Yuan Blood, You Got It: China Bill Passes 348-79

♠ Posted by Emmanuel in ,, at 9/30/2010 12:02:00 AM
[Before reading on, I urge you to cue the appropriate song for this momentous occasion, AC/DC's "If You Want Blood (You Got It)".] Well I never thought I'd live to see the day: 2010 has been a most promising year in terms of long-anticipated events coming true. First Japan waded into forex markets to stem yen appreciation after six long years of standing pat. Now, an even bigger act of economic one-upmanship is well underway. As anticipated in previous posts [1, 2], today the US House of Representatives finally mustered sufficient huevos to vote in favour of a China currency bill. And overwhelmingly so, I must add:
The House of Representatives sent a unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give President Obama the authority to impose tariffs on all Chinese imports — more than $300 billion this year — in retaliation for Beijing’s refusal to revalue its currency. The vote was 348 to 79.

The bill is unlikely to become law because the prospects for Senate approval are dim. Nonetheless, the action was intended to hand President Obama additional leverage in what has become a major flashpoint between the world’s two largest economies. While tariffs have been slapped on specific products, from steel to tires, because of evidence of unfair export subsidies, the threat to put sizable tariffs on a country’s entire line exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law. It reflects both election-year politics over jobs and huge frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.

The administration has been of two minds about the legislation. It has often used the rising public anger over China’s trade advantage to argue to Chinese leaders that the United States would no longer tolerate deliberate currency manipulation. That was a point Mr. Obama made repeatedly last week in a two-hour-long meeting with Wen Jiabao, China’s prime minister.

But in conversations with Congress, Treasury Secretary Timothy F. Geithner and other officials have warned of the danger of touching off a trade war, in which China blocks American goods in retaliation — a tit-for-tat feud that could hurt both economies.
So the gauntlet has been thrown by at least one part of their bicameral legislature. As the article notes, the Senate is said to be more reluctant to pass its own China bill sponsored by venerable New York Senator Charles Schumer. Ask Judd Gregg, for instance. However, things may change after the November midterm elections since the Senate is not likely to vote on the matter before then. What would hasten this eventuality are if (a) the US heads further into a downward spiral and if (b) more China-bashing lawmakers are elected. Who knows? Perhaps China can be made into a litmus test for patriotism.

In the meantime, here are some questions to ponder sequenced in terms of the growing severity of their implications:
  • Is there a Senate majority to push through a version through the upper house?
  • If a bill reaches the White House, will Obama sign it into law? The White House has been coy about the matter.
  • How enthusiastic will perpetual China bashers Stateside be in petitioning the Department of Commerce?
  • Will China take the US to the WTO over the legality of this new law?
  • What kind of retaliation is up China's sleeve--perhaps dumping some Treasuries?
Again, you can argue that this legislation wouldn't pass muster at the WTO--I certainly don't think it does--but the point is to consider what good it may do to global economic imbalances. In essence, both China and the US have given lip service to reducing these imbalances that arguably hastened the arrival of a global economic crisis but do nothing about it. So, to break the suboptimal status quo (a "low-level equilibrium trap" in econogeek speak), what's so bad about a nice trade war to shake matters up? I think this misguided legislation will do the US more harm than good, but hey, I guess there's no real way to find out other to do the deed.

So it's game on. US and China, cut the crap and get down to business. Congress has already done its part to get the ball rolling.

I will keep updating this post as reactions come in, especially from our favourite Chinese state media outlets. WaPo has a pretty good roundup, too.

UPDATE 1: PRC response has been muted since they probably saw this one coming and the Chinese have few plans for making big gestures to appease the Yanks:
China on Thursday warned that a U.S. House of Represenatives bill to penalise it for not letting the yuan rise faster could seriously affect bilateral ties. Foreign ministry spokeswoman Jing Yu told a regular news briefing that Congress should avoid steps that could harm relations, saying Beijing was "resolutely opposed" the the bill. But she declined to say whether China would retaliate...

In response, the official Xinhua news agency quoted China's commerce ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."

Out Now: Proposed EC Changes to Budget Rules

♠ Posted by Emmanuel in , at 9/29/2010 03:27:00 PM
Oh, this day has been very, very hectic on both sides of the Atlantic--and it's not over just yet. As labour demonstrations across Europe protest the current political mood for tightening--Yahoo! has a nifty set of photos--the EC literally intends to lay down the law.

I just wanted to post the legislative proposals the European Commission has come up with regarding economic governance to (hopefully) prevent the recurrence of future Greek or Irish episodes. As they are just proposals to, among other things, tweak the stability and growth pact, we have to see if there are some not-so-conscientious objectors out there who did not reveal themselves just yet. Remember, these proposals must now clear the European Council (the "upper house") and the European Parliament (the "lower house"). Aside from budgetary considerations, there's also new stuff being proposed that deal with "macroeconomic imbalances." Without further ado, here they are:

EU economic governance: the Commission delivers a comprehensive package of legislative measures

The European Commission today adopted a legislative package containing the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms is sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. The recently agreed "European semester" will integrate all revised and new surveillance processes into a comprehensive and effective economic policy framework.

The proposals submitted today are the concrete translation of the recent Commission communications on economic governance dated 12 May and 30 June (see IP/10/561 and IP/10/859) into legislative proposals. Following intense preparatory work and consultations with a broad range of stakeholders, including the Task Force on the Economic Governance chaired by President of the European Council Herman Van Rompuy, these policy proposals underline the Commission's strong will to process diligently with the necessary reforms.

All these reforms are compatible with the existing Treaty of Lisbon and should ensure that the EU and the euro area benefit from more effective economic policy coordination. That should give the EU and the euro area the necessary capacity and strength to conduct sound economic policies, thereby contributing to more sustainable growth and jobs, in line with the Europe 2020 strategy.

The legislative package is made up of six pieces of legislation: four proposals deal with fiscal issues, including a wide-ranging reform of the Stability and Growth Pact (SGP), while two new regulations aims at detecting and addressing effectively emerging macroeconomic imbalances within the EU and the euro area.

For Member States of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions. In other words, the SGP will become more "rules based" and sanctions will be the normal consequence to expect for countries in breach of their commitments.

1) A Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (Regulation 1466/97):

The preventive part of the SGP is meant to ensure that EU Member States follow prudent fiscal policies in good times to build up the necessary buffer for bad times. To break off with past complacency in good economic times, the monitoring of public finances will be based on the new concept of prudent fiscal policy-making that should ensure convergence towards the Medium-Term Objective . The Commission may issue a warning in case of significant deviation from prudent fiscal policy for the euro area Member States.

2) A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97):

The corrective part of the SGP, is meant to avoid gross errors in budgetary policies. The regulation is amended so that debt developments are followed more closely and put on an equal footing with deficit developments as regards decisions linked to the excessive deficit procedure. Member States whose debt exceed 60% of GDP should take steps to reduce it at a satisfactory pace, defined as a reduction of 1/20th of the difference with the 60% threshold over the last three years.

3) A Regulation on the effective enforcement of budgetary surveillance in the euro area:

Changes in both the preventive and corrective part of the SGP are backed up by a new set of gradual financial sanctions for euro-area Member States. As to the preventive part, an interest-bearing deposit should be the consequence of significant deviations from prudent fiscal policy making. In the corrective part, a non-interest bearing deposit amounting to 0.2% of GDP would apply upon a decision to place a country in excessive deficit. This would be converted into a fine in the event of non-compliance with the recommendation to correct the excessive deficit.

To ensure enforcement, a "reverse voting mechanism" is envisaged when imposing these sanctions: this means that the Commission's proposal for a sanction will be considered adopted unless the Council turns it down by qualified majority. Interests earned on deposits and fines will be distributed among euro-area Member States neither in excessive deficit nor in excessive imbalance.

The changes are devised so that they should facilitate the eventual move to a system of enforcement linked to the EU budget as foreseen in the Commission communication of 30 June.

4) A New Directive on requirements for the budgetary framework of the Member States:

Since fiscal policy-making is decentralised, it is essential that the objectives of the SGP are reflected in the national budgetary frameworks, i.e. the set of elements that form the basis of national fiscal governance (accounting systems, statistics, forecasting practices, fiscal rules, budgetary procedures and fiscal relations with other entities such as local or regional authorities). The directive sets out minimum requirements to be followed by Member States.

5) A New Regulation on the prevention and correction of macroeconomic imbalances:

The Excessive Imbalance Procedure (EIP) is a new element of the EU's economic surveillance framework. It comprises a regular assessment of the risks of imbalances based on a scoreboard composed of economic indicators. On this basis, the Commission may launch in-depth reviews for Member States at risk that will identify the underlying problems. For Member States with severe imbalances or imbalances that put at risk the functioning of EMU, the Council may adopt recommendations and open an "excessive imbalance procedure (EIP)".

