1.81% World Payment Share? RMB Going Nowhere

♠ Posted by Emmanuel in , at 3/31/2015 01:30:00 AM
Back out of the global top 5: the not-so-mighty RMB.
So much for the inevitable internationalization of the yuan: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) reports that payments denominated in renminbi fell last month from fifth to seventh place. The Chinese government has been promoting the currency far and wide an an alternative for settling international transactions--especially those with the PRC as a trade counterparty--but China has had a rougher time recently. Its role as a medium of exchange in may be falling victim to doubts over its role as a store of value. That is, folks do not want to hold on to RMB if it is expected to depreciate instead of appreciate in the near future.

At any rate, RMB is falling down the currency league tables. It goes unmentioned here though that the Swiss franc (CHF) became stronger and presumably more attractive  as a vehicle currency in the wake of it losing its euro peg in January:
China's yuan has dropped to seventh place among the world's payments currencies, global transactions organisation SWIFT said Monday, even as Beijing tries to push greater international use of the unit. The yuan -- also known as the renminbi -- held a 1.81 percent share in world payments based on value in February, SWIFT said in a statement on Monday, down from 2.06 percent in January, when it stood in fifth place. The Swiss franc and the Canadian dollar overtook the Chinese currency last month, SWIFT data showed.
The official excuse for now is that the Chinese New Year (lunar) holidays caused business activity to slow during the month, hence the drop. They had to come up with an excuse since this result does not square nicely with China promoting the "bandwagon effect" that more and more are using RMB: 
It attributed the weaker showing to the "seasonal effect" of the Chinese New Year, when business slows because of a week-long holiday. But the demotion also comes amid mounting worries over China's slowing economy, though officials have denied strong capital outflows. China keeps a tight grip on the value of the yuan out of concerns that unpredictable currency inflows and outflows could harm the economy and weaken its financial control.
That said, much hinges on China approving of more offshore destinations where trading yuan is acceptable. For now, Hong Kong dominates: 
Hong Kong, a special administrative region of China which is considered the business gateway to the mainland, handles more than 70 percent of global payments in yuan, SWIFT said, but the share of other countries is growing. "Broader support by more countries beyond Hong Kong, underlining its international use, suggests the potential for future clearing centres and further development of the currency," Michael Moon, head of payments for Asia-Pacific at SWIFT, said in the statement.
As if all the above weren't enough, also consider that dim sum bond issuance--offshore bonds denominated in RMB--is likely to fall this year, too:
Issuance of offshore renminbi bonds — known as “dim sum” bonds — has fallen sharply this year, and is expected by some analysts to record the first annual contraction since the market opened in 2007. So far this year, $5bn has been raised in the dim sum bond market, according to Dealogic, down from $8.6bn over the same period in 2014.

A recent survey by HSBC found that fewer global companies were expecting to increase their use of renminbi in cross-border business this year than did in a similar survey a year earlier. HSBC also found that only 27 per cent of those not currently using the renminbi are planning to start using it, down from 32 per cent in 2014.
So it's still all to play for, but China has to redouble its efforts in the face of a slowing domestic economy. One of the things to watch for is how much the RMB depreciates since engaging in the same competitive devaluation everyone else is doing may be good for Chinese exports in the short term but do nothing to encourage use of the yuan as a dollar alternative in the medium term.

China Buys Europe Cheaply, Pirelli Edition

♠ Posted by Emmanuel in , at 3/30/2015 01:30:00 AM
Presumably, ChemChina will get the risque Pirelli calendar too*
 [*NOTE: The IPE Zone being a family-oriented blog, pictures from the 2015 calendar aren't included here, though you can view them yourselves, of course.] The weak euro currency has meant that many things in the eurozone are dirt cheap in comparison to what they were just a year ago. It goes without saying that some of Europe's prestige brands can be had for a song, one of them being the Italian tire manufacturer Pirelli. The firm certainly needs no introduction. It has been the sole supplier of tires in Formula One for the last five years, bolstering its famous name in the performance segment of the automotive supplier industry.

And of course, we all know who the prospective buyers are: the cash-laden Chinese. Sure the PRC economy is slowing down, but they've had plenty of rich years before the last two or so. It is thus something of a mystery to me why the Chinese haven't bought more European names with cachet, like dorky-sounding Geely buying Volvo. That is, if you can't conquer world markets because your product names sound borderline, er, laughable, why not buy those with global standing already? Enter state-owned firm ChemChina mooting its purchase of Pirelli for a seemingly measly $7.7B:
After years of economic decline, Italy has become a hunting ground for Chinese companies keen to take control of prized but cash-strapped corporate names such as Pirelli, and they are no longer investing from the back seat. "The Chinese have the capital, Italy has the brands, the products and the know-how, but no money," said a banker with direct knowledge of the Pirelli deal.
State-owned China National Chemical Corp (ChemChina) is to buy the world's fifth-largest tire-maker in a 7.1-billion-euro ($7.7 billion) deal that will put the 143-year-old Italian company in Chinese hands.
The planned takeover, announced on Sunday, is one of the biggest acquisitions by a Chinese company in Europe and comes after a string of buys by Chinese investors in the euro zone's third largest economy, which is struggling to emerge from its longest recession since World War Two. 

