Will Somali Pirates Return if EU Stops Patrolling Soon?

♠ Posted by Emmanuel in ,, at 10/30/2013 05:13:00 PM
Ahoy mateys, it's back to the Gulf of Aden for us in this post. The collapse of a functioning government in Somalia led to a period when many turned to piracy as a lucrative livelihood in the absence of other viable sources of income. Americans--people who top the global list of ignoramuses about what's going on in the world--even focused some attention on the issue with the kidnap of Captain Richard Phillips of the MV Maersk Alabama. They even made a movie about it (just don't ask them where Maersk is headquartered since the average Yank probably can't find Denmark on the map, let alone Somalia.)

In any event, EU-led efforts to patrol these lawless seas eventually bore fruit, with piracy receding to far less alarming levels in the last year. With EU Navfor's mandate winding up in 2014, however, there is concern that the pirates will come back strong once the cats are away. Back in the UK, Labour's Shadow Foreign Secretary John Spellar has voiced this very concern. (For non-Brits, a "shadow" minister is someone from the opposition whose portfolio is similar to the "real" minister's except s/he is obviously not in power.) From the industry publication Lloyd's List:
A senior UK official has urged the shipping industry to lobby to extend the mandate of EU Navfor’s Operation Atalanta beyond its 2014 mandate deadline.

The shadow foreign and commonwealth office minister John Spellar warned that “EU Navfor’s Operation Atalanta will be renegotiated in 2014 and it is not clear whether it will be maintained”.
Addressing the Security in Complex Environments conference in London, Mr Spellar revealed that politicians had complained that multiple forces patrolling the high-risk area duplicate each others’ efforts rather than complement each other. “There are voices in the back benches that question why we need UK co-operation when there is [North Atlantic Treaty Organisation] involvement,” he said.
Unsurprisingly, most shipping industry interests are lobbying for EU Navfor to stick around:
Mr Speller warned that some government departments are slow to react to changing circumstances and urged the shipping industry to lobby the government as soon as possible to extend Operation Atalanta. “It is important to get [government] engaged at the earliest possible stage,” he said.
A representative from Mitsui OSK Lines based in London said operators needed EU Navfor forces to stay in place. “If we lose that capability the pirates will come back. It’s as simple as that,” he said.
I think the chances are good that EU Navfor will gain an extended mandate in 2014. While the reduction in piracy is also due to a host of other factors alike more commercial vessels having armed guards and designating traffic zones where pirates are less likely to be successful, European patrolling is clearly valued by industry players. Moreover, I am not convinced that playing Britney Spears music [?!] will drive the evildoers away. 

Ops, I hope they don't do it again.

Colonial Mentality: Chinese Shun Their Own Brands

♠ Posted by Emmanuel in ,, at 10/29/2013 09:11:00 AM
Given the truckload of goods China makes for the rest of the world, it may seem odd that the Chinese are concerned with their inability to develop homegrown brands: Why should you develop your own brands when Apple/General Electric/Samsung and whoever else have you have done the heavy lifting of brand-building for you as a contract manufacturer? It's certainly not easy, either--none of the world's top 100 brands are mainland Chinese. The answer is as simple as it is clear: actually making consumer goods constitutes an ever-decreasing share of the profits--if any. The higher value-added activities come from branding, marketing and goodwill which emanate from (surprise!) building up a brand name. In other words, the Chinese get the grunt work and the industrial pollution, while Western companies get the cushy high-salaried jobs and clean air.

Just in time, the FT has an article discussing how the Chinese perpetuate this lamentable situation themselves by preferring imported to local brands. In sociology, it would be classified under "colonial mentality" or believing that former colonizers--be they the Japanese or the Europeans--are superior. After all, they managed to colonize you, right?
Chinese consumers want foreign goods. Whether sports shoes or cars, televisions or mobile phones, cosmetics or nappies [diapers to non-Brits], surveys show that foreign brands predominate. Shaun Rein of China Market Research Group says people trust foreign brands not to cut corners and associate them with more of an established heritage than their domestic labels.