A Member State under EIP would have to present a corrective action plan that will be vetted by the Council, which will set deadline for corrective action. Repeated failure to take corrective action will expose the euro area Member State concerned to sanctions (see next point).

6) A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area:

Like in the fiscal field, if a euro-area Member State repeatedly fails to act on Council EIP recommendations to address excessive imbalances, it will have to pay a yearly fine equal to 0.1% of its GDP. The fine can only be stopped by a qualified majority vote ("reverse voting", see above), with only euro-area Member States voting.

What's interesting to me is that reverse majority voting made it as part of the proposals. That is, Germany and the ECB (via Trichet) got their wish that sanctions would automatically kick in and need to be overridden via qualified majority voting instead of the present procedure where a similar majority would need to vote for sanctions. We'll see how chronic offenders react to such legislation; let's just say they likely won't go down without a fight.

Also interesting are the last two bits of legislation concerning macroeconomic imbalances (read: gaping current account deficits) aside from the ones on the budget / stability and growth pact. Again, there is talk of a mechanism for dealing with these imbalances but no hard and fast thresholds alike those for fiscal deficits. Talk about asking for a political quarrel. If you will recall, the likes of Spain and Greece experienced ballooning external imbalances prior to the current phase of readjustment, so that's probably what they had in mind.

Sliding $ + Yuan Bill to Clear Congress Today?

♠ Posted by Emmanuel in , at 9/29/2010 01:21:00 PM
Here's a midday--well midday GMT--update on currency matters. Proving once more that the United States is the world's top currency manipulator bar none in terms of the lengths it goes to to debase its currency, expectations of further Fed easing are making it slide. Even the troubles of Ireland in particular and the EU in general coming up with a workable agreement on punishing repeat offenders of financial pacts are apparently having little effect on the euro gaining against the dollar:
The ailing dollar fell on Wednesday as sliding U.S. Treasury yields and below-forecast U.S. data fuelled expectations of further monetary easing. Mounting speculation the Federal Reserve could embark on a second round of quantitative easing, which would be negative for the dollar, drove the greenback to a five-month low against the euro and a two-year trough against the Australian dollar. "The market is jumping on QE expectations as it feels the U.S. data will force the Fed to do something, and I think that will be the case," said Manuel Oliveri, currency strategist at UBS in Zurich.

Analysts said the dollar could face further losses as a selling trend was taking hold, while the euro would continue rising after becoming resilient to economic and banking problems facing some countries on the euro zone periphery. "The safe bet is to keep selling the dollar, especially given reasonably supportive data from the euro," said Peter Frank, currency analyst at Societe Generale.

Data on Wednesday showed euro zone economic sentiment unexpectedly rose in September. Frank said the euro had developed a thick skin to banking and economic problems faced by Ireland, which have flared in past weeks. Unless problems arose in a major country, such as Spain, the future of the euro zone was unlikely to be threatened.
And here's something ladies and gentlemen, children of all ages, that we've been waiting for ages to finally come. Apparently not yet pleased with the dollar sliding to goodness knows where, the House of Representatives look set to pass the Currency Reform for Fair Trade Act H.R. 2378 later today. (More in a recent post on this legislation.) This after years and years of legislators threatening to bash China but passing no bills. For something to become law, of course, the Senate must also pass its own and the president must then sign the reconciled version (House & Senate) of the bill into effect. From Reuters:
The House of Representatives is poised on Wednesday to pass legislation to pressure China to let its yuan currency rise more quickly, fanning the flames of a long-running dispute over trade and jobs. The House is expected to approve, with bipartisan support, a bill to treat China's exchange rate as a subsidy, opening the door to additional duties on Chinese goods entering the United States, some of which are already subject to special levies. But the measure must gain Senate approval and be signed into law by President Barack Obama -- by no means a sure bet.

U.S. lawmakers have long brandished the sword of trade retaliation for what they see as China's deliberate policy of undervaluing the yuan, which they say gives its exports an unfair edge in global markets, but have never sent the president any legislation to be signed into law.

Obama and Chinese Premier Wen Jiabao discussed China's currency and huge trade surplus with the United States during a meeting on the sidelines of the U.N. General Assembly last week, aides said, but declined to discuss the sensitive issues with reporters after the meeting.

Ahead of the vote, China's central bank reaffirmed its long standing pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate. "We will further improve the yuan's exchange rate formation mechanism, let market supply and demand play a key role in its adjustment with reference to a basket of currencies and increase exchange rate flexibility," it said in a summary of the third-quarter meeting of its monetary policy committee.

The House move, little more than a month before U.S. congressional elections, is certain to further roil relations with Beijing, which resents the criticism and says it is its decision alone how fast to proceed with currency reforms.
Reuters also has a factbox outlining the bill's key details. Some excitement, finally. "China Currency Coalition" Obama, would you dare veto the will of the American people? It seems the general hopelessness of America and the need to garner votes ahead of November may finally tip the balance in the favour of "action." Certainly, branding China's currency intervention an actionable subsidy would open the gate to a world of conflict as all sorts of interests petition the US government for remedies against China. While the Senate will not take up its counterpart bill S. 3134 until after the midterm elections and revenues gained from applying duties probably won't amount to much, there's no denying its potential to sour US-China ties. If such legislation becomes law, expect China to take the US to the WTO--guaranteed--for starters.

Gravy Train: High Speed Rail's Economic Benefits

♠ Posted by Emmanuel in , at 9/29/2010 12:18:00 AM
Come in here dear boy, have a cigar. You're gonna go far if you've got the latest transportation must-have: high-speed rail. As you probably know, China is in the vanguard of high-speed rail technology almost alongside the Europeans and the Japanese after investing tonnes and tonnes of dough in this technology. Governator Arnold Schwarzenegger of California even dreams of groping--I mean, availing of--some high-speed trains from the PRC with what should be incredibly funky Chinese financing given the perpetually empty coffers of the, ahem, "Golden State" (so ironic, that).

However, the purpose of today's post is not to heap more well-deserved dirt on the festering carcass of American hegemony, but to instead contemplate high-speed rail's benefits for those still in the land of the fiscally living. Sometime ago, I discussed China's vaunted proposals to establish a high-speed network linking a New Silk Road. Years and years of rapid Chinese growth despite all the acknowledged pitfalls of doing business in that country--corruption, pollution, and so on--suggest to me that infrastructure is important.

While visiting the LSE home page, an interesting feature caught my eye coming from a colleague in the Geography department--the same folks who recently brought us the iPhone happiness app that's caught a fair amount of media attention. Its findings come from a study of the economic effects of linking the German towns of Köln and Frankfurt by high-speed rail. Here's the press blurb:
High-speed rail lines bring clear and significant economic benefits to the communities they serve, the first thorough statistical study of the subject has discovered. Economists discovered that towns connected to a new high-speed line saw their GDP rise by at least 2.7 per cent compared to neighbours not on the route. Their study also found that increased market access through high-speed rail has a direct correlation with a rise in GDP – for each one per cent increase in market access, there is a 0.25 per cent rise in GDP.

The findings, from the London School of Economics and Political Science and the University of Hamburg, may be used to support arguments for high-speed networks which are already being planned in the UK, US and across the world. Until now, no one has demonstrated that high-speed rail brings clear economic gains along its routes.

Authors Gabriel Ahlfeld and Arne Feddersen presented their findings at the conference of the German Economic Association. The paper, From Periphery to Core: economic adjustments to high-speed rail, also points to advantages in employment and GDP per capita for towns on the high-speed network.

Their research focused on the line between Cologne and Frankfurt, which opened in 2002 and runs trains at almost 185mph (300 kmh). The authors looked at the prosperity and growth of two towns with stations on the new line – Limburg and Montabaur – and compared them with more than 3,000 other municipalities in the surrounding regions.

The new line brought Limburg and Montabaur within a 40-minute journey of both Cologne and Frankfurt. Over a four-year period, the researchers found that both towns and the area immediately around them saw their economies grow by at least 2.7 per cent more than their unconnected neighbours.

This effect, say the authors, is entirely attributable to the improved access to markets for Limburg and Montabaur and not to any external factors or inherent growth. They chose the two towns for the study because both were included on the high-speed route due to lobbying by regional government and not because their economies were powerful or expanding.

Dr Ahlfeldt, from the Department of Geography and Environment at LSE, said: 'One of the problems with identifying the impact of high-speed rail has been that lines tend to get built first between areas with strong and growing economies so that it's difficult for economists to be sure which effects are attributable to the new rail line and which to existing factors. But because there was no economic rationale for building the line to Limburg and Montabaur, they provided the perfect "laboratory" conditions for us to measure the effect of high-speed trains.