Unbeknownst to the rest of the world, Pirelli is but the tip of the iceberg when it comes to the Chinese shopping spree in moribund Italy. What's more, the largest buyers into Italian firms these past few years have been Chinese:


The Chinese shopping spree has included power grid firms Terna (TRN.MI) and Snam (SRG.MI), turbine maker Ansaldo and luxury yacht maker Ferretti, as well as a number of small stakes bought by the Chinese central bank in Italian blue-chips.
China's European deals have usually targeted sizeable stakes but not the outright control ChemChina will get on Pirelli. "I think this is a clear signal that they do not want to invest behind the scenes any longer. They want to play a leading role, in the limelight," said Alberto Forchielli, managing director of Mandarin Capital Partners...

A study published by KPMG before the Pirelli deal said Chinese acquisitions in Italy totaled 10 billion euros over the past five years, half of which in 2014. Last year nearly a third of foreign purchases in Italy were Chinese, it said.
So the deal makes sense for both sides. Italian firms are capital-starved and seek new markets in Asia. Meanwhile, Chinese firms need to put vast cash piles to good use, so why not buy name-brand Europeans that can also help with the R&D bits? Italy's leadership tacitly accepts this process as their country attempts to escape from years and years of stagnation:

[Italian Prime Minister Matteo] Renzi has pledged to modernize the economy and cut red tape. After more than a year in power he still seems to be enjoying a honeymoon period with overseas investors. And this year's expected pick-up in the economy is helping.

Renzi, an inveterate tweeter on all subjects, has been uncharacteristically silent about the Pirelli takeover but his government has made no protectionist noises over ChemChina, even as it snapped up one of Italy's best-known corporate names. Bankers say Italy's attitude is encouraging Asian investments while Italian companies gain exposure to the huge Chinese market.

Joel Backaler, author of "China Goes West", said Chinese companies also needed to invest in Europe to compensate for their own very competitive domestic market. "With labor and energy costs rising and the pressure on margins increasing, Chinese companies that want to sell at a premium price need to have something different, for example better quality tires than those you can find in China," he said.
And yes, F1 too will continue as-is with the Chinese at the controls of Pirelli for the remainder of its contract and possibly beyond:
Pirelli motorsport director Paul Hembery told reporters at Sepang ahead of the Malaysian Grand Prix that the supplier remains committed to the sport[:]

 "For us, it's business as normal," he said. "Motorsport for Pirelli remains key. Pirelli is involved in over 250 championships in 54 countries and F1 is the pinnacle of all that activity. Our view is as before, nothing changes. We see F1 as a medium to long term involvement for us and we will be very happy to continue in the sport. It is a business decision to be here. We're not here for fun. It has a great impact on our presence in the market from a brand point of view and buyers' decision-making point of view. We would like to continue with that."
Dear friends, it's called "globalization." Deal with it since tire protectionism would've been a stretch too far. 

Should Korea Partner Japan for 2018 W Olympics?

♠ Posted by Emmanuel in ,, at 3/29/2015 03:00:00 AM
Korea would save $$$ partnering Japan in hosting certain events, but it probably won't.
The out-of-control costs of hosting Olympic events is a well-worn trope by now. Unfortunately for South Korea, it's now its turn to feel the financial burn for the 2018 Winter Olympics in Pyeongchang. It was originally meant to promote development outside the overcrowded capital of Seoul, but like most of these Olympics, the costs are soaring and the local government officials don't know where to find the money to complete venues amid cost overruns. Actually, the IOC has become increasingly mindful of this phenomenon and recently passed a new provision allowing the co-hosting of the Olympics:
For years the International Olympic Committee ignored the rising costs and indebtedness associated with hosting the Olympics. But after Vladmir Putin’s $51 billion Sochi Olympics scared off several cities from even bidding for future games, the International Olympic Committee responded last December with a set of reforms. Among them was a provision allowing for games to be co-hosted across international borders, in order to lower costs for individual countries.

Though the provision wasn’t aimed at any particular country, Pyeongchang should be the first to make use of it. Since 2011, the prospective budget for the 2018 event has increased more than 50 percent, from an already steep $7.8 billion to $11.9 billion. (The final bill for 2006 winter games in Turin, Italy was around $1 billion.)

