professor at the University of Chicago’s Graduate School of Business, places the US at the top of his list of threats to the global economic boom, ahead of China, Iraq and oil prices, in that order.

Speaking to BT during a visit here last week, he cited the US invasion of Iraq, ‘failure in Iraq and massive failures in dealing with its own economy’ as evidence of US policy disasters.

‘The reality is that the US government has been managing its affairs in the worst possible manner for many years,’ he said.

Prof Zonis heads a political risk consultancy, Marvin Zonis & Associates, in Chicago, and is a member of the board of advisers to the US Government Accountability Office (GAO), the investigative arm of Congress that scrutinises government spending.

Citing figures gleaned from his GAO role, in 2001, the present value of the US government’s unfunded liabilities amounted to US$20 trillion, he said.

In other words, the US government owed Americans US$20 trillion in terms of future pensions, social security and medical benefit payouts as at 2001.

By 2007, the present value of the sum has ballooned to US$50 trillion.

‘And that’s because the President, and the Republican-controlled Congress, increased all the benefits without any commensurate increase in taxation,’ Prof Zonis said.

‘And so the US, which has a GDP of US$14 trillion, has unfunded liabilities worth US$50 trillion in the same dollars. This is a country that is going bankrupt. That is reality. And people in America don’t want to hear this.’

And more than half of the US government’s outstanding obligations are owned by non-Americans. That, plus the ballooning US current account deficit, which is running at around US$900 billion a year, can only spell a weakening greenback.

China – with its myriad short-term and long-term ‘very serious’ problems – poses the second most important source of political risk in the world, Prof Zonis said.

While the US ‘and every rich economy in the world’ are driven by personal consumption, China, the world’s biggest factory, spends 45 per cent of its GDP on capital investment – the highest proportion anywhere in the world, ever. Consumer spending accounts for only about 40 per cent of the Chinese economy.

In Prof Zonis’s view, China has built its economy on capital investments, but at some point it will have to ’stop building more new factories, and start closing down the factories’. That will pose major socio-political problems in employment and urbanisation – and ultimately, possibly derail economic growth.

In any case, China faces the huge challenge of managing inflation in the face of growing food prices, ‘without powerfully slowing down the economy’.

Prof Zonis, who has been studying Middle Eastern affairs since the 1960s and who used to go to Iraq every two years for years, describes the third big risk – Iraq ‘and everything that comes from Iraq’ – as another US-inspired problem.

‘The invasion of Iraq is already the greatest disaster in the history of US foreign policy,’ he said, maintaining that it is a non-partisan remark.

And if the US does go on to attack Iran, there is the chance that oil prices – which hit a high past US$80 per barrel last week – could spiral into the US$125-US$150pb range, which would be ‘really devastating for the global economy’, he said.

 

Source: Business Times 18 Sept 07

China needs more rate hikes to curb overheating

Central bank likely to act aggressively given high inflation, heavy speculation

BEIJING – CHINA will need to implement further tightening, even after the fifth interest rate hike this year, to curb the fastest inflation since 1996 and dampen speculation in stocks and real estate, experts said.

‘The economy is really showing signs of overheating,’ said CFC Seymour strategist Dariusz Kowalczyk. ‘This makes China nervous enough to be more aggressive in its monetary policy.’

The benchmark one-year lending rate has increased to a nine-year high of 7.29 per cent from 7.02 per cent, with effect from last Saturday, the central bank said on its website.

A record trade surplus of US$161.8 billion (S$244.6 billion) in the first eight months of this year has flooded the economy with cash, pushing up consumer prices at twice the central bank’s target pace.

The benchmark CSI 300 Index for China’s yuan-denominated A shares has quadrupled in the past 12 months as investors sought better returns than those on offer at banks.

Home prices in cities have risen too, up by 8.2 per cent last month from a year earlier.

‘This is doing nothing to help stem the flow of money into the A-share market,’ said Societe Generale economist Glenn Maguire.

‘There’ll likely be one more move on lending rates this year. Deposit rates will also go up because, with inflation rising, real interest rates are negative.’

