hi, I am working really hard on my dissertation, so that I can't find time to do reading or writing, but will make up for it shortly after submitting my paper on Sept. 2
See you soon
Wednesday 22 August 2007
Wednesday 15 August 2007
Sub-prime mortage crisis is a deja vue
The FT reported today that the European Commission is to investigate credit ratings agencies for their failure to act quickly enough to warn investors about the risks of investing in securities backed by US subprime mortgages.
Why did the agencies fail to act quickly? The report suggested that there could be an issue of conflict of interest since agencies are paid by the issuers, not the users, of their ratings. Besides, another credit ratings agencies also offer consultancy and other supplemental services to issuers, potentially creating conflicts of interest.
Having read the report, I could not help thinking of the Enron collapse a few years ago. It is nothing but a deja vue.
In the issue of Enron collapse, the auditors had been blamed for their close ties with the company they should have audited independently. Many people realized that there was a serious issue of conflict of interest between auditors and those audited. In the case of Enron, Anderson not only was paid by the energy trading firm for their traditional accounting services, but also their consulting services to the same client. Accounting and consulting is simply incompatible. The auditors played a double role of both judge and jury.
Unfortunately, the human kind tend to forget the past, and the Enron collapse, which triggered off a great market upheaval, seems to have failed to prompt the financial market to review all those systems where there might be an issue of conflict of interest.
Now similar things have happened, although this time its not the auditors, but the ratings agency.
It could be helpful to review history for bankers or financial regulators when they are free from counting money.
Why did the agencies fail to act quickly? The report suggested that there could be an issue of conflict of interest since agencies are paid by the issuers, not the users, of their ratings. Besides, another credit ratings agencies also offer consultancy and other supplemental services to issuers, potentially creating conflicts of interest.
Having read the report, I could not help thinking of the Enron collapse a few years ago. It is nothing but a deja vue.
In the issue of Enron collapse, the auditors had been blamed for their close ties with the company they should have audited independently. Many people realized that there was a serious issue of conflict of interest between auditors and those audited. In the case of Enron, Anderson not only was paid by the energy trading firm for their traditional accounting services, but also their consulting services to the same client. Accounting and consulting is simply incompatible. The auditors played a double role of both judge and jury.
Unfortunately, the human kind tend to forget the past, and the Enron collapse, which triggered off a great market upheaval, seems to have failed to prompt the financial market to review all those systems where there might be an issue of conflict of interest.
Now similar things have happened, although this time its not the auditors, but the ratings agency.
It could be helpful to review history for bankers or financial regulators when they are free from counting money.
Thursday 9 August 2007
China's "nuclear option" and game of chicken
According to yesterday's Telegraph report, Chinese government has hinted that it could liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation. The threat is described as "nuclear option", giving the magnitude and scale of the economic threat by China.
China hold massive reserve of US treasury, giving its leverage over the United States. It is easily concluded that the liquidation would lead to great depreciation of US dollars, and consequentially drag the American economy, which has been set back by the ongoing credit crisis stirred off by sub-prime mortgage default, into recession.
However, it would be zero sum game since the move by China would also backfire,due to the increasingly inter-dependency between the two economic powers. Chinese exports would become more expensive, which could be the last thing on the mind of Chinese government.
So will China go ahead with the "nuclear option", or simply big cry and little wool? Or will US back down or simply call China's bluff? it is a very typical game theory, in this case, a game of chicken.
The name "Chicken" has its origins in a game in which two drivers drive towards each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves but the other does not, s/he will be called a "chicken".
So if both China and US won't like to be named "chicken", the worst outcome will be incurred for both players in the game. The Nash equilibrium would be a scenario where one will make the best decision whatever decision the other makes. At the equilibrium, no one would be motivated to change his strategy unilaterally. In the case of Chinese economic threat, it seems that there are two Nash equilibriums, that is either US backs down or China backs down.
But that is the scenario on paper. In reality, not everyone could make rational decision, and as Herbert Simon points out, there is often the bounded rationality as people are partly rational.
There will be a lot of hand-wringing or haggling behind the scenes now. What is exciting is probably not the result of the game, but its process.