As of December, Pyeongchang still needed eight more facilities, including a $120 million sliding center where the bobsled and luge events can be held. But after shelling out $1.5 billion for a ski resort, Gangwon, the economically underdeveloped state where Pyeongchang is located, is already threatening to forfeit its rights to host the games if the federal government doesn’t chip in more money. (It's not clear what such a forfeiture would mean in practice.)
Enter Japan. More specifically, Nagano--the host of the 1998 Winter Olympics. It was held a long time ago, but the facilities there are still useful and, conveniently, are those which Korea has not yet built. Especially since these specialist venues just fall into disrepair after the games, why not eat some humble pie and ask for Japan's help? What's supposedly holding the Koreans back from this idea is having to work with the staunchly nationalistic Shinzo Abe, and this doesn't hold up well with Koreans still upset over being occupied during WWII:
Even if Pyeongchang manages to find the money it needs, that would just be the start of its troubles. As other Olympic cities have learned, maintaining Olympic venues after the conclusion of the games can be extremely expensive -- especially if nobody wants to pay to continue using them. (That problem has been particularly acute in Beijing, host of the 2008 summer games.) According to an analysis published last week, the cost of maintaining Pyeongchang’s Olympic venues will be approximately $18.9 million annually, including almost $3 million per year for the sliding center. Shortly after the latest round of IOC reforms, several news organizations reported that the IOC was urging South Korea to give up on the expensive dream of hosting the Olympics solo, and share the sliding events with Nagano, Japan, as a cost-saving measure.

But if the economic logic is hard to argue with, the political symbolism seems to be a tougher sell. Since the election in Japan of nationalist Prime Minister Shinzo Abe, tensions between Tokyo and Seoul -- always high -- have been on the rise. When South Korea’s then-Prime Minister Chung Hong Won politely dismissed the idea of sharing the games last December, it may have been because he was wary of the political and diplomatic costs of asking Japan to lend it a hand in 2018.  The same goes for last week’s petulant announcement by the head of Pyeongchang’s organizing committee that South Korea would only share the Olympics in the case of a natural disaster.
There is of course a precedent for the Japanese and Koreans co-hosting major sporting events. One of the most (financially) successful World Cups in recent memory was that in 2002 co-hosted by the Japanese and the Koreans.
But South Korea shouldn't only consider the symbolic costs of cooperating with Japan -- it should also consider the potential symbolic gains. The country's political leaders would be well-served by looking back to the 2002 World Cup they successfully co-hosted with Japan. It wasn't the preferred option for either Japan or South Korea, each of whom would have preferred to have had the honor of hosting on its own. But politics and practicality brought the two countries together. And the event is still universally cited as a success -- not only for the events on the field, but also because it marked the first time that geopolitical rivals co-hosted a major sporting event.
It makes much financial sense for South Korea to go down the co-hosting route given its current challenges, but pride gets in the way. Unfortunately, there will be a steep tab for that.

And Vietnam's Largest Foreign Investor is...Samsung

♠ Posted by Emmanuel in ,, at 3/27/2015 01:30:00 AM
Making mobiles for the Man in Vietnam, AKA Samsung.
Unbeknownst to many, Vietnam has, in a number of respects, become the "Republic of Samsung." As labor costs in China have gone up as its development continues apace, it was inevitable that MNCs would move on to countries with relatively skilled workers and more competitive wages. Today's case in point is the Korean electronics behemoth Samsung. How reliant has Vietnam become on Samsung? The Nikkei Asia Review points out that Samsung subsidiaries are three of the four largest foreign investors in Korea; these subsidiaries account for about a fifth of all Vietnamese exports; and a slowdown in global smartphone sales could tip Vietnam into a trade deficit [!] If you're a Marxist, you'd say it's Korean imperialism:
[T]he Vietnamese economy has been growing more reliant on Samsung. In 2014, Samsung group companies ranked first, second and fourth in terms of new foreign direct investment projects in the country. In addition, Samsung accounts for nearly 20% of Vietnam's exports by value. The country could incur its first trade deficit in four years in 2015 if sales of Samsung smartphones slow.
Unsurprisingly, many Vietnamese are now wary of their government giving Samsung too many incentives to locate there, while other foreign investors are envious as well:
The biggest foreign direct investment project in Vietnam in 2014 was Samsung's $3 billion construction of its second plant in Thai Nguyen, according to the Foreign Investment Agency. The figure represents about half of total South Korean foreign direct investment in Vietnam last year.

As its dependence on Samsung increases, Vietnam is growing more dissatisfied with the company's local content ratio. Samsung procures some parts from Vietnamese suppliers, but as of last autumn, 80% of the components used in its products came from South Korean companies.

