Today LSE lecturer Nilesh Dattani told me that the Chinese investment in the world financial market, like the deal with private equity Blackstone and Barclay, is clearly a step in the right direction, however, he warned that China should have paid more attention to the timing of the investment. So far, the financial market is a little over bullish, and some kind of correction of the market is quite likely to happen. Today's FT reported that both European and UK equity markets were highly volatile after stocks in Asia and the US tumbled heavily amid a flight from risk over persistent fears about exposure to credit markets.
So Chinese investment came right in the middle of the market peak, and consequentially have to pay far more than if they bought shares a few months earlier, or a few months later when the correction of market takes place.
I think Mr. Dattani made a very good point. Chinese government could be quite eager to make investment, and diversify the already massive foreign exchange reserve, but more haste, less speed. We may need to do it in the right time to achieve the right result.
Friday 27 July 2007
Wednesday 25 July 2007
Porter's Diamond Model and Chinese economy
In today's international business strategy lecture, I learned the Diamond model on the competitive advantage of Nations and Firms, a brainchild of Michael Porter. Despite some criticisim over his model, most of its theory could still be applied to analyse how healthy or competitive Chinese economy is.
Great hype has been given to the economy of China, which could overtake Germany as the third-largest economy in the world, behind the leading United States and Japan. The continued fast growth has kept hitting the headlines. However, going by the Porter's diamond model, Chinese economy is not as competitive as the hype suggests.
According to the model, there are many factors to the competitive advantage: demanding regulatory standards, demanding customers, rule of law, transparency, intellectual property protection, efficient access to capital, and the like. China has scored very low in those mentioned factors.
But China is making progress, although it will be a slow and painful process. For instance, the rule of law is shaping up, with the introduction of a raft of laws in recent years, including the high-profile enactment of property law and the competition law under draft. China will not be satisfied with being only an export of cheap goods, or the status as nothing but a world factory. They are taking steps to increase their competitive advantage.
Interestingly, Porter give high profile to the role of government in the development of a country's competitiveness, saying that govenrment should act as catalyst for the development of economy by prompting competition, and encourage companies to raise their performance. Given Chinese social system, government will continue to play a big role in its economy. The key is will government be a hindrance or a catalyst for the economy development.
Great hype has been given to the economy of China, which could overtake Germany as the third-largest economy in the world, behind the leading United States and Japan. The continued fast growth has kept hitting the headlines. However, going by the Porter's diamond model, Chinese economy is not as competitive as the hype suggests.
According to the model, there are many factors to the competitive advantage: demanding regulatory standards, demanding customers, rule of law, transparency, intellectual property protection, efficient access to capital, and the like. China has scored very low in those mentioned factors.
But China is making progress, although it will be a slow and painful process. For instance, the rule of law is shaping up, with the introduction of a raft of laws in recent years, including the high-profile enactment of property law and the competition law under draft. China will not be satisfied with being only an export of cheap goods, or the status as nothing but a world factory. They are taking steps to increase their competitive advantage.
Interestingly, Porter give high profile to the role of government in the development of a country's competitiveness, saying that govenrment should act as catalyst for the development of economy by prompting competition, and encourage companies to raise their performance. Given Chinese social system, government will continue to play a big role in its economy. The key is will government be a hindrance or a catalyst for the economy development.
Key player in China's recent financial masterstroke
Today's Wall Street Journal revealed that former HK financial secretary Antony Leung, who joined the Blackstone in January, played a very big role in pulling together a deal in which China used forex reserve to buy the Blackstone stake.
Leung, also husband of former Chinese Olympic diving champion Fu Mingxia, achieved this by leveraging his experience in business and government to gain the trust of Chinese officials.
The WSJ said that the deal between Blackstone and Chinese government was extraordinary not only because of private equity's complicated image in China and because the government has never directly taken a minority stake in a foreign company before, but also because the national forex investment company of China was yet to be really launched-- it was still in the planning stage when Leung approached Lou Jiwei, the Finance Ministry official who is heading preparations fro the agency, to see if he was interested in investing in any Blackstone funds. Within weeks, a very short turnaround for China's consensus-driven bureaucracy, Leung has secured the deal worth 3 billion us dollars.
Leung was not the matchmaker in the Barclays deal, since the British bank has a longstanding relationship with China Development Bank. But once the Chinese State-run policy bank decided to negotiated with Barclays, it hired Blackstone's M&A advisory service to provide counsel, and Leung became the day-to-day point-person in talking to China Development Bank.