The central bank said it wants to strengthen monetary and credit controls, guide investment growth and stabilise inflation expectations.

The one-year deposit rate will rise to 3.87 per cent from 3.6 per cent.

Last Friday’s action on rates came after the statistics bureau said spending on factories, equipment and property had climbed 26.7 per cent in the eight months to August from a year earlier.

Soaring food costs also pushed inflation to 6.5 per cent in August, more than double the 3 per cent annual target set by the central bank.

‘We were too conservative and we are now bringing forward our forecasts,’ Standard Chartered economist Stephen Green wrote in a report after the bank’s decision. ‘We now think one more 27-basis-point hike this year and then another two in the first quarter.’

 

Source: BLOOMBERG NEWS (The Straits Times 17 Sept 07)

Shanghai stocks dive as inflation soars

Interest rate fears fuel 4.5% plunge in Shanghai market

(BEIJING) Soaring food prices propelled China’s annual consumer price inflation to 6.5 per cent in August, the fastest pace in nearly 11 years, cementing expectations the central bank will defy the global trend and keep raising interest rates.

The inflation rate published yesterday, up from 5.6 per cent in July, easily surpassed economists’ forecasts of 5.9 per cent. It was the highest reading since December 1996.

Shanghai stocks plunged 4.5 per cent, the biggest daily drop in two months, as investors fretted that higher borrowing costs could help bring the market’s dizzying rally to a halt.

‘Going forward we believe there are non-trivial risks that inflation may continue to edge up,’ economists at Goldman Sachs said in a note to clients. ‘We expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest rate hikes to the benchmark lending and deposit rates by the end of this year.’

China also reported a trade surplus for August of US$24.97 billion. It was the second-biggest on record but slightly lower than forecast as the ending of some tax rebates dented exports.

The ruling Communist Party, aware that inflation has touched off unrest in China down the ages, has voiced increasing concern about the speed of price rises.

A senior party researcher warned on Monday that inflation becomes difficult to control once it exceeds 5 per cent, while a local paper said Beijing had told schools and colleges in the capital not to raise canteen food prices as inflation climbs.

The National Bureau of Statistics said inflation was driven by an 18.2 per cent leap in the cost of food, which accounts for a third of the consumer price basket.

Meat prices rose 49 per cent in August from a year earlier, reflecting a shortage of pork, China’s staple meat.

China’s pig population has fallen 10 per cent due to blue-ear disease and reduced incentives to rear hogs, including fast-rising foodgrain costs and low prices last year.

China, the world’s biggest producer and consumer of pork, could quadruple its imports of the meat this year to 100,000 tonnes to ease the shortage, industry sources said yesterday.

To keep a lid on inflation and prevent the world’s fourth-largest economy from overheating, the central bank has raised interest rates four times this year and ordered banks on seven occasions to tie up more of their deposits in reserve.

As for the market plunge, analysts said that after more than doubling this year to last Thursday’s all-time high, the benchmark stock index might finally be starting a substantial pullback, even though they believe a full-fledged bear market remains very unlikely.

‘All the government policies will have a cumulative impact on the market – eventually, there will be a last straw on the camel’s back,’ said Liu Lifeng, fund manager at BOCI Securities.

Many traders think the market will in coming days slip to psychological support around 5,000 points.

A drop to technical support in the 4,700-4,800 area, where the index’s mid-August peak roughly coincides with the 38.2 per cent retracement of its rally since early July, also looks quite possible.

 

Source: Reuters (Business Times 12 Sept 07)

Will China’s central bank hike rates again?

From a macroeconomic point of view, it might not be in a rush for an increase this month

THE People’s Bank of China (PBOC), China’s central bank, issued 151 billion yuan (S$30.6 billion) of directional bills to selected commercial banks last week. Unlike the ordinary central bank bills distributed in the open market, PBOC made it compulsory for the commercial banks to purchase its tranche of directional bills.