Critics say the Vietnamese government has done too much for Samsung, granting it tax exemptions [e.g., 10% instead of a 25% income tax] and reductions for more than 10 years and providing subsidies for employee education programs. An official at a Vietnamese financial institution said the government's preferential treatment of Samsung is so generous that it might seem unfair from the viewpoint of other companies.
Oh, and I forgot to add one more superlative: Samsung is also the largest foreign employer in Vietnam. What is very remarkable is that Samsung is ramping up its operations very quickly, having just put up its smart phone factory in 2009:
Samsung Electronics plans to hire 60,000 workers in Vietnam by July, bringing its number of local employees to around 100,000, more than any other foreign company.  The company currently has 84,000 workers on its payroll in the Southeast Asian country. The new employment plan, which takes into account attrition and retirement, comes as the electronics giant is looking to expand production and facilities at its plants in Bac Ninh and Thai Nguyen provinces in northern Vietnam.

Most of the new hires will be female factory workers, but Samsung is also looking to take on engineers, as well as recent graduates for possible executive-track positions. The company has already started recruiting extensively, and the first group of 2,500 additional workers is slated to join by the end of March. Samsung started production in Vietnam at its plant in Bac Ninh, east of Hanoi, in 2009. The plant currently produces smartphones, conventional mobile phones and parts for both, and the company plans to build new facilities for producing displays.
Like China before it, Vietnam offers the attraction of "market authoritarianism" to MNCs wary of labor disputes and other disruptions. So it's starting at a fairly low level with assembly work, but you have to begin somewhere. Still, the Vietnamese leadership is apparently gung-ho on Samsung. As labor costs in China inexorably rise, more will probably follow Samsung's lead in going to lower-cost locations. That is the way of modern manufacturing: it's just that Samsung has made major moves ahead of others being in a cutthroat, highly competitive global industry. Already, about half of its smart phones are made in Vietnam.

China, Samsung hardly knew ye.

Screw the US: Developing Asia & PRC Infra Bank

♠ Posted by Emmanuel in at 3/25/2015 01:30:00 AM
Vietnam wants more of these...even if it takes Chinese support.
There's an interesting story at the WSJ that emphasizes a point I wish to make regarding China and its newfangled Asian Infrastructure Investment Bank (AIIB): Nobody in the region has a particular fondness for China as a rather bullying neighbor that wishes to get its way in territorial disputes it has with nearly everyone else. That said, we are mostly poor countries that could benefit a lot from Chinese largesse. So, despite the US pressuring any and all comers to stay away, we have signed up just as the Europeans did last week. Consider the case of Vietnam, where the popularity of China ranks somewhere alongside that of root canal operations:
Like many Vietnamese, the economist Le Dang Doanh turns darkly suspicious when he speaks about Chinese money. Trade and investment from Vietnam’s giant northern neighbor, says Mr. Doanh, a former top adviser to the Communist Party of Vietnam, often comes with hidden military agendas, economic subterfuge and ecological traps.

A case in point, he says, was a planned Chinese-backed tourist resort to be located at an approach to a strategic mountain pass along the coast—a potential gateway to the country for invaders. Local authorities canceled that project last year because of national security concerns. He also complains that Chinese traders are denuding Vietnam of its rare Star Anise trees by carrying off their roots along with their aromatic flowers used in medicine. China, he concludes, “is really an imperialist country.”

This is why Mr. Doanh believes that a new Chinese-led multilateral development bank is such a clever idea, because it will soothe anxieties as China deploys its vast wealth around the world. Beijing has promised to throw in an initial $50 billion. And Mr. Doanh praises Western powers for breaking ranks with Washington and joining in to raise the bank’s standards. The Wall Street Journal reported that China helped get the U.K., France, Germany and Italy on board by offering to forgo veto power over bank decisions. “It’s a soft approach—very flexible, very intelligent,” Mr. Doanh says.
Contrast China's seemingly popular soft power approach with the 1950s-vintage American one: it's not only a Cold War mentality but a pre-ping-pong diplomacy one to boot:
In opposing the Asian Infrastructure Investment Bank, the U.S. has not only set itself up for a diplomatic rift with its closest Western allies, it’s also dealt a blow to America’s image in developing countries like Vietnam. Emerging economies are desperate for infrastructure, which China can deliver in abundance, but fear being sucked too deeply into Beijing’s orbit. Even vocal critics of China such as Mr. Doanh draw the conclusion that Beijing is trying to balance these concerns with the new bank, while America is stuck in old ways of thinking.

The U.S. Congress refuses to pass additional funding for the International Monetary Fund that is a necessary step toward giving China and other emerging economies more say in decision-making—one reason Beijing has managed to gather such strong support for the infrastructure bank.

More broadly, Washington’s objections support the Chinese narrative of an America trying to thwart China’s rise at every turn. On the one hand, the U.S. urges China to assume greater international responsibilities and burdens. President Barack Obama has criticized Beijing as a “free rider” on the international system. Yet when China steps up with an initiative like the development bank, Washington tries to slap it down.
Chalk this one down to another failure of democracy's checks-and-balances. Political gridlock has rendered the US a non-entity regarding the AIIB as even Vietnam rushes to welcome Chinese cash infusions for infrastructure. Remember, too, that Vietnam has infrastructure-related grievances with China over its upstreaming damming of the Mekong river.