Leung affinity for the mainland began when he was at school. He was a pro-beijing student leader at college. He attended Howard business school before working with Citigroup for 23 years. He is now the Asia China chairman of Blackstone.
Leung will continue to play an instrumental role in the ambitious project of Blackstone in China, and continue writing himself into the finance history of China.
Leung, also husband of former Chinese Olympic diving champion Fu Mingxia, achieved this by leveraging his experience in business and government to gain the trust of Chinese officials.
The WSJ said that the deal between Blackstone and Chinese government was extraordinary not only because of private equity's complicated image in China and because the government has never directly taken a minority stake in a foreign company before, but also because the national forex investment company of China was yet to be really launched-- it was still in the planning stage when Leung approached Lou Jiwei, the Finance Ministry official who is heading preparations fro the agency, to see if he was interested in investing in any Blackstone funds. Within weeks, a very short turnaround for China's consensus-driven bureaucracy, Leung has secured the deal worth 3 billion us dollars.
Leung was not the matchmaker in the Barclays deal, since the British bank has a longstanding relationship with China Development Bank. But once the Chinese State-run policy bank decided to negotiated with Barclays, it hired Blackstone's M&A advisory service to provide counsel, and Leung became the day-to-day point-person in talking to China Development Bank.
Leung affinity for the mainland began when he was at school. He was a pro-beijing student leader at college. He attended Howard business school before working with Citigroup for 23 years. He is now the Asia China chairman of Blackstone.
Leung will continue to play an instrumental role in the ambitious project of Blackstone in China, and continue writing himself into the finance history of China.
China Price or China Index
Forget about the stereotype of China exporting low-end cheap goods like textiles, and forget about the so-called China Price, now I will alert you to the growing tendency of China making impact in world finance, and the would-be China Index.
The trend could be underscored by the recent deal between Chinese Development Bank and Barclay Bank. It is not just a masterstroke by a Chinese bank. Behind the headlines is the country's ambitious drive to turn from a simple reciever of foreign capital into a major player in the world finance market.
One of my friends who works at the finance policy section of the State Council observed that the deal could be a milestone event in China's march to the world capital market. For China, the previous experience in the world financial market was at its maximum limited to some major companies going public in the bourses, but that is nothing but raising foreign capital. However, China has started to take on a more positive approach by buying shares of foreign major companies. The ground-breaking move started with a bang in the form of the Barclay deal, and there will be more to come.
What to ensure? It could be more purchases of foreign shares, just like what CDB has done with Barclay. but there could be also more friendly policies towards private equity, or commodities market, like futures, options and other derivatives. In general, there will be more dynamism to Chinese capital market, and there will be more the capital movement will change from the traditional one-way to bi-direction as more Chinese capital start to go abroad to seek opportunities.
Chinese companies have been getting increasingly capital-wise, typified by the China Development Bank. It has breathed new life into Chinese bank industry, which had been burdened with non-performing loans and rigid system. The policy bank was initially launched as a non-profit bank and designed to support the big projects of Chinese government, but the bank chief Chen Yuan, a money-wise strategist, looked much further than its immediate mandate. Under his leadership, the CDB has adopted a market-oriented approach and operated like a commercial bank. That is why it is the only money-making policy bank in China. (other policy banks include the Import $ export bank, which is aimed to support China's export and import).
The picture could be clearer if you link the Barclay deal with China's purchase of the Blackstone share in May. But the two deals are different in their significance. The Blackstone deal could be mainly explained in the context of China's continusouly growing foreign exchange reserve, but the Barclay deal is more a capital operation by the Chinese bank.
I have a strong hunch that more masterstrokes by Chinese companies are in the pipeline. The West need to adjust their stereotype of China, which has been famous for cheap goods, (that is why the term China Price comes into being). But lets look forward to the coming of China Index.
The trend could be underscored by the recent deal between Chinese Development Bank and Barclay Bank. It is not just a masterstroke by a Chinese bank. Behind the headlines is the country's ambitious drive to turn from a simple reciever of foreign capital into a major player in the world finance market.
One of my friends who works at the finance policy section of the State Council observed that the deal could be a milestone event in China's march to the world capital market. For China, the previous experience in the world financial market was at its maximum limited to some major companies going public in the bourses, but that is nothing but raising foreign capital. However, China has started to take on a more positive approach by buying shares of foreign major companies. The ground-breaking move started with a bang in the form of the Barclay deal, and there will be more to come.