'It is quite clear that the line itself brought significant and lasting benefits in access to markets, growth, employment and individual prosperity. One of our key findings is a positive market access elasticity, which means that improvements in accessibility to other towns, cities and regions, will be reflected in economic growth. We believe this research develops a new framework for predicting the economic effects of large-scale infrastructure projects and will help governments to define future spending priorities.'
Very interesting stuff, and it certainly bodes well for China and the rest of Asia that it plans to link up with the PRC via high-speed rail. There's an ungated version of the paper available online if you're further interested. And did we tell you the name of the game, boy? We call it 'Riding the Gravy Train.'

China / Taiwan Love-In, Banking Edition

♠ Posted by Emmanuel in , at 9/29/2010 12:07:00 AM
And now for some very insightful news from a rather unlikely source. Something I do appreciate about reading official news agency articles is that they seldom fail to fall out out of line with official policy stances. And so it is that we have another interesting sign of detente between the People's Republic of China and the Republic of China. The Global Times usually features some of the more bellicose commentary from Chinese official media, but this time, it seems to be positively cottoning up to Taiwan. (There's even a cutesy photo feature on Taiwan's Hello Kitty children's hospital.) A few months ago, the PRC and ROC inked an Economic Cooperation Framework Agreement or ECFA--an arrangement similar to what the PRC has with its special administrative regions of Hong Kong and Macau.

I suppose China can't bad mouth the US (currency, trade, Tibet, South China Sea); Japan (Senkaku islands, WWII grievances); and Taiwan at the same time. So, while the first two are in Beijing's doghouse, it's Taiwan's turn to be rewarded in signing an FTA with the PRC as well as putting off any aspirations for formal independence in the near future. Economic relations are becoming closer as each--can I use the word "country"?--of the protagonists is keen on establishing a financial service presence in the mainland and Taiwan, respectively:
Taiwan's banking authority has given two mainland banks the green light to open offices in the island province Thursday, marking a milestone in financial sector easing across the Straits. The [state-owned] Bank of China and the Bank of Communications are the first two mainland banks to gain approval from the Taiwan Financial Supervisory Commission to set up representative offices.

Representative offices of the two banks will be allowed to conduct non-business activities including establishing local industry contacts and gathering financial market information. Under the cross-Straits Economic Cooperation Framework Agreement signed in June, mainland banks can apply to set up branches in Taiwan after operating for one year as representative offices.

Last week, the China Banking Regulatory Commission granted approval to four Taiwanese banks to set up branches in the mainland as well. The Land Bank of Taiwan and the First Commercial Bank will establish branches in Shanghai, while Taiwan Cooperative Bank and Chang Hwa Bank are eying locations in Jiangsu Province.

The new market access will provide business opportunities for mainland banks in terms of growing tourism, trade and investment across the Straits, said Guo Tianyong, a finance professor with Beijing's Central University of Finance and Economics.

Taiwanese banks also are keen on entering the mainland market where interest margins are as high as 3 percent compared with 0.8 percent in Taiwan, according to Shen Chung-Hua, finance professor with Taipei's National Taiwan University [this is certainly useful information, but fat spreads surely aren't ideally disclosed in a propaganda outlet?]

Taiwanese banks will also face their fair share of challenges including having to wait for one year after market entry before they can conduct business using the mainland yuan. In addition, the Taiwan university professor asserts these banks probably won't be allowed to engage in lending to large, lucrative public works projects such as railways, roads and airport facilities in China.
So Taiwanese banks won't be able to lend to PRC national projects, but there should still be plenty to lend to nonetheless. It will certainly be interesting to watch if Taiwanese banks can make more inroads into the Chinese banking system than the Western ones who've always chafed about barriers being placed on their ability to conduct business in the mainland.

Eire, Eurozone & Ever After: Brussels Free for All

♠ Posted by Emmanuel in , at 9/28/2010 12:06:00 AM
Here's a selection of excerpts to keep us up to speed concerning the latest Eurozone trials and tribulations. Let's try to order them in a way that makes sense:

(1) Massive credit downgrades by Moody's to unsecured debt of nationalized Irish lender Anglo Irish knocked stock markets in Europe back over fears of a Greek-style rehash. Massive bailout costs exacerbated by downgrades to near-junk are a fear:
Moody's cut the nationalised bank's senior unsecured debt by three notches to Baa3- just one notch above junk status - citing a small risk the government would not continue to support that class of debt, the agency said on Monday. It slashed Anglo Irish's subordinated debt by six notches to Caa1...

According to unnamed government sources cited by German business daily Handelsblatt on Monday, the European Central Bank gave serious consideration to activating the euro zone's bailout fund for Ireland but in the end decided not to [my emphasis; see more on this point in (2)]. Finance Minister Brian Lenihan has said it was unthinkable that Ireland would default on senior debt but, in the absence of such assurances given on subordinated paper, analysts say those might face a buyback at well below par...

Facing political pressure to shut down Anglo Irish, whose loan book soured dramatically after a disastrous property binge left it heavily exposed to the impact of the financial and market downturn, the government has outlined a compromise plan. It is splitting the lender into an asset recovery bank and another entity to house its deposits which will not lend any money. Though the final cost of the exercise is not expected to be revealed until later this week or early October, the 25 billion euros so far earmarked would already push Ireland's 2010 budget deficit to well over 20 percent of gross domestic product.
(2) So why was the €440 billion European Financial Stabilization Fund not activated as per the gossip above? Wolfgang Munchau believes the mysterious EFSF, alike many now-shunned and similarly structured CDOs, uses a lot of "credit enhancement" to bring about a AAA rating. These guarantees may likely push final borrowing costs to troubled European countries into the 7.5 to 8% range:
Let us assume the EFSF raises the €1bn at an interest rate of 4 per cent. With administration charges and lending margins of 350 basis points, the effective interest rate to the borrower would be 7.5 per cent. What about the cash buffer? The EFSF must reinvest the buffer in the best triple A rated securities in the market. So if its own funding costs are 4 per cent, and if it invests the cash buffer into German bonds at a hypothetical yield of 2 per cent, there is a loss of 2 percentage points. This also has to be paid for by the borrower. This comes on top of the 7.5 per cent interest. It is not all that hard to conceive of a situation in which the borrower would end up paying a total interest rate of 8 per cent.
(3) Meanwhile, Martin Wolf offers his now-familiar theme of "We can only cut the debt by borrowing." In essence, it's the old argument that growth cannot be restarted if both the private sector goes into austerity mode as a necessity while the public sector does the same due to misguided "belt tightening" policies. He is particularly hard on the UK:
“You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?

The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.
Note though that the IMF has given the UK plan a thumbs-up.

(4) Heading back to the frontlines, there are political clashes aplenty as Eurozone members attempt to thrash out an agreement to avoid future Greeces (and Irelands, for that matter). Although an agreement is supposedly due Wednesday, there is much wrangling over how sanctions should come into effect. Essentially, Germany wants more of the sanctions to take effect when limits are breached without political input, while France and Co. are wary of this approach. Cynical old me observes they want to retain the ability to water down sanctions despite giving lip service to being tough on repeat offenders:
European Union ministers backed tougher sanctions on Monday for euro zone budget rule-breakers and disciplinary steps for countries running high debts, but clashed over how automatic the penalties should be. "The discussion today showed a very large degree of convergence on important issues related to budgetary and economic surveillance," EU President Herman van Rompuy said after chairing the finance ministers' talks in Brussels.

They agreed much more attention must be paid to debt, and countries which have debt higher than the EU limit of 60 percent of GDP and are not reducing it fast enough should face disciplinary action, he said in a statement. There was also backing for a new system of sanctions. "Sanctions would be introduced at an earlier stage, be more progressive and rely on a wider spectrum of enforcement measures. There was broad support that, as a first step and on the basis of the (European) Commission upcoming proposals, sanctions should be strengthened in the euro area," Van Rompuy said.
And here is the key point of contention involving "reverse qualified majority voting." Instead of sanctions being levied after a qualified majority decide to do so alike in the present system, the EC (the executive branch of the EU) wants to require a qualified majority to override sanctions that automatically kick in once stipulated limits are breached. There's also talk of withholding EU cash to repeat offenders:
In a letter to the officials meeting on Monday, German Finance Minister Wolfgang Schaeuble said he wanted the EU's budget rules to be given "more bite" and that they should include quasi-automatic sanctions The Commission also wants to reduce the scope for discretionary decisions by EU finance ministers.