This spells trouble for China as its people become more middle-class and spend more on non-essential items. The more that they buy foreign goods, the more that the proceeds of China’s progress will accumulate to shareholders elsewhere. It will also mean fewer profits for Chinese companies to reinvest in innovation and expertise at home in electronics, for example.
Moreover, there is the matter of "sham" trade surpluses (the image above comes from the ADB Institute): trade figures aside, once you adjust for the actual value-added of Chinese exports, the results look rather less impressive:
Its lack of popular brands is already visible to some degree in its trade balances with other countries. China may run a large nominal surplus but when economists adjust those numbers for the value that it adds or gives away in making goods that are consumed at home or abroad, the numbers tell a very different story.

For example, its total trade surplus with the US drops from $189bn to $127bn on a value-added basis, according to calculations by economists at BBVA, the Spanish bank. Most of this reduction is due to value given away in electrical and optical equipment, textiles and clothing.
Consider it as a warning sign. Sometime ago, I wrote a journal article together with a marketing scholar about the pressing need for the likes of China to develop brands of its own. Suffice to say that message has gone unheeded, and things may get worse in terms of prospects for Chinese development going forward if this matter is not addressed:
If China can follow its neighbours and develop its own powerful brands like Samsung of South Korea, or Toyota of Japan, it can sell not only to its own 1.35bn people but to billions of others all over the world.
If it does not build or buy such brands there is a risk that its consistent trade surpluses will become deficits in the decades ahead. That is not what the push to rebalance China’s economy towards consumerism is supposed to do.
Consider these folks warned. After all, if you don't buy your own brands, what confidence will others have in them?

Post-Crisis, What are the World's Safest Banks?

♠ Posted by Emmanuel in at 10/27/2013 04:49:00 PM
Your initial reaction will likely be the same as mine: Who are these guys?  After years dabbling in own-account speculation, derivatives and other get-rich-quick schemes, the stalwarts from days gone by are no longer on this list. Deutsche Bank? You must be joking. American money center banks? Get outta here! Instead, we have an interesting combination of European banks with government ownership and Singaporean banks with conservative practices. From the press blurb:
The safest 10 banks in the world are all European, just as they were last year and the year before that. However, in all but one case, that safety arises largely as a result of ownership by a European government or sponsorship by government-related entities. Of the 10 banks that lead this year’s rankings of the World’s Safest Banks, only one, Rabobank, is privately owned.

As in recent years, Germany’s KfW heads the rankings, though four other institutions also have AAA ratings from Fitch, Moody’s and Standard & Poor’s (S&P): Bank Nederlandse Gemeenten, Z├╝rcher Kantonalbank, Landwirtschaftliche Rentenbank and L-Bank.

No privately owned bank holds a Triple-A rating from any of the three agencies, although four have an Aa1 from Moody’s: TD Bank Group and the three leading Singaporean banks, DBS Bank, Oversea-Chinese Banking Corporation and United Overseas Bank. Neither Fitch nor Standard & Poor’s assigns AA+ ratings to any private bank.
Global Finance's rankings are based on ratings of the three major agencies, by the way. My intuition is not so much that government ownership guarantees the safety of the aforementioned European banks (sorry, WSJ Deal Journal), but by charter or mandate they are required to maintain conservative banking practices. In other words, they tend to stick to the low risk spectrum with its accompanying implications for reward (at least in a short-term sense). Hence, I am puzzled as to why the privately-owned Rabobank cracks the top 10, not least because it's been implicated in the LIBOR-fixing in a big way. Go figure.