What to ensure? It could be more purchases of foreign shares, just like what CDB has done with Barclay. but there could be also more friendly policies towards private equity, or commodities market, like futures, options and other derivatives. In general, there will be more dynamism to Chinese capital market, and there will be more the capital movement will change from the traditional one-way to bi-direction as more Chinese capital start to go abroad to seek opportunities.
Chinese companies have been getting increasingly capital-wise, typified by the China Development Bank. It has breathed new life into Chinese bank industry, which had been burdened with non-performing loans and rigid system. The policy bank was initially launched as a non-profit bank and designed to support the big projects of Chinese government, but the bank chief Chen Yuan, a money-wise strategist, looked much further than its immediate mandate. Under his leadership, the CDB has adopted a market-oriented approach and operated like a commercial bank. That is why it is the only money-making policy bank in China. (other policy banks include the Import $ export bank, which is aimed to support China's export and import).
The picture could be clearer if you link the Barclay deal with China's purchase of the Blackstone share in May. But the two deals are different in their significance. The Blackstone deal could be mainly explained in the context of China's continusouly growing foreign exchange reserve, but the Barclay deal is more a capital operation by the Chinese bank.
I have a strong hunch that more masterstrokes by Chinese companies are in the pipeline. The West need to adjust their stereotype of China, which has been famous for cheap goods, (that is why the term China Price comes into being). But lets look forward to the coming of China Index.
Monday 23 July 2007
Measure your mind's height by the shade it casts
Today read an article on managerial model: Blake Mutton Managerial Grid (BMMG). quite interesting. there are two kinds of managerial style, one is production or task-oriented, with the other people-oriented. Sometimes, they could be at conflict, but i think, a genuine teamleader could blend them very naturally. But this model fails to take into account the cultural context in the age of globalisation. The managerial model could be categorized into not just task-oriented, or people-oriented, but also culture-oriented. I think the latter is more interesting than the former two, given that none could escape from the globalisation context. As New York Time columnist Thomas Friedman argues, we now live in a "flat" world. The tested managerial model in the West has to be re-tested again in a different cultural context.
Wednesday 18 July 2007
Black Swan and Hedge Funds
Trader-cum-philosopher Nassim Nicholas Taleb has been back to hedge fund business, according to a recent report by WSJ. This guy is well-know for this "black swan theory", which he defines as extreme, highly disruptive events that sent shockwaves through financial markets.(Because in the West, there is wide held belief that there are only white swans, until European explorers discovered the black swans that are native to Australia)
He criticised people for tending to overestimate their ability to prejudge or predict the future risk. On the contrary, the potentially devastating risks are often "outliers" that fall outside of people's radar. one example is the 9.11 attack on the United States, which was beyond everyone's wildest imagination.
Based on his awareness of the Black Swan events, he adopted an unusual trading strategy. He often bet on those which seem impossible to happen but will have overwhelming effects when taking place. The cost on such bet is always cheap. When the bet fails, he loses marginally, but when the bet wins, he gains marvelously. When the dotcom bubble burst, his fund was awash in money, while others performing poorly.
But there is risk to his black swan strategy as well, which flourish on the impossible mission. It is painful, since you lose one dollar every day before hitting the jackpot someday. The money loss on a daily basis is quite painful process for people who can't insist on. In financial market, patience is nothing but a luxury. So he admited:if I go three or four years without a big bang in the market, I start having battle fatigue. Then he turned to writing in ivory tower.
But he has now staged a comeback. Has he foreseen the Black Swan coming again?
He criticised people for tending to overestimate their ability to prejudge or predict the future risk. On the contrary, the potentially devastating risks are often "outliers" that fall outside of people's radar. one example is the 9.11 attack on the United States, which was beyond everyone's wildest imagination.
Based on his awareness of the Black Swan events, he adopted an unusual trading strategy. He often bet on those which seem impossible to happen but will have overwhelming effects when taking place. The cost on such bet is always cheap. When the bet fails, he loses marginally, but when the bet wins, he gains marvelously. When the dotcom bubble burst, his fund was awash in money, while others performing poorly.