This is the fifth time the central bank has wielded such a tool to restrain domestic banks from expanding credit too fast. While the term remains the same, the size of the current bill issuance is bigger than the previous four batches of 101 billion yuan.

Moreover, while the yields of the previous four batches of directional bills were only two to six basis points lower than normal central bank bills, the spread between the yield of the new batch and that of the ordinary ones widened to 10 basis points.

The issuance of directional bills came only one day after PBOC announced an increase in bank reserve ratio of 0.5 percentage points to 12.5 per cent, effective from Sept 25. It is the seventh time the central bank has increased the bank reserve ratio this year.

Contrary to general expectation, China’s economy didn’t slow in 2007. Instead, China’s economy has been accelerating despite a series of macro economic control measures.

In the first half of 2007, China’s GDP grew by 11.5 per cent, 0.6 percentage points higher than the same period in 2006. In particular, the investment growth remains at an uncomfortably high level.

In the first seven months, fixed asset investment in urban China grew by 26.6 per cent, which is partly driven by excess liquidity.

According to the central bank, M2, the broad measure of money supply, went up 18.48 per cent by the end of July 2007, over the same period last year. The growth rate is 1.42 percentage points higher than that of the end of June, indicating acceleration in money supply.

Currently, directional bills, bank reserve ratio requirements and interest rates are the three major instruments the PBOC uses to adjust liquidity in China’s financial market.

So far, PBOC has increased the interest rate four times within this year. Therefore the question we are left with is whether PBOC will increase the interest rate again this month after last week’s tightening move.

Usually, the decision of an interest rate hike is made at a weekend after major economic statistics, such as the consumer price index (CPI) and fixed asset investment in urban areas, are released by the National Statistics Bureau (NSB). According to the data release schedule, the next possible interest rate hike may be announced on Sept 14.

It does seem that the forthcoming August figure would trigger a new interest hike. It is widely expected August CPI will go beyond 6 per cent, provided food prices, the major drive for a high CPI rate, continue to pick up. The July figure hit a 33-month high to reach 5.6 per cent.

However, from a macroeconomic point of view, we reckon that even if a high CPI rate comes together with a high fixed asset investment figure, PBOC might not be in a rush for a new interest rate hike this month.

First of all, the high CPI rate might not be a bad thing in China. In fact, the CPI figure in July was less than one per cent, if food prices, which account for about one-third in the price basket, is excluded.

The food price surge will eventually benefit the farmers and help the country to narrow the widening income gap between the urban population and the rural one.

In the first half of 2007, net income of farmers grew by 13.3 per cent, which is a 20-year high.

Additionally, it is a common practice that Chinese banks extend loans much faster in the first half of one year.

Thus PBOC is under less pressure to control bank credit expansion in the second half.

Therefore, the current stronger-than-usual directional bill measure, together with a new bank reserve ratio hike, might allow PBOC more time to see the result of its actions.

Tiger Tong is an analyst with China Knowledge, a premier provider of trade and investment information on China

 

Source: Business Times 12 Sept 07

Japan economy in shock Q2 contraction

Revised data stokes fears of growth recession; Nikkei takes a hit with 2.2% fall

IN TOKYO

JAPAN’s economy shrank by a bigger than expected 0.5 per cent in the second quarter of this year, according to revised official data published yesterday.

The news sent Tokyo stock prices plunging and reinforced concerns that the long-lasting recovery in the economy has finally come to an end. It also appeared to rule out any early rise in interest rates.

Initial figures had suggested that gross domestic product expanded 0.5 per cent in the second quarter, but revised data released last week showed that corporate capital expenditure in the April-June period fell by more than 12 per cent. That led economists to re-do their GDP calculations – but even so, the 1.2 per cent annualised decline announced yesterday caught analysts off-guard.

Finance Minister Fukushiro Nukaga tried to put a brave face on the situation. ‘The GDP data showed that consumption is growing moderately,’ he said.

‘Capital spending fell but corporate earnings have been improving. Overall, I don’t think there has been a big change in the economy. I expect the economic recovery to continue.’