China's 'Maritime Silk Road' as a Hegemonic Project

♠ Posted by Emmanuel in ,,,, at 10/24/2013 10:12:00 AM
 The wrangling over both the US government shutdown and the debt ceiling caused Barack Obama to cancel his attendance at the annual Asia-Pacific Economic Cooperation (APEC) shindig being held this year in Bali, Indonesia. So he stayed at home to deal with a localized insurrection led by an angry, mostly whitebread crowd, "Tea Party" members, they call themselves. Just desserts, I say. His absence triggered yet another round of commentary about the existence of American hegemony in general and its alleged "pivot to Asia" in particular. Some say the absence does not matter; others think it's a culmination of US decline.

At any rate, this notable omission only served to highlight China's latest plan (gimmick?) to curry favor with other nations in the Asia-Pacific. After having its Noughties-era outreach efforts to ink economic agreements alike free trade deals undermined by its strident assertions to territorial disputes in the South China Sea and East China Sea, the PRC seems to attempting to return to a more diplomatic approach. The Silk Road was named after the commercial routes plied by China when it was an empire. At APEC, keynote speaker Xi Jingping's main talking point concerned the "Maritime Silk Road" which once again promises improved relations with neighbors through commercial ties.
On Oct. 3 during his trip in Indonesia, Xi [Jingping] said in a speech that China and the ASEAN will promote maritime cooperation and build a 21st-century maritime Silk Road. This was also brought up by Li [Keqiang] in his seven-point proposal on China-ASEAN cooperation in Brunei on Wednesday. [B]uilding a maritime Silk Road will involve a new consensus, including discussing the signing of a treaty on good neighborliness, friendship and cooperation, strengthening security exchanges, setting up an Asian infrastructure investment bank and prioritizing maritime connectivity development...

In the seven-point proposal, Li [Keqiang] said "the two sides should launch negotiations on upgrading their free trade area and strive to bring bilateral trade to one trillion U.S. dollars by 2020 so as to allow ASEAN countries to benefit more from regional integration and China's economic growth." Zhang Jiuhuan, former Chinese ambassador to Thailand, Singapore and Nepal, said, "Upgrading the free trade area is another significant step for the Chinese government to beef up China-ASEAN cooperation." 
President Xi and Premier Li have been flogging this idea for many months in ASEAN countries, although they have not yet taken it to the Philippines and Vietnam with which it has the most pronounced maritime disputes in Southeast Asia. Still, they allude to the success of the China-ASEAN FTA which they wish to use expand and use as a focal point in strengthening ties:
Starting operation in 2010, the China-ASEAN free trade area is the largest one among developing countries. China is the largest trading partner for ASEAN, and the association is the third largest trading partner for China. According to Zhang, bilateral trade volume between China and the ASEAN grew from 78.2 billion U.S. dollars in 2003 to 400.1 billion U.S. dollars in 2012. Volume reached 210.56 billion U.S. dollars in the first half of this year, up 12.2 percent year on year.

Zhang said "upgrading the free trade area" is needed for both sides. He said the area will help improve the trade of commodities and services and investment cooperation in order to provide convenience and freedom. "All-dimensional cooperation will create more favorable conditions for the maritime Silk Road," said Zhang. "China's economic growth will also bring about more opportunities." 
The idea remains the same in a liberal sense: improved economic ties will smoothen relations--including frayed ones over territorial disputes. However, reception of the Maritime Silk Road idea is mixed among Southeast Asian countries as you would expect: Malaysians are more sanguine, but then again their territorial conflicts with China are not particularly heated. How successful can the Maritime Silk Road project be in calming neighbors? I personally believe that building more economic ties is welcome, but they will be accompanied by more guarded opinions of China's broader intentions. That is, for how long can it afford to give security matters lesser priority while the "security dilemma" the PRC has created makes others feel insecure?
President Xi Jinping and Premier Li have toured ASEAN extensively; it reflects their strategic outlook of developing relationships with neighbouring countries. The new leadership is trying to diffuse tension in the SCS by using various techniques, of which MSR is one. However, a revival of the MSR looks bleak. Also, earlier the route was used for the import of precious stone, wood and spices but today it will used for oil and gas, which is directly connected to the energy security of not one but many countries. There is an emerging security architecture in the region which has led to an increased arms build-up, and the assertiveness of new regional powers has further complicated the regional military balance, which makes the MSR an unlikely prospect.
Moreover, isn't this the same China that disinvited the Philippine president from participating in a trade mission due to the South China Sea imbroglio? More commerce is welcome, but I believe that economic and security matters are becoming less positively correlated in terms of Sino-ASEAN dynamics. That is, stronger economic ties do not necessarily imply improved security ties. Remember, trade has been increasing against a backdrop of worsening conflicts over the South China Sea with the Philippines and Vietnam especially.