But there is risk to his black swan strategy as well, which flourish on the impossible mission. It is painful, since you lose one dollar every day before hitting the jackpot someday. The money loss on a daily basis is quite painful process for people who can't insist on. In financial market, patience is nothing but a luxury. So he admited:if I go three or four years without a big bang in the market, I start having battle fatigue. Then he turned to writing in ivory tower.
But he has now staged a comeback. Has he foreseen the Black Swan coming again?
Tuesday 17 July 2007
Dual-class shares structure, to be or not to be
Murdoch hopes to add Dow Jones to his already expansive media empire, but the bid was far from plain sailing, mainly due to stumbling block in the form of the Bancroft family, which controlling the super-voting Class B shares which has ten times voting power than the class A shares held by ordinary shareholders.
According to corporate goverance experts, these supervoting shares -- usually impossible for outside investors to get -- often are the regime in place at family-controlled firms, particularly newspaper companies that created separate, unequal share classes as a way to preserve their editorial independence. Of course, it could also prevent those hostile takeover, which appears more relevant given the growing trend in merger and acquisitions.
Many media companies have clinged to the dual-class share structure, like New York Times, and Washington Post. The latest examples is search giant Google, which decided to adopt the dual-class share structure at their IPO. Chinese internet companies have also jumped on the bandwagon, for instance, Baidu, the number one search in China, adopted a similar goverance structure, labelled as Niu Ka Jihua.
But there have been growing dissatisfaction with the structure, saying that it is against the interest of the shareholders, and can not ensure good governance. One notorious example is Conrad Black and his management of the Canadian newspaper firm Hollinger International.
Black held 30% of the company's equity but 73% of its voting power. Along the way, he was accused of granting large fees to managers and himself, as well as taking personal dividends. Hollinger's performance suffered as a result and it eventually was taken over by Sun-Times Media Group Inc.
So the dual-class share strucutre has been designed to repel the takeover bid, but the Hollinger International was eventually taken over by others. So we can see that the dual structure can't make sure of good governance, and there is a risk of management abuse. Consequentially, it could incur takeover from other rivals.
So the key for the dual-class shares structure to work properly is to ensure that those who are in control will not abuse their power. There might need another mechanism to go with the share system to check the super-voting power.
But the change will not come by easily, unless there is compelling reason, for example, the companies' shares have performed quite poorly, so that the great pressure is there for change.
But in the case of Google, the shares value is so high that even ordinary shareholders wouldnot bother to complain against being powerless for holding the class A shares.
In the case of Murdoch's bid for Dow Jones, Murdoch really came up with a very tempting package, almost 60 dollars per share. Refusal to accept the bid could be regarded as hurting the interest of shareholders and stemming the growth of the company. In this case, the Bancroft family was under pressure to have convincing reason like the editorial independence to rebuff the bid. But the Dow Jones board directors have worked out a way to ensure editorial independence. So it has been increasingly difficult for the family to say no.
According to corporate goverance experts, these supervoting shares -- usually impossible for outside investors to get -- often are the regime in place at family-controlled firms, particularly newspaper companies that created separate, unequal share classes as a way to preserve their editorial independence. Of course, it could also prevent those hostile takeover, which appears more relevant given the growing trend in merger and acquisitions.
Many media companies have clinged to the dual-class share structure, like New York Times, and Washington Post. The latest examples is search giant Google, which decided to adopt the dual-class share structure at their IPO. Chinese internet companies have also jumped on the bandwagon, for instance, Baidu, the number one search in China, adopted a similar goverance structure, labelled as Niu Ka Jihua.
But there have been growing dissatisfaction with the structure, saying that it is against the interest of the shareholders, and can not ensure good governance. One notorious example is Conrad Black and his management of the Canadian newspaper firm Hollinger International.
Black held 30% of the company's equity but 73% of its voting power. Along the way, he was accused of granting large fees to managers and himself, as well as taking personal dividends. Hollinger's performance suffered as a result and it eventually was taken over by Sun-Times Media Group Inc.
So the dual-class share strucutre has been designed to repel the takeover bid, but the Hollinger International was eventually taken over by others. So we can see that the dual structure can't make sure of good governance, and there is a risk of management abuse. Consequentially, it could incur takeover from other rivals.
So the key for the dual-class shares structure to work properly is to ensure that those who are in control will not abuse their power. There might need another mechanism to go with the share system to check the super-voting power.