Lee Kuan Yew & Singapore-Israel 'Special Relationship'

♠ Posted by Emmanuel in ,,, at 3/24/2015 01:30:00 AM
The Ultimax machine gun is proudly Made in Singapore.
Today marks the end of an era as arguably the best-known Asian leader of his generation, Lee Kuan Yew--statesman, father of an independent Singapore, champion of 'Asian Values', and all-purpose pundit--has passed away aged 91. So it is that I find myself watching wall-to-wall coverage of his passing on Channel NewsAsia, which is wholly-owned by the Singaporean government through its Temasek sovereign wealth fund. Like the man himself, Channel NewsAsia is quite matter-of-fact and, er, not quite critical of Singaporean leadership under the People's Action Party.

No matter; there are a lot of tidbits that I've picked up watching the channel these past few hours. The economic story of Singapore has been rehashed countless times already, so I'll leave that to others. However, the security story has not really garnered as much attention despite it being crucial to Singapore's modern-day existence. Remember that, prior to declaring independence from Malaysia which it was a part of for two years (1963-1965), Indonesia's military was setting off bombs in Singapore during the Konfrontasi conflict Indonesia waged with Malaysia. Hence it had to develop militarily as well. For instance, it is somewhat difficult to square that these folks with an otherwise peaceful demeanor developed the famous Ultimax 100 section assault weapon (SAW) that weapons designers still regard as among the finest of its type.

More remarkably, it was later revealed that Lee Kuan Yew chose a rather politically incorrect ally to help train Singapore's armed forces: Israel. Why did it take so long for this factoid to be revealed? The optics certainly weren't good then: like Israel, Singapore was a predominantly non-Muslim country surrounded by rather hostile neighbors. After all, Malaysia kicked Singapore out, while Indonesia bombed Singapore regularly when it was still part of Malaysia. It's a tough neighborhood, and the Vietnam conflict was the last straw. From Haaretz:
Lee explained the need to maintain secrecy to his close friend in the leadership, and the first defense minister in his government, Dr. Goh Keng Swee. "We have to ensure, as far as possible, that the arrival of the Israelis will not become public knowledge, in order not to arouse opposition among the Malay Muslims who live in Malaysia and Singapore," the prime minister summed up. That, in essence, is Singapore's problem. The residents of the small island, which has an area of about 670 square kilometers (Israel is 30 times as large), are mainly Chinese, and they live between the two Muslim countries of Malaysia and Indonesia. Life in the shadow of the large Muslim majority and fear of a Malaysian incursion are an integral part of the history of the two countries. Until 1965, Singapore was part of Malaysia. In that year, the British government decided to withdraw from all its colonies east of the Suez Canal. In a rapid process it was decided to sever Singapore from Malaysia and to establish it as a new and separate country.

Singapore declared its independence on August 9, 1965. At the time of its creation, it had only two infantry regiments, which had been established and were commanded by British officers. Two-thirds of the soldiers were not residents of Singapore, and in any event the leaders of the nascent state had no faith in the strength of the minuscule army. The defense minister, Goh, contacted Mordechai Kidron, the former Israeli ambassador to Thailand, and asked for assistance. Kidron arrived in Singapore within days, along with Hezi Carmel of the Mossad. "Goh told us that they think that only Israel, a small country surrounded by Muslim countries, with a strong army, could help them build a small, dynamic army," Carmel says. The two Israelis met with Lee, who writes that he "told Keng Swee to put it on hold until Lal Bahadur Shastri, the prime minister of India, and President Nasser of Egypt replied to my letters seeking their urgent help to build up our armed forces." 
The Indians and Egyptians eventually dropped out of contention, and a long-forgotten 'special relationship' was born that was only uncovered when Lee published his 2000 autobiography:
In his book, "From Third World to First: The Singapore Story 1965-2000," published in 2000, Lee Kuan Yew, Singapore's founding father and its first prime minister, disclosed the secret that had been kept for almost 40 years: It was the Israel Defense Forces that established the Singaporean army. The Israeli military mission was headed by Yaakov (Jack) Elazari, then a colonel, who was later promoted to brigadier general. After leaving the army, he became a consultant to the Singaporean army. Hedied 15 years ago. "To disguise their presence, we called them `Mexicans.' They looked swarthy enough," Lee wrote.