To achieve that, it has proposed that only a qualified majority of EU ministers should be able stop sanctions, or what the Commission calls reverse majority voting. Under the current rules, a qualified majority is needed to impose sanctions. But French Economy Minister Christine Lagarde said the automaticity of the rules was a bad idea. "To foresee a complete automaticity, a power totally in the hands of the experts, no. We believe that the political power, the political appreciation should remain fully in the game," Lagarde told reporters...

Another German notion - to freeze the flow of EU funds to countries that do not respect EU budget rules - seemed to be put off for more discussions, but not dismissed. "Conditionality for the use of EU funds linked to sound implementation of the Stability and Growth Pact should also be introduced as soon as possible," Van Rompuy's statement said.
(5) And finally [whew!] the European Central Bank is weighing in bigtime on the EC to come up with a programme to deal with repeat offenders with teeth--or else. Apparently unhappy with having to implement extraordinary measures time and again, the ECB wants the Brussels bigwigs to sort matters out once and for all:
The European Central Bank has warned eurozone governments that it will sound the alarm if they fail to agree reforms to Europe’s monetary union that are tough enough to prevent a future Greece-style crisis. Jean-Claude Trichet, ECB president, set out on Monday a series of “five questions” the governments had to address in a system for surveying and imposing sanctions on countries that lose control of their finances. “If the responses were too timid in our opinion, we would make clearly the point,” Mr Trichet told the European parliament in Brussels.
Trichet's speech spells out his wish list...
To summarize, the “checklist” for a review of proposals for euro area governance would be affirmative answers to the following five questions:

* First, does the fiscal surveillance framework effectively address the weaknesses that might give rise to a future crisis?
* Second, is there a macroeconomic surveillance framework that can trigger effective adjustment of imbalances, of external indebtedness and of losses of competitiveness?
* Third, are the enforcement mechanisms of fiscal and macroeconomic surveillance quasi-automatic and the enlarged sanctions sufficient to protect other members and the monetary union as a whole?
* Fourth, does the framework include appropriate independence in surveillance, and impeccable quality checks of analysis and statistics?
* And finally: are the new principles of economic governance anchored within national frameworks?
It's a lot to digest, I know. If the sheer enormity of EU institutions begin to overwhelm, a volume I can unreservedly recommend is Baldwin and Wyplosz's The Economics of European Integration--one of our textbooks here at the LSE. Hopefully Brussels folks will sort out a workable plan by Wednesday, though it's a bit of an optimistic schedule. As many of you know, I ultimately have faith in the European project--especially the ECB and the currency it issues. Having come this far, it makes no sense to throw it all away.

Brazil FinMin Declares 'International Currency War'

♠ Posted by Emmanuel in , at 9/28/2010 12:01:00 AM
I enjoy hyperbole as much as the next guy, but this one's got to be top of the pops for 2010 as far as verbal jabs are concerned. Although Brazilian authorities curiously threatened to use their new sovereign wealth fund to buy dollars sometime ago, they haven't done so (yet). And, while the central bank has waded in to buy dollars on a fairly regular basis these past few weeks, the article excerpted below notes this buying is in anticipation of the imminent floatation of Petrobras stock that's attracting many foreign investors. Still, the relatively higher yield of the real is drawing in the punters and causing headaches for export-minded authorities:
An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness. [Really? That's a surprise.] Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies...

The US dollar has fallen by about 25 per cent against the Brazilian real since the beginning of last year, making the real one of the strongest performing currencies in the world, according to Bloomberg. In spite of Mr Mantega’s recent aggressive public statements, however, Brazil has so far held back from taking any action other than intervening in the local currency spot market.

The central bank bought as much as $1bn a day for much of the past two weeks – about 10 times its daily average in recent months – but this was largely to absorb money entering the country to take part in last week’s $67bn share issue by Petrobras, the national oil company. [In other words, that's sterilization to us to mop up excess local liquidity.] “There’s a real gap between the rhetoric and the action,” said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York.
Of course, we all must trace where the impetus to intervene stems from for so many. If the US insists on near-zero interest rate policy and refuses to withdraw extraordinarily accommodative measures like trying to refloat the housing market singlehandedly, it certainly cannot fault others on currency manipulation. Before pointing the finger at what everyone else is doing, America should for once look in the mirror and see itself as the rest of us do. Make no mistake: Sammy is the biggest manipulator there is--the rest's efforts pale by comparison.

Fat World: The Globalization of American Obesity?

♠ Posted by Emmanuel in , at 9/27/2010 12:04:00 AM
Your butt is wide, well mine is too
Just watch your mouth or I'll sit on you

The word is out, better treat me right
Cause I'm the king of cellulite

Although they're arguably becoming a country of fatheads as well, Americans are better known worldwide for their astonishing girth. A new OECD study finds that over a third of these stupendously gluttonous people are clinically obese. Indeed, there's no stopping Yankee pavement pounding tonnage in the obesity league tables as the percentage of overweight folks is set to increase even more in the coming years:

It seems exceedingly odd to me that other IPE people don't make more of these ominous statistics. Whether it's common American unwillingness to face up to the fats I really don't know. I'm not hitting below the belt here (besides, I can't see where America's belt lies since it's well-hidden under rolls of flab). So the weighty truth stares us in the quintuple chin: it is well-known and accepted that health care bills will gobble the bulk of developed country budgets in the coming years. However, there is a deadly combination of fiscal and health indiscipline driving this dietary-industrial complex. It ain't cheap to be chubby, honey:
Rates are highest in the United States and Mexico and lowest in Japan and Korea, but have been growing virtually everywhere. Children have not been spared, with up to 1 in 3 currently overweight. Severely obese people die 8-10 years sooner than those of normal-weight, similar to smokers, and they are more likely to develop diseases such as diabetes, cardiovascular disease and cancer. Obesity is a burden on health systems, with health care expenditure for an obese person at least 25% higher than for someone of normal weight.
So America's public finances are set to suffer more under the weight its citizens will place on health services than those of other developed nations. What else is new? Aside from Americans topping the obesity sweepstakes, there's an incredibly curious finding here depicted in the above chart [click to enlarge image]: 6 out of the 7 of the OECD's portliest nations, in ascending order--Ireland, Canada, the UK, Australia, New Zealand and the US--are English-speaking. Why is this so? Medical News Today throws up some researchable hypotheses:
Several people, including nutritionists, health care professionals and economists are beginning to wonder what it is that bunches all the Anglo-Saxon nations up at the top of the obesity/overweight league.

One theory is that they are all driven by an American lifestyle. Being countries that speak the same language, they are more likely to absorb and embrace features of a major nation more readily and rapidly. So, why Mexico? Historically, Mexico was never an overweight country until recently. However, during the 1990s Mexico joined NAFTA (North American Free Trade Agreement) and acquired US business practices, and perhaps also other behaviors, such as driving everywhere, living on TV dinners, and embracing fast food outlets. Osmosis is probably a likely factor too; Mexico is next door to the USA.

The United Kingdom is the fattest country in Europe, and obesity/overweight rates are growing apace. While the UK has had the fastest growing rates in Europe over the last ten years, Australia's obesity/overweight rate has been growing faster than any other OECD country's over the past 20 years. The OECD believes that over the next ten years obesity rates in Australia will grow another 15%.

In the USA, UK and Australia the difference in average bodyweight among men is fairly similar across all socioeconomic and academic groups. An American woman with poor education is 1.3 times more likely to be overweight than an educated woman, in the UK and Australia the difference is 1.4 times. The three countries have three similarities among male and female adult bodyweight variations.

In England, almost 1 in 3 children is overweight - in Scotland it is more than 1 in 3. Recently there have been signs of stabilization in childhood obesity rates in England. 40% of American children are overweight, but as in England, there are signs that rates are leveling out. If you look at rates and recent trends among people in English-speaking nations and compare them to other countries', you sometimes get the impression that Anglo-Saxon countries experience the same good and bad things almost in unison.

Historically, England (the main source of recent Anglo-Saxon culture) has had a diet based on butter for cooking, versus the Mediterranean countries which predominantly have used olive oil. But this behavior goes back a long time, while the obesity epidemic is comparatively much more recent.
Maybe its in the genes. Why don't those Freakonomics geeks research stuff like this that's actually important? It certainly casts ominous portents if Mexico's rise in the cellulite league tables is due in part to joining NAFTA. It's also interesting to figure out why countries in the Anglosphere are so darned portly. Is Americanization indeed synonymous with this kind of mega-obesity? It's too scary to ponder.

And the whole world knows I'm fat and I'm proud
Just come tell me once again - who’s fat?

UPDATE: See my recent post on Singapore's seemingly effective fat-fighting policy for an update.