But the change will not come by easily, unless there is compelling reason, for example, the companies' shares have performed quite poorly, so that the great pressure is there for change.
But in the case of Google, the shares value is so high that even ordinary shareholders wouldnot bother to complain against being powerless for holding the class A shares.
In the case of Murdoch's bid for Dow Jones, Murdoch really came up with a very tempting package, almost 60 dollars per share. Refusal to accept the bid could be regarded as hurting the interest of shareholders and stemming the growth of the company. In this case, the Bancroft family was under pressure to have convincing reason like the editorial independence to rebuff the bid. But the Dow Jones board directors have worked out a way to ensure editorial independence. So it has been increasingly difficult for the family to say no.
China wall of worry
Wall of Worry is a market adage which means that stocks can still flourish when people are nervous. Skeptics hold money on the sidelines. As the worst of their fears are alleviated, they put money into stocks, pushing the market higher.
Today read an article titled China Wall of Worry. Good stuff! I tried to summarize his "alternative" arguments against the prevailing worry about the rise of Chinese economy. In his eyes, Amercan economy is climing on the wall of Chinese worry.
1. there is worry about the chance that China will replace US to be No.1 economy in the world.
But the author argued that the US enojoys a great head start so that it will be very hard for China to catch up
2. jobs are lost due to the cheap imports from China
But the author held that it is a myth that the jobs are lost due to Chinese goods, actually, cheap goods from China could help US create jobs as well.
3. There is hand-wringing about our trade deficit with China
But the author dismissed the worry saying that US coin the money and China send them manufactured goods. That's a great trade! It's so much easier to make slips of paper than manufacturing television sets.
4. There is worry about China's supposedly undervalued currency
But the author said that he can't complain when China are only short-changing themselves.
The author ended his article by saying that "It just could be that worry is America's secret economic weapon. It's terrific that we care so much about keeping our position as the world's No. 1 economy — it keeps us sharp, makes us work hard, and gives us a shared mission"
Today read an article titled China Wall of Worry. Good stuff! I tried to summarize his "alternative" arguments against the prevailing worry about the rise of Chinese economy. In his eyes, Amercan economy is climing on the wall of Chinese worry.
1. there is worry about the chance that China will replace US to be No.1 economy in the world.
But the author argued that the US enojoys a great head start so that it will be very hard for China to catch up
2. jobs are lost due to the cheap imports from China
But the author held that it is a myth that the jobs are lost due to Chinese goods, actually, cheap goods from China could help US create jobs as well.
3. There is hand-wringing about our trade deficit with China
But the author dismissed the worry saying that US coin the money and China send them manufactured goods. That's a great trade! It's so much easier to make slips of paper than manufacturing television sets.
4. There is worry about China's supposedly undervalued currency
But the author said that he can't complain when China are only short-changing themselves.
The author ended his article by saying that "It just could be that worry is America's secret economic weapon. It's terrific that we care so much about keeping our position as the world's No. 1 economy — it keeps us sharp, makes us work hard, and gives us a shared mission"
Saturday 14 July 2007
E-waste and regulatory opportunism
Wall Street Journal on Friday published a report that E-waste like discarded computers and other electronic goods in the West are sold to and dumped in China before being exported back to the West. It is like a return trip for the E-waste but in a different form. For example, the jewelry pendants exported to US could contain hazardous elements from the E-waste.
So who should be blamed in the E-waste issue?
For the United States and other developed countries, they need to deal with the large quantity of electronic waste, but the cost of complying with the environmental protection regulation is high so that they sell the E-waste to China where the regulation is very lenient. In academic term, it is called regulatory opportunism.
Now China has become the biggest reciever of the E-waste, which becomes a major source of pollution to China, in particular south of China. this is a mutual process. On one hand, the west has strong incentive, due to the draconian environmental regulation, to get the high-tech rubbish to foreign countries, on the other hand, China needs such waste to continue maintaining the low cost and low price of their exports.
But we live in an era of globalisation, even the movement of the wing by a butterfly in the South America could stir off a storm or hurricane in North America. As Giddens said, the locality could be shaped by what happens at long distance. No wonder that the waste discarded in the waste and dumped in the west could be returned although it has been transformed into another form.
The Extended Producer Responsibility (EPR) has been adopted by an increasing number of developed countries to deal with the management of e-waste. It is aimed to “shift the responsibility upstream toward the producer and away from municipalities.” This regulatory approach creates incentives for producers to consider, even at the design stage, the subsequent disposal and recycling of used products, and to participate as key players in the entire system of end-of-life management.