Lastly, wasn't the Silk Road at its height when China effectively enforced a tributary system on others in the region? Perhaps the metaphor China has chosen is not a good one since its original iteration had others accepting their subordinate position relative to the Middle Kingdom. The PRC always says it does not seek hegemony (alike white people do), but it has given the rest of us reason to doubt.

Hong Kong, World's Freest Economy 42 Years Running

♠ Posted by Emmanuel in at 10/22/2013 02:18:00 PM
I guess some things in life are inevitable: Canada's Fraser Institute, watchdog of economic freedom the world over, has designated the special administrative region (formerly a crown colony) of Hong Kong the world's freest economy for a 42nd consecutive year.  This matter is of special interest given how HK's most famous businessman is warning that too much clamor for political freedom may dent this vaunted reputation for economic freedom. Think of the political free-for-all Stateside--a moronic version of political expression from all sides--and you catch his drift.

Speaking of which, the United States is zooming down the index at a rapid clip. Talk about American decline:
Hong Kong again topped the rankings of 151 countries and territories, followed by Singapore, New Zealand, and Switzerland in the Fraser Institute’s annual Economic Freedom of the World report. The United States, once considered a bastion of eco nomic freedom, now ranks 17th in the world. “Unfortunately for the United States, we’ve seen overspending, weakening rule of law, and regulatory overkill on the part of the U.S . government, causing its economic freedom score to plummet in recent years.

This is a stark contrast from 2000, when the U.S. was considered one of the most economically free nations and ranked second globally,” said Fred McMahon, Dr. Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute. 
Despite how bad things are in the godawful US of A, there is always worse. Venezuela ranks dead last. Fortunately for it, the likes of Cuba and North Korea were not surveyed for lack of data:
Venezuela has the lowest level of economic freedom worldwide, with Myanmar, Republic of Congo, Zimbabwe, and Chad rounding out the bottom five countries. Some nations, like North Korea and Cuba, could not be ranked because of a lack of data.
The Fraser Institute gives me a new tagline for the United States: America, where you can have as much TP as you want! So it's not quite the commercial success story that's Hong Kong, but things could be rather worse...

Contrarian Thoughts: Depopulation's Benefits

♠ Posted by Emmanuel in , at 10/21/2013 11:38:00 AM
The essence of dramatic tragedy is not unhappiness. It resides in the solemnity of the remorseless working of things - Alfred North Whitehead as quoted by Garrett Hardin in The Tragedy of the Commons

While doing research on an environmentally-related issue, it occurred to me to re-read the famous article concerning the tragedy of the commons by Garrett Hardin. Unbeknownst to many, he was not only concerned with collective environmental abuse but also overpopulation--on which he voiced many politically incorrect opinions. However, questions of demography remain foremost as the world's population has zoomed past 7 billion and the consequences of anthropogenic activity on the environment capture the world's attention.