But the market delivered a more bearish verdict on the news. The Nikkei 225 stock average fell a hefty 357.19 points or 2.2 per cent to 15,906.52.

The yen, meanwhile, continued its climb against other major currencies, casting doubts on the future strength of exports, which have been a mainstay of the economy, along with corporate capital spending.

With personal consumption remaining stagnant and government spending set to contract further in 2008, some economists are now beginning to acknowledge the possibility of a ‘growth recession’ (declining rates of growth) or even an absolute recession (where the economy contracts for two consecutive quarters) by next year.

Some analysts are also saying that the Bank of Japan may be unable to raise interest rates this year given the clouds on the economic horizon and the prospect of continuing turbulence in global financial markets.

The bank’s policy board, due to meet next week, is likely to hold its short-term policy lending rate at 0.5 per cent rather than raise it to 0.75 per cent, as had been expected earlier.

 

Source: Business Times 11 Sept 07

Asia still looking rosy in medium term: Tharman

(SINGAPORE) The repricing of risk sparked by the crisis in sub-prime debt in the US is not over, but there is no reason to downgrade Asia’s economic prospects in the medium term, said Tharman Shanmugaratnam, Second Minister for Finance. Speaking yesterday at the opening of SG Private Banking’s new office, he pointed out that the current turbulence does not alter the basic story of an ‘ascendant Asia’.

‘It introduces significant near term uncertainty, both for the markets and for economic growth, but it does not alter the picture of an increasingly dynamic and resilient Asia in the coming years and decades.’

He said that the growth of SG Private Bank, along with that of the private banking industry, reflected a few fundamentals. One of these is the emergence of Asia as the big story in the global economy. ‘Global investors have good reason to believe Asia will continue to outperform other regions for at least another two decades to come.’

Mr Tharman said the fallout in Asia has so far been limited. MSCI Asia ex-Japan is down 1.6 per cent since mid-July and is still up 24 per cent in the current year. Excluding China, Asian markets are up 22 per cent since the start of the year, and 45 per cent since the middle of last year.

Credit bond spreads in Asia have widened but the correction has been healthy and spreads remain below their historical levels. Average credit spreads in Asia recently rose by 100 basis points over US Treasuries to reach about 234 basis points currently. But they remain well below the 400 basis points seen between 2000 and 2003.

He said that there is increased uncertainty over the US near-term outlook, which could impact Asia. But Asian producers will continue to make productivity strides, and Asian consumers will provide an independent growth engine. ‘Global investors will, therefore, continue to seek out higher returns in Asia.’

Steve Forbes, Forbes magazine publisher, said in an address that Forbes has a great affinity with private banking as it monitors private wealth. Forbes publishes annual listings of the world’s wealthiest individuals. Asia’s 160 billionaires, he said, now account for 17 per cent of the world’s wealthiest, compared with a share of 14.5 per cent a year ago. This represents several hundred individuals, with assets of over US$650 billion. ‘The current crisis is a temporary one. We had a far worse one 10 years ago. The long-term dynamics are very positive,’ he said. Forbes is hosting its Global CEO conference in Singapore, bringing together top CEOs with a combined net worth of US$130 billion.

SG’s new office is at One Raffles Quay. SG chief executive for private banking Pierre Baer said the move is part of efforts to stay ‘at the forefront of this robust trend (in wealth creation), but at no compromise to our service quality’. The office is also its regional hub.

 

Source: Business Times 11 Sept 07

More market panic ahead as banks ‘fess up’ on sub-prime

Confidence in banks exceptionally low, says JP Morgan Asia

(SINGAPORE) Be prepared for more market panic as major banks continue to ‘fess up’ to their holdings of US subprime mortgage securities over the next several months, said Ivan Leung, JP Morgan Asia chief investment strategist.

The world’s financial markets are in turmoil as worries over exposure to the US sub-prime mortgage debt has led to a freeze in the credit market with global central banks having to step in to provide liquidity.

Around the world, banks are under intense pressure as investors and analysts cast a spotlight on their exposure to sub-prime, or high-risk, property loans in the US through their investments in collateralised debt obligations, known as CDOs.