China hold massive reserve of US treasury, giving its leverage over the United States. It is easily concluded that the liquidation would lead to great depreciation of US dollars, and consequentially drag the American economy, which has been set back by the ongoing credit crisis stirred off by sub-prime mortgage default, into recession.
However, it would be zero sum game since the move by China would also backfire,due to the increasingly inter-dependency between the two economic powers. Chinese exports would become more expensive, which could be the last thing on the mind of Chinese government.
So will China go ahead with the "nuclear option", or simply big cry and little wool? Or will US back down or simply call China's bluff? it is a very typical game theory, in this case, a game of chicken.
The name "Chicken" has its origins in a game in which two drivers drive towards each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves but the other does not, s/he will be called a "chicken".
So if both China and US won't like to be named "chicken", the worst outcome will be incurred for both players in the game. The Nash equilibrium would be a scenario where one will make the best decision whatever decision the other makes. At the equilibrium, no one would be motivated to change his strategy unilaterally. In the case of Chinese economic threat, it seems that there are two Nash equilibriums, that is either US backs down or China backs down.
But that is the scenario on paper. In reality, not everyone could make rational decision, and as Herbert Simon points out, there is often the bounded rationality as people are partly rational.
There will be a lot of hand-wringing or haggling behind the scenes now. What is exciting is probably not the result of the game, but its process.
Tuesday 7 August 2007
Could China export its law
My question is could China leverage its most coveted market to export the law to other countries, as what EU has done?
The question crossed my mind after reading an article by FT which titled "Standard bearer". It talks about how EU has replaced the United States as the global standard setter. The community's laws in corporate governance, food safety, electronic waste, hazardous substances, competition, emission trading scheme, among others, have been copied or followed by a growing number of countries, including such economic power as Japan. What is incredible is that one state of the United States, California, even tried to bypass the Federation government to try to join the EU emission trading scheme. The EU is also trying to convince China to follow its competition law. The US has, with great jealousy, expressed its concern over the EU's status as global standard maker.
Mr. Datanni, who teaches me international business strategy, cited one typical example on how powerful EU is. American giant GE had thought of merging with Honeywell, only to give up the proposal, due to the objection from the EU who voiced its concern over the possible monopoly resulting from the merger.
In my view, EU could exert their power on non-EU companies could be attributed to various factors, like the way it promotes its standard(in the case of the mobile network standard GSM), or the sophistication of its standard(like its competition law is wide acclaimed to be the best of the world), but the major factor lies in the fact that its market has carried enough weight to force foreign companies to comply. The economic bloc which has rapidly expanded to 27 nations with a total of more than 480m largely afflunet consumers, and which accounts for one third of the total economic output of the world, has given EU enough claim on global standard maker. No foreign companies want to be ruled out of the EU lucrative market, and therefore, they have to comply with the EU law to gain access to it. In the above example, GE had to give up their planned merger with Honeywell to maintain their access to EU market.
What about China? There is no doubt that China has great market power as well. We have used market in exchange for advanced way of management and sophisticated technology from the West. Could we do more than that? Could China start to export not just textiles and other low-end products, but also our standards?
Standards is far more than a legal issue. It has broader political and economic implications. As far as I know, China has tried to promote its standards in telecommunication around the world, but most of them, such as the Wi-fi standard and 3G standard, have met with resistance from the West. However, China should never back from the competition for setting global standards.
The question crossed my mind after reading an article by FT which titled "Standard bearer". It talks about how EU has replaced the United States as the global standard setter. The community's laws in corporate governance, food safety, electronic waste, hazardous substances, competition, emission trading scheme, among others, have been copied or followed by a growing number of countries, including such economic power as Japan. What is incredible is that one state of the United States, California, even tried to bypass the Federation government to try to join the EU emission trading scheme. The EU is also trying to convince China to follow its competition law. The US has, with great jealousy, expressed its concern over the EU's status as global standard maker.
Mr. Datanni, who teaches me international business strategy, cited one typical example on how powerful EU is. American giant GE had thought of merging with Honeywell, only to give up the proposal, due to the objection from the EU who voiced its concern over the possible monopoly resulting from the merger.