How to Close WTO Doha (Nearly a Decade On)

♠ Posted by Emmanuel in ,, at 9/27/2010 12:03:00 AM
Here's something that I just missed from the ever-interesting Foreign Affairs which always has something good to read (even if I disagree with the contributors once in a while). In case you're still counting--and even I tend to lose count for obvious reasons--we are nearing the tenth year of Doha Development Agenda negotiations with nary a sign of it nearing completion. Began in 2001 partly in sympathy for America after the 9/11 attacks, let's say the rest of the world hasn't given the red, white, and blue a free pass in the trade realm since then. Sometime ago, Aditya Mattoo and Arvind Subramanian offered their take on how the DDA should be, ah, structurally adjusted to bring about a greater chance of completion. Now, Gray Hufbauer and Robert Lawrence offer their thoughts on the same.

What is interesting is how these two authors focus on the two big players who now arguably hold the cards in world trade. In particular, what should be done to make this a genuine development round? On one hand we have the world's biggest largest exporter of goods and services as well as its largest importer of the same (America). On the other we have the world's largest merchandise exporter, having recently surpassed Germany. Insofar as Germany is pretty content to let others with longstanding interests to protect (French and US agriculture) and images to burnish (China as a fast-developing economy) duke it out in trade negotiations, let's read the authors' prescriptions for Chimerica:
If China acts as a leader in the trading system, it should be recognized as one. In its WTO accession agreement, China reluctantly agreed to be treated as a nonmarket economy in antidumping cases until 2015, which meant that its exports could be subject to safeguards with a lower trade impact threshold ("market disruption") than normal safeguards applied to other WTO members ("serious injury"). This provision was invoked by Obama last year, when the United States slapped high duties on inexpensive car tires made in China and imported by Wal-Mart and other budget retailers. China also agreed in advance of its WTO accession to submit to annual compliance reviews, which Beijing considers humiliating. In return for concessions on government procurement and services, the United States and other developed countries should grant China recognition as a market economy -- with normal remedies in antidumping and safeguard cases -- and also put an end to annual compliance reviews.

Meanwhile, the United States should phase out cotton subsidies -- which were ruled illegal by the WTO two years ago -- and put a cap of about $9 billion annually on all its agricultural subsidies. Washington should also agree to extend duty-free, quota-free treatment to virtually all the exports of the least developed countries and allow duty-free imports on all manner of environmental goods, including ethanol. Such a gesture would give substance to the development promise of the Doha Round and, in a modest way, put the United States on the right side of the climate agenda.

If China and the United States are on board, other major players will feel enormous pressure to contribute. India, with its demonstrated interest in maintaining open markets in information services, would likely join the services talks and sign on to the GPA. Brazil and other successful developing countries would do the same and contribute concessions on industrial products.

These proposals could make the Doha Round a political winner: major concessions by China and a few other emerging countries would be seen in the United States as evidence of greater access in markets that count. And China would not advance its status as a full participant in the world trading system, while also positioning itself as the leader that delivered the benefits of the Doha agenda to all developing countries. The world would recover that much faster from the hangover of the Great Recession.

India Stumbling: The Commonwealth Games Fiasco

♠ Posted by Emmanuel in ,, at 9/25/2010 12:30:00 AM
One of the slogans used by Indian authorities to describe the economic ascent of their country has been "India Rising." However, another longstanding knock on the country has been its lacklustre infrastructure--ports, roads, sanitation and what else have you. Compared to the likes of China, which always prioritizes these things, let's say that India lags behind. Among the BASIC countries, China put up all sorts of dazzling stadiums to impress the foreigners during the 2008 Summer Olympics, while South Africa just hosted a very successful 2010 World Cup where international visitors were treated to a real showcase of African culture and development. Football organizer FIFA certainly wasn't one to complain.

Now it's India's turn to strut its stuff as another member of the BASIC countries (Brazil gets its shot, of course, with World Cup 2014). The upcoming 2010 Commonwealth Games in New Delhi are exactly what they say on the tin, featuring the UK and its myriad former colonies which constitute the British Commonwealth. Held every four years, it gathers some of the best athletes these countries can muster. Unfortunately for India, these games have proven to be an absolute media fiasco. The newspaper headlines worldwide are all agog over unmissable signs that preparation has been lacklustre such as collapsing structures, unfinished stadiums, and a squalid athletes' village:
[W]ith infrastructure collapsing, stadiums unfinished and the athletes' village resembling the aftermath of a party advertised by a teenager on Facebook, Delhi is in danger of humiliation. And all this before the most cynical body of workers known to man arrives in town: the world's sporting press.

Delhi appears to be doomed. Yet all is not entirely lost. Sure, the few high-profile sportsmen available to the Games – Sir Chris Hoy, Phillips Idowu and above all Usain Bolt – long ago indicated that they would be absent. Sure, some of the sports are hardly likely to seize the front page (lawn bowls, anyone?). Sure, the unholy combination of incompetence, corruption and a delayed monsoon have turned much of the site into a festering swamp...
You simply can't get away with this kind of lackadaisical preparation in this day and age. Some are already saying that the negative images beaming out of Delhi will negatively affect India's ability to attract foreign investment and tourists:
Moody’s Analytics Inc., a unit of Moody’s Corp., said India’s preparations for next month’s Commonwealth Games may discourage investors and dent its appeal with holidaymakers. “Confidence in India’s infrastructure, its capacity to organize large events, and its reputation as a tourist destination have all been brought into question,” Matt Robinson, a senior economist at Moody’s Analytics in Sydney wrote in a note today.

India has struggled to get venues, bridges and other infrastructure ready in time to host teams from 71 countries and territories during the Oct. 3-14 event. Prime Minister Manmohan Singh wants to tap private financing for at least half of the $1 trillion India needs to build roads, ports, utilities and airports in the five years ending March 2017 to accelerate growth in Asia’s third-biggest economy.

“The negative publicity could deter foreign investment and give multinational businesses considering expanding in India reason to think twice,” said Robinson. The buildup to the Games, which Singh had said would highlight India’s growing economic strength, has been marred by the collapse of a footbridge next to the main stadium, an outbreak of dengue fever, monsoon floods and security concerns after the Sept. 19 shooting of two Taiwanese near a mosque.

“There is no major project anywhere in the world which is concluded to perfection,” India’s Minister of Commerce and Industry Anand Sharma told reporters today in Ottawa, where he was meeting with his Canadian counterpart. “Our guests will be welcomed and the Commonwealth games will be rejoiced and remembered.” Sharma said “unprecedented” rains and floods have caused difficulties and other countries should show “understanding.”

Complaints about conditions at the athletes’ village, which will house the teams, emerged this week. Canada, Scotland and New Zealand delayed their arrival in India to give organizers time to fix plumbing, wiring and furnishings. “The fiasco is undermining the anticipated benefits of hosting a major international sports event,” said Robinson. Commonwealth Games Federation chief Mike Fennell said today that “considerable improvements” had been made to the village.
There went India's nation branding exercise--for now. Instead of Beijing, it looks more like the great American city of Detroit. So much for the showcase bit; let's just hope the show goes on reasonably well for India's sake. I can guarantee you this, however: F1 impresario Bernie Ecclestone, a stickler for preparation, simply will not allow such things to happen during the inaugural 2011 Indian Grand Prix.

Obama Kisses Up to ASEAN

♠ Posted by Emmanuel in , at 9/25/2010 12:22:00 AM
In case you missed it, President Obama met with ASEAN leaders in New York just yesterday. What are notable to me are that (1) in approaching ASEAN as a whole, the US is bashing Myanmar less and less on human rights grounds; (2) Obama didn't emphasize the South China Sea so much--though he maintained the hypocrisy of referring to "international law" it hasn't signed; and (3) he pledges to visit Indonesia again after failing to do so three times before. The read-out of his working lunch meeting with ASEAN bigwigs is posted on the White House website for what it's worth; what follow are the key bullet points...
  • The United States acceded to the ASEAN Treaty of Amity and Cooperation in July 2009.
  • At the invitation of the ASEAN states, the United States will participate in the East Asia Summit comprised of ASEAN and eight other prominent countries in the Asia Pacific region [ASEAN-10 + China, Japan, South Korea, Australia, New Zealand, India, Russia & USA]
  • Secretary Clinton will initiate U.S. participation in the East Asia Summit by attending its meeting in Hanoi on October 30, 2010.
  • President Obama will attend the East Asia Summit meeting in Jakarta in 2011.
  • The President will also visit Indonesia in November 2010 [one hopes he'll finally come after already striking out here].
  • Secretary Gates will attend the first ASEAN-hosted meeting of Asia Pacific region Defense Ministers in Hanoi in October 2010.
  • The President has nominated the first-ever resident U.S. Ambassador to ASEAN.