So who should be blamed in the E-waste issue?
For the United States and other developed countries, they need to deal with the large quantity of electronic waste, but the cost of complying with the environmental protection regulation is high so that they sell the E-waste to China where the regulation is very lenient. In academic term, it is called regulatory opportunism.
Now China has become the biggest reciever of the E-waste, which becomes a major source of pollution to China, in particular south of China. this is a mutual process. On one hand, the west has strong incentive, due to the draconian environmental regulation, to get the high-tech rubbish to foreign countries, on the other hand, China needs such waste to continue maintaining the low cost and low price of their exports.
But we live in an era of globalisation, even the movement of the wing by a butterfly in the South America could stir off a storm or hurricane in North America. As Giddens said, the locality could be shaped by what happens at long distance. No wonder that the waste discarded in the waste and dumped in the west could be returned although it has been transformed into another form.
The Extended Producer Responsibility (EPR) has been adopted by an increasing number of developed countries to deal with the management of e-waste. It is aimed to “shift the responsibility upstream toward the producer and away from municipalities.” This regulatory approach creates incentives for producers to consider, even at the design stage, the subsequent disposal and recycling of used products, and to participate as key players in the entire system of end-of-life management.
Friday 13 July 2007
China-Japan forex reserve comparison
Both China and Japan are the holders of massive foreign exchange reserve, taking the top two slots in the world rankings. Interestingly, great concern has been raised only about Chinese reserve, whose massive amount and continued growth has been blamed for the appreciation of Chinese currency and the inflation pressure, among others.
I think the reasons could be traced to the sources of reserves in both countries. According to the Bank of China research fellow Wang Yuanlong, the sources of forex reserve could be divided into two parts: credit-based and debts-based. The former is reserve from current account with the latter from capital account. China, like most developing countries, used to have more debts-based reserve, due to the influx of direct foreign investment. later, the rights-based reserve increased a lot. However, during 2003-2004, the debt-based reserve rebounded greatly due to the influx of hot money or international speculative short-term capital.
Another analysis of Chinese forex reserve is divide them into mainly three parts: trade surplus, foreign investment, and hot money. The latter two accounted for a very big percentage of the Chinese total reserve. But according to Weng Xueqin(2007), Japanese reserve is largely different in terms of sources, with a majority coming from trade surplus. The foreign investment accounts for a very small proportion of the reserve.
Besides, Japan has a surplus of capital due to its strong economy, and need to invest to keep their value. Due to the very low interest rate and bearish stock market in Japan, most of the capital moves out of Japan and invests in foreign national bonds. On the contrary China fall short of capital and have to rely heavily on foreign investment.
The foreign reserve doesnot represent the disposal wealth for China, whose reserve has a large porportion of foreign investment and hot money. But it is not the case with Japan.
The two countries' differences could be also found in the way of reserve management. Japan has done well in maintaining the value of reserve, while China has has been set back by misconception on the reserve, thinking the more reserve, the better for national economy. They also think forex reserve should not be used except at the crucial moment. So such misconception have led to the overgrowth of the reserve, and consequent sideeffects and risks the country face today.
I think the reasons could be traced to the sources of reserves in both countries. According to the Bank of China research fellow Wang Yuanlong, the sources of forex reserve could be divided into two parts: credit-based and debts-based. The former is reserve from current account with the latter from capital account. China, like most developing countries, used to have more debts-based reserve, due to the influx of direct foreign investment. later, the rights-based reserve increased a lot. However, during 2003-2004, the debt-based reserve rebounded greatly due to the influx of hot money or international speculative short-term capital.
Another analysis of Chinese forex reserve is divide them into mainly three parts: trade surplus, foreign investment, and hot money. The latter two accounted for a very big percentage of the Chinese total reserve. But according to Weng Xueqin(2007), Japanese reserve is largely different in terms of sources, with a majority coming from trade surplus. The foreign investment accounts for a very small proportion of the reserve.
Besides, Japan has a surplus of capital due to its strong economy, and need to invest to keep their value. Due to the very low interest rate and bearish stock market in Japan, most of the capital moves out of Japan and invests in foreign national bonds. On the contrary China fall short of capital and have to rely heavily on foreign investment.