In my view, EU could exert their power on non-EU companies could be attributed to various factors, like the way it promotes its standard(in the case of the mobile network standard GSM), or the sophistication of its standard(like its competition law is wide acclaimed to be the best of the world), but the major factor lies in the fact that its market has carried enough weight to force foreign companies to comply. The economic bloc which has rapidly expanded to 27 nations with a total of more than 480m largely afflunet consumers, and which accounts for one third of the total economic output of the world, has given EU enough claim on global standard maker. No foreign companies want to be ruled out of the EU lucrative market, and therefore, they have to comply with the EU law to gain access to it. In the above example, GE had to give up their planned merger with Honeywell to maintain their access to EU market.
What about China? There is no doubt that China has great market power as well. We have used market in exchange for advanced way of management and sophisticated technology from the West. Could we do more than that? Could China start to export not just textiles and other low-end products, but also our standards?
Standards is far more than a legal issue. It has broader political and economic implications. As far as I know, China has tried to promote its standards in telecommunication around the world, but most of them, such as the Wi-fi standard and 3G standard, have met with resistance from the West. However, China should never back from the competition for setting global standards.
Is state-owned really painful?
Yesterday the WSJ carried a commentary titled " State-owned Pain". It said that though govenment shopping or the so-called sovereign wealth fund actually is all the rages but problematic, because bureaucrats are not as good as private investors in making investment decisions.
For example,Singapore's Temasek Holdings, an investment firm fully owned by the city-state's Ministry of Finance reported a 29% fall in group net profit for thefiscal year ending March. It is the same case with China. Since Beijing bought Blackstone at 31 dollars a share in May, the stock has sagged to 24.39 dollars.
So it seems that a bureaucrat is not often making wise decision on investment, as the author concluded. However, I think the author is "framing" his argument, by not talking about the wrong decisions by private investors. It is true that the recent performance of the investment by both Singapore and China have failed to impress the financial observers, but one should not jump to conclusion that the government-controlled fun can't make good investment. Likewise, we can't say private investors always are wise in their investment decisions. There have been enough and well-known empirical evidences that private investors are not sage as well.
For example,Singapore's Temasek Holdings, an investment firm fully owned by the city-state's Ministry of Finance reported a 29% fall in group net profit for thefiscal year ending March. It is the same case with China. Since Beijing bought Blackstone at 31 dollars a share in May, the stock has sagged to 24.39 dollars.
So it seems that a bureaucrat is not often making wise decision on investment, as the author concluded. However, I think the author is "framing" his argument, by not talking about the wrong decisions by private investors. It is true that the recent performance of the investment by both Singapore and China have failed to impress the financial observers, but one should not jump to conclusion that the government-controlled fun can't make good investment. Likewise, we can't say private investors always are wise in their investment decisions. There have been enough and well-known empirical evidences that private investors are not sage as well.
Saturday 4 August 2007
Foreign currency and trade balance
Economists have welcomed a weak dollar thinking that will faciliate American exports and reduce the trade deficit. Those thories have been applied to China as well, as most people blame China's alledgedly underappreciated curreny for its trade surplus.
However, I read a report of the Economist which argued that the link between trade balance and foreign currency actually is not inherent. Currency markets, rightly or wrongly, are blithe about trade imablances.
For example, some of the countries whose currencies have gained most at the dollar's expense, like Britain, Australia and New Zealand, have large external deficits and debts too, Australia's current account shortfall has been more presistent than America's and as a result, its net overseas debt last year was 60% of its GDP, compared with 19% for America. New Zealand's debt ratio is larger still at 90% of GDP. Meanwhile the currency of the world's largest creditor nation, Japan, continue to languish-even against weak dollar.
So I don't know why some people continue to complain against Chinese currency, thinking it is delibately manipulated by the Chinese government to boost exports. But as the above empirical evidence shows, there is no strong correlation between trade balance and foreign currency. I was wondering why some people continue to complain about it.
However, I read a report of the Economist which argued that the link between trade balance and foreign currency actually is not inherent. Currency markets, rightly or wrongly, are blithe about trade imablances.