Anti-China Legislation Heads to Vote in Congress

♠ Posted by Emmanuel in , at 9/25/2010 12:22:00 AM
Just as I was getting set for a restful weekend, the news intervened. H.R. 2378, better known as the "Currency Reform for Fair Trade Act," is now set for a vote in the House of Representatives this coming Wednesday, September 29 after successfully clearing the Ways and Means Committee. The immediate retort would be that there have been many currency bills in recent years aimed at punishing China over its alleged currency manipulation, none have ever gotten anywhere. With a moribund US economy. continued US-China jousting, limited yuan revaluation, and an important midterm election coming up, will these factors finally be enough for some real China bashing action?
Legislation pressing China to raise the value of its currency is set for a vote in the U.S. House next week, as Republicans joined Democrats in expressing frustration that the yuan is appreciating too slowly. “We cannot wait any longer to level the playing field for U.S. businesses and protect American manufacturing jobs,” Democratic Leader Steny Hoyer of Maryland said yesterday after the Ways and Means Committee sent the bill to the full House.

The committee adopted the measure by voice vote after the panel’s top Republican, Dave Camp of Michigan, voted with Democrats to back the bill. The full House will vote Sept. 29, said committee Chairman Sander Levin of Michigan, a Democrat. The measure would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency. President Barack Obama’s adminisration hasn’t taken a position on the bill, said Natalie Wyeth, a Treasury Department spokeswoman...

Lawmakers [s]ay they are also frustrated with barriers China has raised to American imports and the piracy of copyrighted American movies, music and software. The currency dispute “is a proxy for the state of the overall U.S.-China commercial relationship,” William Reinsch, president of the Washington-based National Foreign Trade Council, said Sept. 23 on Bloomberg Television. “I don’t think it will have that big of an impact on the American economy...”
Fred Bergsten is keen on letting China feel some heat from Washington. Barack Obama seemingly making little headway with Hu Jintao at the sidelines of the UN over the currency issue also seems to raise the stakes:
Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China’s currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.

Obama pressed China’s Premier Wen Jiabao in a two-hour meeting at the United Nations Sept. 23 to increase the yuan’s value. Wen said this week that a 20 percent increase in the currency would cause severe job losses and trigger social instability in China.
Will these bellyaching lawmakers finally grab China by the collar having failed to do so many times before? Remember that there's a separate bill working its way through the senate (S. 3134). Our friends at the IELP have more on the technical details of "export contingency" [1, 2]. The stakes are high and we're certainly approaching put up or shut up time. As before, the time is always right for these belligerents to cut the crap and start fighting already. While the sponsors' motives may be deplorable, I certainly think it's better to shake things up and see if we can escape the rut we're in called subprime globalization instead of same old, same old.

Ladies and gentlemen, in the red(s) corner, weighing in at $2.4 trillion worth of reserves...

UPDATE: The usually bellicose official outlet The Global Times is strangely subdued in response to this legislative manoeuvre.

Vinashin: State Capitalism Undone in Vietnam?

♠ Posted by Emmanuel in at 9/24/2010 12:04:00 AM
Vietnam has received much attention in recent years as a China mini-me. Their most obvious shared characteristic is being among the last few communist states (we too have the Lao People's Democratic Republic in ASEAN). One must remember, though, that these two states didn't get along well for a very long time over Vietnam invading Chinese client state Cambodia during its Khmer Rouge years. And, among ASEAN members, Vietnam most strenuously contests dominion over the South China Sea islands with China. So there's not much love lost here.

In this day and age, I don't suppose there is anything exceptional about states wanting to retake the commanding heights given the outward success many observe in China: "See? The Chinese Communist Party can have its cake and eat it too!" In recent years, Vietnam has been trumpeted as the world's second fastest growing economy after the PRC. However, recent reports suggest Vietnamese state capitalism is more brittle than the Chinese variety. In fact, the largest state-owned enterprise in Vietnam, shipbuilder Vinashin, is on the brink. Plied plentiful cheap credit by national banks, it is now coming undone. From the Wall Street Journal:
About a third of Vietnam's economy, however, is controlled by state-owned companies—part of a policy to ensure that key industries such as oil, mining and shipbuilding stay under Vietnamese control. Now the dangers of that strategy are becoming clearer amid a deepening financial scandal at Vietnam Shipbuilding Industry Group, or Vinashin, that is raising questions among investors about how much longer the country can afford to pump up its state enterprises.

In recent weeks, Prime Minister Nguyen Tan Dung has removed two successive bosses at Vinashin after its debts ballooned to over $4.7 billion, pushing the company, one of Vietnam's largest, to the edge of bankruptcy. Former chairman Pham Thanh Binh was arrested in August for allegedly falsifying the shipbuilder's financial statements and breaking other laws; his replacement, Tran Quang Vu, was arrested later that month, pending an investigation into his activities running the company's shipyards.

Neither Mr. Binh nor Mr. Vu could be reached for comment. Legal analysts say that under Vietnam's legal system, they might not be assigned a lawyer until their cases reach court. Three other executives, a former financial controller and two subsidiary managers—none of whom could be reached for comment—are also being detained. In an interview with local media prior to his arrest, Mr. Vu said he was "dizzy" at the speed with which Vinashin unraveled.

Vinashin's fundamental problem, according to internal government documents viewed by The Wall Street Journal, is that it expanded too aggressively in its bid to become a major global shipbuilder. Lax oversight and a pervading disregard for financial regulations added to the crisis, the documents said. Some independent analysts say the company's strong political connections also prevented the scale of the problems at Vinashin from emerging until the company was on the brink of disaster.

The chairman, Mr. Binh, invested heavily in businesses outside the company's expertise, such as hotels, brewing and insurance, while buying up obsolete vessels for Vinashin's sea cargo business, the government's analysis of the situation says. One of the ships Mr. Binh bought was made in Poland in 1973 but couldn't be put into service because of cracks in its steel hull.

Many of Vinashin's businesses were "out of control," concluded one government report, dated Aug. 4 and shared with creditors. Governance over "state-owned enterprises and economic groups in general and Vinashin in particular [is] inefficient and inadequate," the report added. In addition, Vinashin faced challenges in an industry where barriers to entry are high and South Korean and Chinese companies are already established...

Analysts and investors say there's no evidence Vietnam's other major state-owned companies, which include national oil company Vietnam Oil & Gas Group, or PetroVietnam, are in trouble. The broader Vietnam economy continues to expand despite Vinashin's problems. Still, the missteps have alarmed investors. While equity markets in nearby Indonesia and the Philippines breach record highs, Vietnam's main stock index has dipped 8.3% since the start of the year, as investors worry about the sustainability of the country's boom.
Is this fiasco confined to Vinashin? Other Vietnamese SOEs have also expanded quickly, often diversifying into unrelated businesses in dreams of becoming the next Korean-style conglomerates. Just as South Korea got into shipbuilding in a big way, so too did Vinashin--and a number of other players in different industries:
Many of Vietnam's 4,000 state companies have expanded their reach in recent years as capital flowed into the country. PetroVietnam expanded into tourism, set up financial subsidiaries and is building a five-star hotel in Hanoi. The state electricity company, Electricity Vietnam Group, invested heavily in mobile phone networks and pumped $250 million into a beach resort development. That move angered businesses and residents who have to put up with frequent power outages thanks to government caps on power prices that deterred investment in EVN's core business, even though power demand is rising 15% a year.

In many cases, Vinashin and other state companies were encouraged to expand and take more risk by a government eager to turn them into global powerhouses, economists say, much like South Korea's famous chaebols—-the giant conglomerates that helped direct that country's rapid industrialization and spawned household names such as Hyundai and Samsung.

More often, though, the companies are too inefficient to compete on the global stage, analysts say. Private-sector businesses expanded their industrial output by 16% year-on-year in August; the state sector expanded its output by barely 8%. Government instructions to state-run banks to extend inexpensive loans to government-linked companies, especially during the global financial crisis, triggered resentment among smaller, private businesses that have been struggling to secure credit, local analysts say.
It's very curious indeed. China and Vietnam probably won't top anyone's corporate governance list, but it seems the former gets away with more than the latter. Cheap loans for national champions certainly isn't a surefire recipe for success. I figure having a billion plus folks as potential customers works in the former's favour, but I could be wrong.