The foreign reserve doesnot represent the disposal wealth for China, whose reserve has a large porportion of foreign investment and hot money. But it is not the case with Japan.
The two countries' differences could be also found in the way of reserve management. Japan has done well in maintaining the value of reserve, while China has has been set back by misconception on the reserve, thinking the more reserve, the better for national economy. They also think forex reserve should not be used except at the crucial moment. So such misconception have led to the overgrowth of the reserve, and consequent sideeffects and risks the country face today.
China crackdown on hot money
China has stepped up their clampdown on hot money or illegal international capital bettting on specualtive gains. The foreign exchange regulator said that since an initiative launched last November, more than 5,775 export firms have been put under close scrutiny for being suspected of dealing in speculative capital through disguised trade flows.
I applaud the risk-prevention move by the Chinese regulator. Hot money has been a significant factor for the continued fast growth of Chinese foreign exchange reserve and it could be a timed bomb to Chinese finance system. The excessive inflow of hot money would force the Central Bank of China to buy it and sell the Chinese curreny to keep the exchange rate stable. This could not only lead to the surplus of liquidity and contributes to the overheating of the economy, but also contribute to a vicious cycle, because the continued purchase of foreign currency by Central Bank could do nothing but expanding the already massive reserve. The expectation for appreciation of Chinese currency will therefore be increased again, which makes China more attractive to the speculative short-term capital.
So China need to prevent such a vicious cycle from taking place. A premature attack on the hot money would strengthen Chinese defense against financial risk and economic instability.
I applaud the risk-prevention move by the Chinese regulator. Hot money has been a significant factor for the continued fast growth of Chinese foreign exchange reserve and it could be a timed bomb to Chinese finance system. The excessive inflow of hot money would force the Central Bank of China to buy it and sell the Chinese curreny to keep the exchange rate stable. This could not only lead to the surplus of liquidity and contributes to the overheating of the economy, but also contribute to a vicious cycle, because the continued purchase of foreign currency by Central Bank could do nothing but expanding the already massive reserve. The expectation for appreciation of Chinese currency will therefore be increased again, which makes China more attractive to the speculative short-term capital.
So China need to prevent such a vicious cycle from taking place. A premature attack on the hot money would strengthen Chinese defense against financial risk and economic instability.
CEO's online campaign backfire
Today's WSJ reported the alter ego of the Whole Foods CEO John Mackey who used Yahoo finance forum to trumpet shares of his own company while bashing rivals Wild Oats. He posted his opinion under an pseudonym, only to be revealed by the Federal Trade Commission who tried to enjoin Whole Foods' acquisition of Wild Oats for anti-competitive concern.It is interesting that an CEO would employ such tactics to attack his rivals, and, as reported, the board of the Whole Foods might have to reconsider the judegement or sanity of the CEO rathern than his possible criniminality.As a student in media law, I also have an interesting eye on the legal implications of the CEO maverick behavior. It could be related to defamation in media law, or concern security law. Mr. Roger Paloff had a good summarisation of the possible breaches.called some securities law experts, but they all seemed to think that the problem was a bit broader than that. It’s a control issue, they explained. The CEO is disseminating information that hasn’t been reviewed by either the general counsel or the board. If his comments move the market, he could be engaging in stock manipulation. If anything he says is materially misleading, he’s violating Section 10B of the Securities Exchange Act. If any material nonpublic information slips out, he’s violating Regulation FD, which forbids selective disclosures. If he’s ragging on a competitor’s CEO, he could inadvertently say something defamatory. If there are confidentiality agreements in place, he could be violating them.So far, what is interesting is that the Wild Oats, attacked by Mackey online, havenot made any response. Neither have the press reported the response of the Wild Oats. But it would be interesting to see what will happen next.
Thursday 12 July 2007
what is wrong with Chinese trade surplus
According to the recent report by China Customs, the trade surplus in June reached a new high standing at 26.91 billion US dollars, eclipsing the previous record of 23.83 billion dollars in October, 2006.
It is not good news for Chinese government who have put in place a raft of measures to control and reduce the growth of trade surplus, including the cut or cancellation of tax rebates on some exported commodities, and the gradual appreciation of Chinese currency.
But such measures seemed to cut little ice, and fail to slow down the growth of trade surplus. In my view, such measures are not the foundamental solution to the issue. Some experts called for a little quicker appreciation of Chinese currency, but it is hard to prove that there is straight correlation between appreciation of currency and ease up of trade surplus. It would be simplistic to think that the appreciation of currency would result straight in reduction of trade surplus. As a Chinese economist said, Reminbi requires stability, which is good not only for Chinese economy but also for the world economy as well.