Singapore's army is today considered the strongest and most advanced of the military forces in Southeast Asia. The alliance between the Israeli and Singaporean defense establishments intensified and expanded, and it now encompasses cooperation between the two countries' military industries, as well. The scope of the deals, according to foreign sources, indicates that the Singaporean army is one of the major clients of Israeli combat means and military technology. 
Like any other human endeavor, training security forces well is another facet of organizational skill. As it transpired, Singapore and Israel were kindred spirits. Although Singapore eventually became quite friendly with everyone else in its neighborhood (and beyond), there was a time when it perceived a high level of external threats in Southeast Asia. It is probably not a coincidence that the need to deal with such an environment spurred not only professionalism in terms of military ability but also the economic growth necessary to sustain these armed forces:
Prior to setting out, the members of the [Israeli] military mission were invited to the chief of staff's bureau. "Dear friends," [Yitzhak] Rabin said, "I want you to remember several things. One, we are not going to turn Singapore into an Israeli colony. Your task is to teach them the military profession, to put them on their legs so they can run their own army. Your success will be if at a certain stage they will be able to take the wheel and run the army by themselves. Second, you are not going there in order to command them but to advise them. And third, you are not arms merchants. When you recommend items to procure, use the purest professional military judgment. I want total disregard of their decision as to whether to buy here or elsewhere." 
Even if you are not particularly fond of Singapore or Israel, there is no taking away from their historic achievements as small countries lying in relatively forbidding environs. They possessed foresight on how to run a society and the capability to realize it--things in short supply elsewhere when these nations were born. The world hasn't changed much in these respects.

Will Geezerization Cost Finland Another AAA Rating?

♠ Posted by Emmanuel in , at 3/23/2015 01:30:00 AM
The economic consequences of a top-heavy population pyramid are predictable.
After dwelling on the political economy of East Asian depopulation in recent posts [1, 2], let's change the venue to Finland. Unfortunately for our Nordic friends, the dynamics of stalling population growth are equally dire. A few months ago, S&P downgraded Finland from AAA status, leaving Germany and Luxembourg as the only Eurozone members with top ratings from all three major credit rating agencies. (The others--Denmark, Norway and Sweden--still have the top rating with all three agencies but do not use the euro).

Now, we have news that Finland is on the cusp of another credit rating agency, Fitch, bringing it down a notch as public debt has increased markedly in recent times:
Finland came a step closer to losing its top credit grade at Fitch Ratings as divisions within the government led to a failure to stem the growth of public debt. The outlook on the northernmost euro member’s long-term AAA rating was reduced to negative from stable, the rating company said in a statement Friday.

While the statement affirmed the top rating, slow economic growth and mounting debt could lead to a cut, Fitch said. Finland’s government has allowed public debt to double since 2008 as economic growth proved elusive. It’s also missed all its key economic goals over the past four years and this month oversaw the collapse of a key health-care overhaul. 
Who's to blame for the malaise? Finnish officials cite slowing population growth:
“Our population is aging, which weakens potential economic growth,” Finance Minister Antti Rinne said in an interview Saturday on YLE TV1. “We also have a structural problem with exports; we now need export-led economic growth. To restore the balance in public finances, we also need to cut spending and increase revenue.” [Finland has been hurt by falling trade with Russia as sanctions take effect.]

Standard & Poor’s cut Finland’s top rating by one level in October, citing the prospect of protracted stagnation, while Moody’s Investors Service has the Nordic nation at its highest Aaa level. Fitch reduced its forecast for Finnish growth to 0.5 percent this year from 1.1 percent and said growth will accelerate to 1.3 percent next year.
So there: it's a cut-and-shut case of potential GDP growth being curtailed by an aging population in Finland. Its total fertility rate of 1.73 does not bode well for the future even if it's marginally higher than that of, say, Japan or Singapore. I'm becoming predictable in this regard, but Finland too could use more migrants.

Migration & Japan's Half-Black Miss Universe Contestant

♠ Posted by Emmanuel in , at 3/21/2015 11:41:00 AM
Beauty contest winner Ariana Miyamoto--the face of a modernizing Japan.
Time for a weekend feature: a few days ago, Ariana Miyamoto from Nagasaki prefecture won the Miss Universe Japan beauty contest. As the winner, she will represent Japan at the Miss Universe competition early next year. What does this have to with IPE, you ask? You see, Ariana Miyamoto is half-black, and being of "mixed" descent is a big thing in a famously homogeneous society. For the first time ever, from Madam Noire:
On March 8, Ariana Miyamoto made history by becoming the first Afro Asian to be crowned Miss Japan. And she’ll move on to represent the country in the Miss Universe pageant. And while her victory is being celebrated by some, others aren’t particularly happy about it. Because outwardly, with a Japanese mother and an African American father, she doesn’t fit the typical mode of a Japanese woman.
The notion of "multiculturalism" does not really resonate yet in Japan, but times may be a-changin'. That said, there have to be more positive role models such as Miyamoto-san to change prevailing and quite frankly pervasive attitudes that she is not really "Japanese" based merely on appearance (physiognomy):
And several Japanese people are taking issue with that because, according to the Washington Post, a half Japanese woman, called “haafu” in the culture, does not adequately represent the country, known as one of the most homogeneous places on Earth. Though Miyamoto may look differently from her competition, the 20-year-old native of Sasebo in Nagasaki says that her soul is replete with Japaneseness. The model, who has an advanced mastery of the art of Japanese calligraphy, had to defend herself when she met with the Japanese media after she received her crown.
Madam Noire makes a good point that it's easy to criticize the Japanese for being racist, but even in the US, the frequent "American" beauty ideal is not that flexible, either. That said, it bears remembering that she did win the competition. Moreover, it may set up a national dialogue about what it really means to be Japanese:
But not everyone is against her representing the nation. Some feel like her selection represents a change in attitude in the country. Megumi Nishikura, who directed a film about mixed people in Japan, says this represents “a huge step forward in expanding the definition of what it means to be Japanese: “The controversy that has erupted over her selection is a great opportunity for us Japanese to examine how far we have come from our self-perpetuated myth of homogeneity while at the same time it shows us how much further we have to go.”