There is little information on the amount of CDOs held by banks, which has led to ‘exceptional low’ confidence in the banks, said Mr Leung in an interview last week. In the past month, European and Asian banks including DBS Group Holdings and United Overseas Bank have revealed their CDO holdings.

‘(US banks) originate it, they package it, they sell it – but it doesn’t necessarily mean they hold on to it,’ Mr Leung said.

He said that, often, US banks do hold on to some of these CDOs in structured investment vehicles – off their balance sheets – so there is no transparency on their holdings. He described this as scary.

‘European banks, and to a lesser extent – so far as we have seen – Asian banks, were purchasers of these products,’ Mr Leung said.

‘So the crisis in confidence is not so much that there could be a 80 billion or even a 200 billion dollar loss of subprime; the confidence issue is that we don’t know exactly who is holding all this debt,’ he said.

And we don’t really know the prices of all this debt, and how much of it will be subject to default, he said.

‘The confessions, you see them once in a while; that’s why we think this is an issue, because over the next three to six months, some banks will begin to confess that they have some on their balance sheet, and some off-balance sheet, but clearly right now, nobody really has a true picture of what’s going on. ‘It’s the worst of all situations – nobody knows.’

Mr Leung expects the markets to veer between confidence and ‘blind panic’ each time there is another disclosure.

Bank shares skidded on Aug 24 after DBS and three of Asia’s biggest banks revealed bigger-than-expected exposure to the US sub-prime mortgage crisis.

DBS said that it had US$1.6 billion (S$2.43 billion) in holdings of CDOs – more than the S$1.3 billion disclosed on Aug 7.

An additional 1.5 million sub-prime borrowers may fall behind on their mortgage payments as introductory interest rates on those loans rise this year and next, US Federal Deposit Insurance Corp chairman Sheila Bair said last week.

Among the 2.5 million sub-prime mortgages with interest rates that are expected to be reset this year and next, ‘1.5 million will be in financial distress’, Ms Bair said.

Getting any kind of centralised data collection will be very challenging, she said.

JP Morgan estimates that US$600 billion worth of adjustable rate mortgages will be reset over the next 12 months.

But, following the adage that there are always opportunities when risks are high, Mr Leung said that one way for investors to take advantage of the current extreme volatility in the markets is to buy ‘plain vanilla’ short-term structured notes with capital protection.

The notes are designed to give a high payout even if the stock markets move only slightly higher, he said. ‘When volatility is as high as it is right now, we can go for simple structures,’ Mr Leung said.

The notes that JP Morgan is offering are meant for investors who share the view that the US mortgage crisis will not lead to a recession. Lower growth, yes, and therefore moderately bullish stock markets still.

Mr Leung said that JP Morgan was positive on undervalued markets such as Thailand and South Korea and favours Singapore and China companies which have superior corporate and economic fundamentals.

 

Source: Business Times 10 Sept 07

Rents, wages up but S’pore cheaper than HK, Tokyo

Also, it has qualities like liveability that economies in region cannot easily copy, says Lim Hng Kiang. But it has to keep an eye on costs

EVEN though property costs and wages are on the rise, Singapore remains cheaper than global cities in the region such as Hong Kong and Tokyo, said Trade and Industry Minister Lim Hng Kiang.

Nevertheless, the Republic cannot afford to be complacent, said Mr Lim. ‘We have to maintain vigilance over our costs, as excessive cost increases will dampen our growth prospects,’ he said.

Mr Lim was speaking in Parliament yesterday in response to MPs’ concerns about the impact of rising business costs on Singapore’s economic competitiveness.

In response to questions on this issue from Mr Liang Eng Hwa (Holland-Bukit Timah GRC), Mrs Josephine Teo (Bishan-Toa Payoh GRC), Dr Muhammad Faishal Ibrahim (Marine Parade GRC) and Madam Halimah Yacob (Jurong GRC), he laid out proactive steps that the Government has taken to address supply constraints.