What about the tax rebates? The Ministry of Finance announced on June 18th that as of July 1st, China would again adjust export tax rebate rates on some commodities. But is this working well? Since 2004, China has adjusted its export tax policy for iron and steel products six consecutive times, but the momentum for trade surplus continues. The tax rebate policy adjustment failed to discourage the Chinese export. The reasons are, among others, Chinese enterprise increasing ability to adapt to the tax rebate adjustment. Besides, while the tax rebate could facilitate the slowdown of the export, but the import would be also consequentially reduced, due to the structure of Chinese export.
As some scholars have argued, the basic reason for continued growth of trade surplus lies with the fact: high deposits but low consumption. Such imbalance between savings and consumption results mostly from the inadequacy of Chinese social welfare system. The domestic imbalance will lead to the imbalance of import and export. This is the truly bottom reason for the Chinese trade surplus.
It is not good news for Chinese government who have put in place a raft of measures to control and reduce the growth of trade surplus, including the cut or cancellation of tax rebates on some exported commodities, and the gradual appreciation of Chinese currency.
But such measures seemed to cut little ice, and fail to slow down the growth of trade surplus. In my view, such measures are not the foundamental solution to the issue. Some experts called for a little quicker appreciation of Chinese currency, but it is hard to prove that there is straight correlation between appreciation of currency and ease up of trade surplus. It would be simplistic to think that the appreciation of currency would result straight in reduction of trade surplus. As a Chinese economist said, Reminbi requires stability, which is good not only for Chinese economy but also for the world economy as well.
What about the tax rebates? The Ministry of Finance announced on June 18th that as of July 1st, China would again adjust export tax rebate rates on some commodities. But is this working well? Since 2004, China has adjusted its export tax policy for iron and steel products six consecutive times, but the momentum for trade surplus continues. The tax rebate policy adjustment failed to discourage the Chinese export. The reasons are, among others, Chinese enterprise increasing ability to adapt to the tax rebate adjustment. Besides, while the tax rebate could facilitate the slowdown of the export, but the import would be also consequentially reduced, due to the structure of Chinese export.
As some scholars have argued, the basic reason for continued growth of trade surplus lies with the fact: high deposits but low consumption. Such imbalance between savings and consumption results mostly from the inadequacy of Chinese social welfare system. The domestic imbalance will lead to the imbalance of import and export. This is the truly bottom reason for the Chinese trade surplus.
Thursday 5 July 2007
World's rich have different dialects
They all have wallets with unfathomed depth, but they spend their fortune in different ways.
European millionaires are most money-wise, and they spend not to spend, but to invest, so they allocate about 25% of their luxury money on art, the highest proportion in the world. On one hand, this is tradition, they love collecting painting and sculputre dated back to long time ago, but on the other hand, they tend to view art as shrewd investment.
North America: tend to be more pupulist, spending the largest share of their passion dollars on cars, boats and jes-- in many cases upgrading many things they craved before they get rich.
Besides, they spend a large percentage on coins, antiques, rare baseball cards and other collectible paraphernalia due to nostalgia.
Asia: tend to show off wealth. so they outpsend their american counterparts when it comes to jets , yachts and cars. they also spend far more than european and american on jewelry.
Middle East: spend the most on jewelry due to their nomadic traditions in the regions which have made jewelry a popular commodity, since it is easily portable.
European millionaires are most money-wise, and they spend not to spend, but to invest, so they allocate about 25% of their luxury money on art, the highest proportion in the world. On one hand, this is tradition, they love collecting painting and sculputre dated back to long time ago, but on the other hand, they tend to view art as shrewd investment.
North America: tend to be more pupulist, spending the largest share of their passion dollars on cars, boats and jes-- in many cases upgrading many things they craved before they get rich.
Besides, they spend a large percentage on coins, antiques, rare baseball cards and other collectible paraphernalia due to nostalgia.
Asia: tend to show off wealth. so they outpsend their american counterparts when it comes to jets , yachts and cars. they also spend far more than european and american on jewelry.
Middle East: spend the most on jewelry due to their nomadic traditions in the regions which have made jewelry a popular commodity, since it is easily portable.
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