Time to Join the Fight Against Maritime Piracy

♠ Posted by Emmanuel in ,,,, at 9/23/2010 01:07:00 AM
Later this morning I'll be off to the International Maritime Organization (IMO) headquarters here in London to participate in the launch of a new initiative called Seafarers' Rights International. In essence, it's a response by various stakeholder groups to the plight of seafarers travelling through the volatile Gulf of Aden where still-rampant piracy endangers not only crewmen but also world trade. While I'm not much of an activist, I'll make an exception here since my country sends somewhere between a fifth to a quarter of all seafarers worldwide. Not coincidentally, today (23 September) is also the UN-designated World Maritime Day. Here is a brief description of what we're up against from the press blurb:
Piracy and crime at sea have been problems throughout history. But, in recent years, there has been a dramatic upsurge in the threat to shipping and crews, particularly with attacks originating from the lawless coastal regions of Somalia. 2008 saw an increase in attacks on shipping in the Gulf of Aden from pirates operating out of certain coastal regions of Somalia. In that year 111 ships were attacked. By 2009, the number of ships attacked had increased to 217, with 47 vessels and 867 crew taken hostage.

Currently there are 354 people being held hostage (including Paul and Lynn Chandler). Their nationalities are Indian, Sri Lankan, Greek, Pakistani, Filipino, Sudanese, Ghanaian, Bangladeshi, Ukrainian, Yemeni, Burmese, Turkish, Vietnamese, Kenyan, Indonesian, Chinese, Korean and British. Sixteen vessels are also being held to ransom.

Twenty to twenty five thousand vessels pass through the affected area each year – that’s over 400 vessels and 6,000 seafarers at risk every week. In 2007, a piracy attack was reported approximately every 31 hours. There were 15 piracy related deaths in 2006, 11 in 2008 and nine in 2009. In 2008 the amount paid to pirates in ransoms was estimated at US$150 million. There are an estimated 600 to 1,000 pirates operating out of Somali waters.
And here are more details of the petition which you can of course sign on to online:
The petition (www.endpiracypetition.org) was launched just four months ago as the centrepiece of a campaign to persuade all governments to commit the resources necessary to end the increasing problem of Somalia-based piracy. Originally intended to achieve half a million signatures, it has far exceeded that figure and definitively proves that immediate action is needed.

At a time when 354 seafarers and 16 ships are being held hostage in Somalia, pirates are being released unprosecuted to kidnap, loot and maybe kill again, when it is impossible to use routes via the Suez Canal between Asia/the Middle East and Europe/North America without passing through a high risk area, the campaign calls on governments to:

• Dedicate significant resources and work to find real solutions to the growing piracy problem
• Take immediate steps to secure the release and safe return of kidnapped seafarers to their families
• Work within the international community to secure a stable and peaceful future for Somalia and its people
Since this is the IPE Zone, we must also consider the negative effects of piracy on world trade if ships choose to go around the Cape of Good Hope instead of passing through the Suez Canal or purchase increasingly costly insurance:
As well as the human cost in fear and trauma caused to victims, seafarers and their families, piracy creates additional economic costs which are ultimately passed on to taxpayers and consumers. Apart from military patrols, paid for by a handful of governments, ship operators have to pay to re-route ships, meet higher insurance premiums, hire security guards and install shipboard deterrent/protection equipment.

6.8 billion tons of goods are moved by sea each year, in a global trade cycle worth $7.4 trillion. European economies are those most affected in relation to trade through the Gulf of Aden. In August 2009 the Suez Canal reported a 20% drop in revenues, partly as a result of piracy.


Re-routing a tanker from Saudi Arabia to the USA via the Cape of Good Hope means 2,700 extra miles on the voyage. Over a year this reduces the number of voyages the ship can do from six to five round trips (a 26% drop). Additional fuel costs over the year would be $3.5 million.

In 2002 maritime insurers tripled the premiums for tankers passing through Yemeni waters. The cost to insure the ship, not the cargo, for a typical supertanker that carries 2 million barrels of oil jumped from $150,000 to $450,000 for a single trip. That increase translated into an additional 15 cents a barrel on the delivered cost of the oil.

Re-routing on a liner trade would mean adding another ship to the service to maintain the schedule. On a Europe - Far East route, re-routing around the Cape of Good Hope would increase the costs by $89 million per year ($74.4 million in fuel and $14.6 million in charter expenses).

War risk binders for ships transiting the Gulf of Aden cost $20,000 per ship per voyage, excluding injury, liability and ransom coverage. Crew costs while the vessel is in the high risk area can double. The cost of hiring a security escort through the Suez Canal can be as much as $100,000. Yemen’s navy is charging commercial vessels up to $55,000 each for escorted transit through the Gulf of Aden.

Maersk Line is reportedly increasing the amount it charges for cargo in and out of East African ports by $50 to $100 per container. The company’s ‘war risk charges’ for containers transported through the Gulf of Aden are $25 for a 20 foot container and $50 for a 40 foot container.

The breakdown of what a typical ransom costs (Source: Miller Insurance Services Limited) is as follows:
Average ransom $2 to $5 million
Managing the pirates: approx $550,000
Managing the people: approx $600,000
Managing the business: approx $1 million
TOTAL = ransom + $2.15 million

Attacks on energy vessels account for a large proportion of piracy attacks (12% in 2006, 24% in 2007). Over 60% of all oil used worldwide is transported by sea.
It's not fun stuff, I hope you'll agree.

PRC Tips for Understanding American Naivete

♠ Posted by Emmanuel in ,,, at 9/23/2010 12:05:00 AM
In Graham Greene's famous, twice-filmed novel The Quiet American, the titular character Alden Pyle represents blind faith in The Enduring Goodness of America despite harbouring much capacity for harm in trying to bring such naivete to life. That is, remaking the world in the image of American-style capitalist liberal democracy would supposedly deliver the rest of us primitives to a higher state of enlightenment.

To be sure, there is a bland, whitebread sameness that pervades much of the Amerocentric blogosphere. While you get variations here and there, the end message inevitably converges on a similar idea: a combination of democracy and markets will deliver freedom 'n' growth to uplift even the most benighted.

So it comes as no surprise that the Chinese have been at the receiving end of this shtick for the longest time from the Americans. However, China's relative ascent means it has become less and less willing to take rewarmed Alden Pyle-ish statements at face value. Recently, I read David Shambaugh's book China's Communist Party: Atrophy and Adaptation. An important takeaway is the Chinese do understand that the Alden Pyle complex is very much real. Compared to Europeans who've been there, done that, seen the movie, and bought the T-shirt, the US still tries to do what the erstwhile European imperialists ultimately gave up on.

The Chinese Academy of Social Sciences came up with this trenchant observation quoted by Shambaugh on p. 101:
The most characteristic policy in Europe is rationalism, while the most valued philosophy in the U.S. is pragmatism. The latter deals with the world task-by-task and does not tend to analyze situations deeply or systematically. While it is not irrational, it is a more simplistic and shallow worldview than rationalism. European rationalism considers situations more comprehensively and more deeply. As a result, Europe has a more mature outlook on the appropriate paths for global development. The philosophically shallower U.S., however, often has a hard time understanding the depth of European thinking and the extremely complex world.

U.S. assessments of the global situation are often simplistic and biased, as exemplified by the belief that transforming the rest of the world in the mold of American-style democracy will guarantee world peace. Europeans once wanted to use religion and weapons to conquer the world, but their experiences with the tragedies of many wars have forced them to reexamine the nature of power. Americans are merely repeating the mistakes that Europeans have already learned from. European culture is actually more respectful of diversity of cultures…The U.S. approach to global cultures is to try to conform other cultures to Western civilization. In contrast, Europe emphasizes the need for global cultural tolerance and dialogue.
That sounds about right to me. Just see how far plying freedom 'n' growth shtick will get you in today's world. Make no mistake: the Chinese understand.

China, US Duke It Out Over Currency, S China Sea

♠ Posted by Emmanuel in ,,, at 9/22/2010 12:07:00 AM
What a difference a day makes! Only yesterday, Hillary Clinton and PRC Foreign Minister Yang Jiechi were allegedly having a heart-to-heart on currency matters at the United Nations. (Aww, ain't that sweet?) However, the former's boss has apparently annoyed the Chinese foreign ministry sufficiently to warrant a verbal intervention. (As an aside, can we really take this latest verbal exchange seriously when it's not the monetary authorities of China who've gone on the offensive here?) As yesterday's news noted, Obama wants a faster pace of yuan revaluation, while US Treasury Secretary Tim Geithner is rumoured to be rallying other countries ahead of the South Korea G20 to press China on currency matters. On to the fightback:
China's foreign ministry told the United States on Tuesday to stop pointing its finger at Beijing and pushing for a stronger yuan, saying Washington should focus on spurring its fragile economy. The strong-worded statement by the ministry came as President Barack Obama kept up tough American rhetoric ahead of mid-term U.S. congressional elections in November and as the yuan extended gains to a ninth day -- its longest rally since it was revalued in July 2005.