For example, some of the countries whose currencies have gained most at the dollar's expense, like Britain, Australia and New Zealand, have large external deficits and debts too, Australia's current account shortfall has been more presistent than America's and as a result, its net overseas debt last year was 60% of its GDP, compared with 19% for America. New Zealand's debt ratio is larger still at 90% of GDP. Meanwhile the currency of the world's largest creditor nation, Japan, continue to languish-even against weak dollar.
So I don't know why some people continue to complain against Chinese currency, thinking it is delibately manipulated by the Chinese government to boost exports. But as the above empirical evidence shows, there is no strong correlation between trade balance and foreign currency. I was wondering why some people continue to complain about it.
Thursday 2 August 2007
Money speaks louder
Whether you like it or not, the fact is that Murdoch managed to add Dow Jones to his expansive media empire. Sad? Yes, I can't help feeling that. In the protracted debate on Murdoch's bid, the forces supporting Dow Jones' editorial independence have been locked in a bitter fight with the forces seeking commercial profit. At the end of the day, money speak louder, and Murdoch's smiles are splashed across the frontpages of the world newspapers.
More sadly, the media, the special instrument to democracy, will continue to see concentration through merger or takeover. As Amercian scholar Mchesney pointed out, media concentration begets concentration, Murdoch's takeover of Dow Jones will spark a new wave of concentration. Other rivals like Financial Times or NBC, among others, will have to responde to the takeover to survive in the market dominated by jungle law.
I may have to say that in the age of capitalism, money is the master. You could fight for public interest, but at the end of the day, money will carry the day.
More sadly, the media, the special instrument to democracy, will continue to see concentration through merger or takeover. As Amercian scholar Mchesney pointed out, media concentration begets concentration, Murdoch's takeover of Dow Jones will spark a new wave of concentration. Other rivals like Financial Times or NBC, among others, will have to responde to the takeover to survive in the market dominated by jungle law.
I may have to say that in the age of capitalism, money is the master. You could fight for public interest, but at the end of the day, money will carry the day.
Market in fear of government shopping
Financial market has been in high alert against the growing trend of goverments going shopping. As a new market player, government seems to be something indomitable, injecting growing fear into the market. One of the major concerns, according to the latest issue of the Economist, is its murkiness of the so-called sovereign wealth fund, which in turn leads to unpredicability.
It reminds me of the private equity, which has been under fire for its similar murkiness. Yesterday's Financial Times reported that private equity funds will be forced to reveal more sensitive information, and a strategy of naming and shaming will be taken against them.
Interestingly, both private equity fund and sovereign wealth fund could make big impact on the financial market, but both could bring great uncertainty to the market. Thats why people are so vigilant against them.
Therefore regulation seems to be necessary, but in practice, it could be quite tricky. For the private equity, the regulation could drive them away from the Britain and go to other hunting ground where the regulation is lax. Regulatory competition could often lead to the so-called "race to the bottom" unless there is a uniform act.
For the sovereign wealth fund, the regualtion appears to be a much harder act., as the player behind the fund is nothing but sovereign government. German Chancellor Merkel has been seeking to restrain the government shopping, but the proposal could meet with strong resistance with the UK government, which has been quite happy to give green light to the deal in which Chinese Development Bank bought shares from Barclay.
It reminds me of the private equity, which has been under fire for its similar murkiness. Yesterday's Financial Times reported that private equity funds will be forced to reveal more sensitive information, and a strategy of naming and shaming will be taken against them.
Interestingly, both private equity fund and sovereign wealth fund could make big impact on the financial market, but both could bring great uncertainty to the market. Thats why people are so vigilant against them.
Therefore regulation seems to be necessary, but in practice, it could be quite tricky. For the private equity, the regulation could drive them away from the Britain and go to other hunting ground where the regulation is lax. Regulatory competition could often lead to the so-called "race to the bottom" unless there is a uniform act.
For the sovereign wealth fund, the regualtion appears to be a much harder act., as the player behind the fund is nothing but sovereign government. German Chancellor Merkel has been seeking to restrain the government shopping, but the proposal could meet with strong resistance with the UK government, which has been quite happy to give green light to the deal in which Chinese Development Bank bought shares from Barclay.
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