Also, citing as examples London and New York, which are thriving hubs despite their high costs, Mr Lim said ‘competitiveness is more than offering low costs alone’, but also about value creation. In this respect, Singapore has attributes that economies in the region cannot easily replicate, such as its livability.

Also Mr Lim pointed out that in the past three years, the consumer price index has increased at an annual rate of 1 per cent, while overall unit labour cost actually declined at an annual average rate of 2.2 per cent.

‘However, in recent quarters, we have seen increases in property prices and rentals, as well as wages,’ he noted.

He cited recent moves to release land for temporary office space as well as provide more public flats for rental.

The Ministry of National Development (MND) also released additional information on property prices and rents ‘to allow the public and businesses to make more informed decisions on property purchases and rentals’.

And the MND has been putting out an ample supply of land with more than 42,000 private residential units and 640,000 sq m of office space to be completed by 2010.

The Government is also looking at ways to help more Singaporeans such as older workers and women take advantage of the strong employment market and rejoin the workforce.

Despite media reports of ’sky-high’ office rentals, Mr Lim said although the median prime office rent in the second quarter was $9.50 per sq ft per month, the median rent in other locations, accounting for about 80 per cent of office space here, was less than half of that.

Mr Lim also quoted studies which showed that Singapore remains cheaper than other global cities in the region.

A survey on global office market rentals by consultants CB Richard Ellis showed that Singapore was 30 per cent cheaper than Hong Kong, and 50 to 60 per cent cheaper than Tokyo.

 

Source: The Straits Times 28 Aug 07

Reaction to banks’ sub-prime exposure mixed

China’s markets have shrugged off worries over the US credit crisis

(SHANGHAI) China’s banks are just beginning to disclose figures on their exposure to the US sub-prime mortgage crisis – and so far the reaction is mixed.

Bank of China saw its Hong Kong stock price fall by as much as 8.1 per cent yesterday as investors sold shares in reaction to the bank’s report it holds US$9.65 billion in sub-prime asset-backed securities and collateralised debt obligations, or CDOs. That’s 3.8 per cent of its total securities investments.

But in the Chinese mainland, where the state-controlled press ran headlines touting the minimal risks faced by two of the country’s biggest banks from the US credit crunch, Bank of China’s shares rose early yesterday.

At the close, Bank of China’s Shanghai-traded shares had gained one per cent to 6.16 yuan.

Its Hong Kong shares closed down 5.4 per cent at HK$3.87, despite stronger than expected first-half earnings.

As the most international of China’s four big banks, with a quarter of its earnings from overseas business, Bank of China is likely to have the largest exposure to sub-prime mortgage-backed securities and CDOs.

‘Sub-prime’ refers to people with risky credit. Those two kinds of securities have lost value recently, due to rising sub-prime mortgage defaults and a credit squeeze.

Bank of China’s Hong Kong unit, BOC Hong Kong (Holdings), reported it had US$1.6 billion in sub-prime-linked securities, making up 1.2 per cent of its total assets.

The parent bank said it has seen no defaults on any of its sub-prime-linked securities.

However, it made ‘impairment charges’ for potential losses amounting to 1.15 billion yuan (S$231 million) in its earnings report on Thursday.

Since the asset-backed securities all had ratings of ‘A’ or above, though, analysts say they see little risk to the bank from the credit crisis.

Bank of China denied a report earlier this month by a Chinese financial magazine, Capital Week, that it risks losses amounting to 3.85 billion yuan through such investments.

The magazine, citing ‘accounting estimates’, put potential losses for six major Chinese lenders from sub-primerelated securities at 4.9 billion yuan.

China’s biggest lender, Industrial & Commercial Bank of China (ICBC), said on Thursday that its sub-prime mortgage- backed securities were valued at US$1.23 billion by the end of June, accounting for only 0.3 per cent of its total securities investment.

‘ICBC did have a loss from the investment if calculated at the current market value of the securities,’ Xinhua quoted Yang Kaisheng, the bank’s president, as saying. ‘But the loss is not significant and well within ICBC’s capacity to bear,’ Mr Yang said.