"Recently, there are some discordant voices in the U.S. criticizing the yuan exchange rate, and saying it (the U.S.) would adopt any possible means to press for yuan appreciation. It is unwise and also near-sighted," the ministry said in a statement on its website. "The trade imbalance between China and the U.S. is not decided by exchange rate but by globalization. Yuan appreciation cannot solve the U.S. trade deficit, on which the Americans have also reached consensus..."

On Monday, President Barack Obama weighed in, saying that Beijing had not done enough to raise the value of its currency. U.S. Treasury Secretary Timothy Geithner vowed last week to rally world powers ahead of a G20 meeting in South Korea in November to push China for trade and currency reforms.

The Chinese foreign ministry said the United States, a major currency issuer, should instead focus on its own economic recovery and put its fiscal house in order to help maintain stability of its own currency. China has been trying to boost its imports from the United States, but the latter must relax its restrictions on high-tech sales to China, it said. [For more on this quarrel over "dual use" technologies being exported from the US to China, see an earlier post...]

The ministry added that domestic expectations for yuan appreciation were not strong, and that a stronger currency would do little to resolve the Sino-U.S. bilateral trade imbalance. The yuan rose on Tuesday for a ninth straight day -- its longest string of gains since its landmark revaluation in July 2005 -- and broke through key resistance at 6.70 per dollar for the first time since its revaluation.

However, a senior Chinese government economist warned that the rise in the yuan, which has gained 1.35 percent since September 9, could soon hit a speed bump. Chinese officials have repeatedly warned that any sharp currency appreciation could hit exporters and trigger job losses.
So yuan gains have been slow but steady in spite of the rhetorical flourishes--by the MFA, not the PBoC it must be noted again. Also keep in mind that the dollar is receiving an almighty shellacking in currency markets after the Fed indicated in its most recent FOMC statement that it stands ready to undertake extraordinary measures if deemed necessary. In plain English, I guess that means prop up the dollar via intervention to the rest of the world. Once more, who's the real "currency manipulator" here?
The dollar fell sharply against the yen and euro on Tuesday after the Federal Reserve suggested it stood ready to further stimulate the U.S. economy, raising fears it may print more dollars to do so. The euro surged to a 6-week high against the dollar and broke above its 200-day moving average for the first time since January, suggesting more gains were ahead. The yen powered higher against the greenback as well, breaking through the 85 level for the first time since Japanese authorities intervened to weaken the currency last week.

The Fed statement suggested the U.S. central bank may be preparing to do more to keep unemployment from rising and prices from falling. The sentiment confirmed [currency] investors' fears ahead of the meeting.
And speaking of the foreign affairs ministry, China is apparently not done with giving America a good ol' fashioned tongue-lashing. Word on the street (NHK Tokyo, to be more precise) has it that the United States is working with ASEAN member countries party to the dispute with China over contested South China Sea islands to craft a statement over the coming days. Alike the US seeking allies in getting China to revalue, so is it trying to play "good cop" by currying favour among Southeast Asian nations. The big catch as I noted earlier is that the US is hardly in a position to act on the matter, being neither a contestant of dominion over the islands nor a signatory to laws governing maritime territorial disputes.

In any event, the rhetoric emanating from the PRC is again quite strident:
China told the United States not to interfere in a regional dispute over claims to the South China Sea, saying it would only complicate the matter. Japan's NHK TV reported last week that the United States and Southeast Asian countries may announce a joint statement on September 24 that obliquely presses China over its recent activities near disputed isles in the South China Sea. China has been increasingly strident in asserting its territorial claims, especially maritime ones...

"We express great concern about any possible South China Sea announcement made by the United States and the ASEAN countries," Foreign Ministry spokeswoman Jiang Yu told a regular news briefing. ASEAN is the 10-member Association of Southeast Asian Nations. "We resolutely oppose any country which has no connection to the South China Sea getting involved in the dispute, and we oppose the internationalization, multilateralization or expansion of the issue. It cannot solve the problem, but make it more complicated," she said.

Washington has criticized Chinese claims to swathes of the South China Sea, where Taiwan and several ASEAN members including Vietnam, Malaysia and the Philippines also assert sovereignty. China says it has sovereignty over the seas, home to valuable fishing grounds and largely unexploited oil and natural gas fields. It reacted with anger in July when the United States brought up the issue at a regional meeting, further souring ties between Beijing and Washington already under strain from spats over the value of the Chinese currency, Tibet and Taiwan.
While I certainly doubt whether China's expansive claims to the entirety of the South China Sea would stand up to adjudication at the International Court of Justice, I hardly see how the US, ah, intervention improves matters. As before, I believe it's running interference in an attempt to partly mitigate its diminishing economic stature in the region. Is this world big enough for China and the US? High noon approaches at the Not-So-O.K. Corral.

Brazil's Brand New Bag: SWF Currency Intervention

♠ Posted by Emmanuel in , at 9/21/2010 12:45:00 AM
As a follow-up to the roundup I posted only yesterday on currency intervention worldwide, here's more on Brazil talking down its currency in a fairly alarming way. Their authorities say they've given Brazil's brand spanking new sovereign wealth fund carte blanche to buy dollars and keep the value of the Brazilian real down. This, of course, is in addition to central bank intervention on a fairly regular basis (see below).

Of course, a sovereign wealth fund is usually not intended for the purpose holding back the appreciation of one's currency. After all, isn't a sovereign wealth fund supposed to make foreign investments using existing stocks of foreign exchange instead of buying foreign exchange for the sake of currency intervention? Let's just say the Brazilian authorities have come up with alternative, unfunded uses for their SWF:
Brazil's government authorized on Monday the use of its sovereign wealth fund to buy U.S. dollars in the foreign exchange market, as part of an effort aimed at stemming a recent rally in the local currency. The government set no limit on the amount of dollars that can be purchased by the $10.4 billion fund to curb a more than 4 percent rally in Brazil's real since late June, the finance ministry said in a statement.

The fund was created last year to help finance overseas expansion by Brazilian companies, and its use in the currency markets has been considered for months. The move gives the government another tool in its fight against the appreciation of the local currency that threatens to hamper exports and slow economic growth. So far, the central bank has done the bulk of the legwork with daily purchases of dollars in the spot foreign exchange market.

"This is another form of verbal intervention. But the dog has been barking a lot in the last couple of days; it's going to need to bite soon," said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York. The real has rallied against the dollar partly as a result of huge interest in the country's [relatively high yielding] debt and expectations of massive inflows related to the upcoming share offering of state-controlled oil company Petrobras. Petrobras is expected to raise up to $79 billion on Thursday, in what could be the largest-ever share offering.

The Brazilian real was 0.6 percent weaker at 1.7323 after the announcement, according to the international reference rate...The impact of any intervention by the wealth fund on the market is unlikely to be permanent, but it could push the national debt higher in the long run, analysts said. Analysts also added that dollar purchases by the sovereign wealth fund are likely to be more random and less transparent than those by the central bank. That could help have a greater effect on the market than the central bank's daily purchases in the spot market.

Diego Donadio, an economist with BNP Paribas in Sao Paulo, said that, in the absence of strong dollar inflows in the coming days, the actions of both the central bank and the fund could push the real down to as low as 1.78 reais within the next two weeks. "The sovereign wealth fund could be a source of surprises. By that I mean that its actions could have more impact than we think," Donadio said.

The National Treasury would not officially comment when the sovereign wealth fund will be used. A government source told Reuters last week that "the sovereign fund will go in without the market knowing."
And speaking of using SWFs for this purpose, there's the seemingly inevitable matter of accounting shenanigans. Ultimately, purchases of dollars are probably funded by the public purse instead of more organic reserve accumulation via export proceeds:
One serious concern stemming from the central bank's actions in the currency market is their apparently high fiscal costs. In the statement, the National Treasury said purchases of dollars carried out by the sovereign fund would not add to the nation's budget deficit--which in July reached an eight-month high. "It's an accounting gimmick," Nomura's Volpon said, adding that the wealth fund purchases "will add massively to the debt of the country."

As the central bank buys dollars from investors, the treasury has to issue local notes that the bank will use to pay those investors. The process is known as sterilization. The central bank has recently increased its purchases on the spot market, calling two auctions rather than just one to buy dollars every day. Last week, it announced it had bought a staggering $815 million in dollars in the month through Sept. 10.

On Sept. 9, the bank bought more than it did during the whole of February. In addition to the central bank's intervention, the National Treasury has been allowed to keep government dollars abroad for a longer period. "The good thing about this is that the need for sterilization should decrease," Donadio noted, saying that the government could prevent its debt from growing by about $1 billion a year if it uses the fund to buy dollars.
Attaboy Brazil? I guess nobody really fears being labelled a currency manipulator by the US Treasury anymore.