Another Japanese woman, Emi Foulk, studying Japanese history at UCLA said that the idea of criticizing a beauty contestant for not looking average is absurd. The whole point is that she’s supposed to be extraordinary. The very notion that it’s a beauty pageant means that she won’t be an average looking woman.

I think this is such an interesting story. It would be very easy to dismiss this as racism plain and simple. And I’m sure there are some people who are truly in their feelings about Miss Japan being a Black woman. But is this comparable to the way we feel when lighter skinned women are constantly chosen to represent us in the media, on runways and in beauty campaigns? Y’all know the outrage some felt at Zoe Saldana being cast as Nina Simone. It’s comparable to the way some Mexicans felt when the Puerto Rican Jennifer Lopez was cast as Selena.
Being of the nation-as-imagined-community school of thought--some elites constructed the notion of nationhood as opposed to it being some organic construct--I believe it's high time that Japan grappled with this issue. Instead of maintaining a really superficial bias against someone who practically grew up there, acceptance is well overdue. With depopulation well underway in Japan, they certainly could use more people regardless of ethnic background. Perhaps Miyamoto-san will be remembered as someone who brought more acceptance of gaijin (foreigners) and haafu, but there really is no more time left for Japan to decide as it grapples with the long-term consequences of an aging and depopulating society.

Gross US Miscalculation on PRC's Asian Infra Bank

♠ Posted by Emmanuel in , at 3/20/2015 11:28:00 AM
Obama's international economic diplomacy team is hard at work.
I suppose that if I were in their place, I too would exhibit the sort of nonchalant complacency American officials have displayed before its erstwhile "allies" paid it no heed in joining China's newfangled Asian Infrastructure Investment Bank (AIIB). Fat, dumb and happy, they have been totally outmaneuvered by their Chinese counterparts despite the PRC not being exactly popular in the region since it has territorial disputes with about everyone. Perhaps for this reason the Americans thought that it would be a simple matter of discouraging involvement in China's forays into multilateral development lending, but no. I suppose there was a time when the US could have its cake and eat it too in international economic diplomacy--think of the Asian financial crisis--but now is not that time.

Let us update ourselves with who's fled America in the meantime since the list keeps getting longer since we last discussed the topic. Apparently, the UK was the Pied Piper: other Europeans were not about to let the Brits get a head start by participating in potentially lucrative Asian infrastructure deals. Remember, too, that the UK and China have a rather contentious history but that was overlooked in a bout of pragmatism from both sides:
But as Beijing systematically recruited longtime American allies to help fund and oversee the new bank, it became clear that the push was more than a public relations gesture to China’s Asian neighbors. It was also a direct threat to the post-World War II financial institutions led primarily by the United States, and to President Obama’s pledges to make a “pivot” to Asia in American foreign policy.

Now with Britain, France, Germany and Italy signing up to join the new bank, despite direct pleas from Washington to steer clear, the question is whether the Obama administration mishandled a significant challenge from China, and what it might have done differently. “The administration made a major mistake in its opposition. It was a very shortsighted,” said Paul Haenle, director of the Carnegie-Tsinghua Center in Beijing. “The bank was going to go ahead whether we supported it or not.”
In a changed world, the United States should have swallowed its pride and accepted being just another member country of an organization China founded, some say. Instead, they will be on the outside looking in due to an inability to imagine not being the center of attention:
The United States would have been wiser, he and others said, to temper its resentment of China’s efforts to raise its international profile and play a bigger role in global financial affairs. Some argue it may also have sought to play a role in an Asia-focused bank led by China, just as Washington expects China to contribute more to the World Bank and the International Monetary Fund, the Washington-based lending agencies for development and monetary stability.