Up to now 2007 has been a banner year for China’s big banks.

ICBC said its first-half net profit rose 62 per cent from a year earlier to 41 billion yuan , boosted by higher interest income and an expansion of its fee-based businesses.

Bank of China’s net profit for January-June rose 52 per cent to 29.5 billion yuan.

China Construction Bank, another of the big state lenders, is due to report earnings over the weekend.

Chinese banks and other financial institutions have relatively less exposure to international market trends, and so far, the country’s own stock markets have shrugged off worries over the US credit crisis.

In a report released yesterday, ratings agency Standard & Poor’s said Asian economies would be able to weather the turmoil in global stock and credit markets without ‘major reversals’. ‘Asian economies have improved their banking systems, reined in fiscal deficits, brought down external debts, built up foreign exchange reserves and improved their current account balances,’ credit analyst Ping Chew said in a statement.

However Mr Chew noted increasing vulnerability for some central banks due to the fact that lower quality borrowers have migrated to the region in search of high returns.

For China and most of Asia, the greater worry is over whether the problem might spill into the broader world economy, sapping demand for imports and hurting global growth.

So far, though, China’s markets remain bullish.

The benchmark Shanghai Composite Index topped 5,000 for the first time on Thursday. Yesterday it gained 75.18 points, or 1.5 per cent, to close at a record high 5,107.67.

 

Source: AP (Business Times 25 Aug 07)

Will market jitters slow down spending in Asia?

Major risk comes from prospect of US downturn, says Credit Suisse

(SINGAPORE) Amidst the brouhaha about the economic boom, one puzzle has been why consumer spending in Singapore has not quite kept pace with the buoyant economy.

While the region is gradually ‘decoupling’ from the United States and intra-regional trade is expanding, Asia remains linked and exposed to the US economy, still the biggest market for its exports.

And now, there is the risk that private consumption across Asia – as well as overall GDP growth – could well be hit if the recent financial market turmoil intensifies, and especially if the US economy takes a sharp downturn.

While the Singapore economy grew a strong 7.9 per cent last year, growth in private consumption expenditure averaged a weak 2.5 per cent in the five quarters through Q1 2007. Things started looking up in Q2, as growth in private consumer spending more than doubled to 5.8 per cent, although there was no pick-up in spending on household goods and furnishings, communications products, and even food and beverages.

Then came the recent bout of global financial market volatility, which saw a rout on the stock markets.

Investment bank Credit Suisse’s economists reckon the wealth effects of the recent sell-off are, for now, ‘too modest’ to have a big impact on consumption.

‘To the extent the equity market sell-off intensifies in the months ahead, the wealth effects on consumer spending and growth would presumably be felt most where large numbers of retail investors participate in the equity market, including in Korea, Hong Kong, Singapore and Taiwan,’ the bank says in an Emerging Markets Economics Research report this week.

But, pockets of banking and financial market risk notwithstanding, Asia’s biggest risk exposure is to a sharp slowdown in the US economy, it says.

Emerging Asia’s growth outlook is exposed to the recent market volatility mainly through US growth, it maintains.

While the region is gradually ‘decoupling’ from the United States and intra-regional trade is expanding, Asia remains linked and exposed to the US economy, still the biggest market for its exports.

The US share of Asia’s exports has fallen since 2000, but this has been offset by commensurate increases in Asian exports of intermediate goods to China, which in turn are exported to the US as final goods, the Credit Suisse report notes.

Hence Asia’s exports still closely track US manufacturing new orders and its GDP growth has remained correlated with US growth.

‘A sharp slowdown in the US is thus bound to affect Asia’s growth outlook negatively, although governments in the region generally have the flexibility to pursue counter-cyclical policies to cushion the impact,’ the bank says.

Credit Suisse’s economists have pared their forecasts of US economic growth for Q4 (to 1.7 per cent from 2.8 per cent) and for 2008 (to 2.6 per cent from 3 per cent) and ‘the balance of risks is on the downside’.

 

Source: Business Times 24 Aug 07