The willingness of Britain to join the China bank over American objections was an especially clear sign of China’s sophisticated strategy for winning friends, and Washington’s failure to respond effectively.
The biggest positive for the AIIB is that it makes sense: China has a massive capacity for building infrastructure it doesn't need at the moment as the PRC seeks to curb overinvestment in marginal projects. At the same time, the rest of Asia suffers from poor-quality infrastructure. So, having lots of foreign exchange to buy friends and infrastructure for, well, infrastructure given lesser domestic demand, China was bound to internationalize both:
China was upset that after the 2008 financial crisis, Congress rebuffed legislation intended to increase Beijing’s voice in the World Bank and the International Monetary Fund. Now that China was sitting on more than $3 trillion in foreign exchange reserves, Beijing could easily afford to finance an entirely new institution that would have a majority Chinese stake with other countries as minority shareholders, they said.

Moreover, China had decided that it wanted to use its excess capacity in steel, concrete and pipes to build up neighboring economies and benefit the Chinese economy, said Laurence J. Brahm, an American who worked with Prime Minister Zhu Rongji on China’s entry to the World Trade Organization in 2001.
Not wanting to be left out perhaps, Australia and South Korea are reconsidering their American lackeydom:
The British decision cleared the way for other European allies that China had courted to go Beijing’s way, as well. Australia is expected to sign up in the next week, according to government officials, and South Korea is likely to follow.
Barrons mirrors these points...
But China can be forgiven for wanting its own development bank. “China’s voting power in the Bretton Woods institution is only 5% even though it accounts for more than 10% of global GDP,” noted Bank of America Merrill Lynch.

Plus, Asia does need more infrastructure money. Asian Development Bank estimates that Asia needs about $800 billion a year to meet its infrastructure needs. Combined, the World Bank and Asian Development Bank only provide $20 billion financing.
...as the AIIB buoys PRC infrastructure stocks at a time of domestic slowdown:
China’s equities have certainly responded. Looking at the performance of Hong Kong-listed Chinese stocks since the People’s Bank of China‘s interest rate cut last November, China Communications Constructions (1800.HK), China Railway Group (390.HK) and China Railway Construction Group (1186.HK) have risen 24%-46% respectively. This is quite remarkable considering they are industrial stocks and China has been slowing down. 
There's a new sheriff in Asia, folks. It looks like everyone's bandwagoning with China in the expectation that the PRC's regional influence will only increase, infrastructure needs in Asia will hardly diminish among fast-growing developing economies, and commercial opportunities are there to be taken by infrastructure-related firms whether they're Chinese, British, French, etc.

UPDATE 1: Also catch Treasury Secretary Lew's testimony before the United States Congress that's effectively blocked reform at the World Bank and IMF:
The Obama administration recognizes the link between the creation of the AIIB and Washington’s pathetic performance on multilateral funding. As Treasury Secretary Jack Lew pointed out in recent congressional testimony: “It’s not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the IMF.” The failure to act, suggested Lew, raised “significant questions about U.S. credibility and leadership in the multilateral system.”

New ECB Frankfurt HQ's Literal Baptism of Fire

♠ Posted by Emmanuel in , at 3/19/2015 01:30:00 AM
A jubilant display of fireworks greets the opening of the ECB's new Franfurt digs.
For an increasingly controversial organization, the ECB opening its new, EUR 1.3B headquarters in Frankfurt was never going to go down well with its critics. Namely, the European left. Having prescribed so much austerity, it doesn't sit well with protesters that relatively well-off central bankers have built such an expensive building. To no one's real surprise, its inauguration has brought a pan-European protest to the usually sleepy German town. Riots have raged as police cars have been set on fire, protesters have been roughed up, and the mood has turned sour:
Dozens of people have been hurt and some 350 people arrested as anti-austerity demonstrators clashed with police in the German city of Frankfurt. Police cars were set alight and stones were thrown in a protest against the opening of a new base for the European Central Bank (ECB). Violence broke out close to the city's Alte Oper concert hall hours before the ECB building's official opening. "Blockupy" activists are expected to attend a rally later on Wednesday. In earlier disturbances, police in riot gear used water cannon to clear hundreds of anti-capitalist protesters from the streets around the new ECB headquarters. 
Call it the European Cup of Anti-Austerity Protests. Moreover, it certainly doesn't look good that "Europe's central bank" has to be ringed with barbed wire to separate it from the folks it supposedly serves:
Organisers were bringing a left-wing alliance of protesters from across Germany and the rest of Europe to voice their anger at the ECB's role in austerity measures in EU member states, most recently Greece. The bank, in charge of managing the euro, is also responsible for framing eurozone policy and, along with the IMF and European Commission is part of a troika which has set conditions for bailouts in Ireland, Greece, Portugal and Cyprus.

A spokesman for the Blockupy movement said the troika was responsible for austerity measures which have pushed many into poverty. Police set up a cordon of barbed wire outside the bank's new 185m (600ft) double-tower skyscraper, next to the River Main.
Uniting Europe has long been an elusive dream for the EU's architects. Ironically, could it be that they may be able to do so if these leftists succeed in getting more Europeans on their side in opposition to the European project? It is certainly a frightening prospect that you cannot rule out.

MarketWatch has more scenes from the battle in Frankfurt.