In many recent posts, I have treated "Detroitification" as shorthand for demise. Fewer and fewer people implies lower and lower economic growth. But, what if we recognize the finitude of economic growth as a consequence of finite resources? It would follow that fewer people may be more desirable. What's more, overpopulating a country, town or what else have you may be a strategy of maximizing one's welfare while reducing that of the broader (world) community--precisely, a tragedy of the commons:
Work calories are used not only for what we call work in common speech; they are also required for all forms of enjoyment, from swimming and automobile racing to playing music and writing poetry. If our goal is to maximize population it is obvious what we must do: We must make the work calories per person approach as close to zero as possible. No gourmet meals, no vacations, no sports, no music, no literature, no art. ... I think that everyone will grant, without argument or proof, that maximizing population does not maximize goods.
Hardin's potential insight is that the more people = more economic growth equation does not hold at a global level given the proverbial limits to growth. Consider, also, the world situation circa 1968 when the article was written:
Has any cultural group solved this practical problem at the present time, even on an intuitive level? One simple fact proves that none has: there is no prosperous population in the world today that has, and has had for some time, a growth rate of zero. Any people that has intuitively identified its optimum point will soon reach it, after which its growth rate becomes and remains zero. 

Of course, a positive growth rate might be taken as evidence that a population is below its optimum. However, by any reasonable standards, the most rapidly growing populations on earth today are (in general) the most miserable. This association (which need not be invariable) casts doubt on the optimistic assumption that the positive growth rate of a population is evidence that it has yet to reach its optimum.
In 2013 we have reached the point where there are any number of "prosperous" populations which have growth rates approaching zero in Western Europe as well as the East Asian tigers--Hong Kong, Singapore, South Korea and Taiwan. And then there's Japan which is already depopulating at a fairly rapid clip but remains the world's third largest economy.

Instead of feeling sorry for them or bemoaning their lack of growth, perhaps the environmentally and morally appropriate response would be to welcome their contribution to sustainability. In effect, they sacrifice national well-being by old metrics alike GDP growth for the sake of not lessening the world's carrying capacity.

Just a thought for you from a reading on Hardin.

Why are the World's Best Central Bankers All Asian?

♠ Posted by Emmanuel in at 10/20/2013 11:09:00 AM
Ben Bernanke is the world's leading practitioner of what I call "Jive-A** Central Banking." It involves creating vast negative externalities for others. Easy money policies Stateside have not only led others to justifiably accuse the Fed of beggar-thy-neighbor policies via competitive devaluation (which he denies), but also cause further turmoil in the Hamlet-style drama of whether to end them or not. Suffice to say that these unconventional measures have done little to put the United States on a firm economic footing, let alone a sustainable path for growth.

Recently, Global Finance released this year's list of the world's best central bankers, a sort of Pro Bowl for central banking. In a sign that the "Asian Century" has come to central banking at least, all of the featured top vote-getters were from Asia. (Perennial selection Mark Carney famously moved to the UK from Canada so the jury is still out on him.) Again, I believe this points out that since the Asian financial crisis, these states have learned their lessons about prudent monetary policy in the face of unusual situations: avoidance of extremely negative real interest rates, balance sheet abuse, market-misleading pronouncements and so on. Prudent central banking is not exactly a mystery; why so many violate sound practices is quite frankly galling.

Obviously none of these holds insofar as Ben Bernanke is concerned. Faced with its own crisis, the United States has embarked on Wild West experiments in central banking that, quite frankly, have not produced much of anything.

Anyway, to the press blurb:
Global Finance magazine has named the heads of the central banks of Malaysia, the Philippines and Taiwan as the World’s Best Central Bankers over the past year, in recognition of their achievement of an “A” rating on Global Finance’s Central Banker Report Cards. In addition, the central bankers of Chile and the European Union earned “A-” ratings.

The Central Banker Report Cards, published annually by Global Finance since 1994, grades central bank governors of more than 50 key countries (and the European Union) on an “A” to “F” scale for success in areas such as inflation control, economic growth goals, currency stability and interest rate management. (“A” represents an excellent performance down through “F” for outright failure.) Subjective criteria also apply.
It is almost surreal to me, but the Philippines' own Amando Tetangco is the "veteran" here, having won the award five times in 2006, 2007, 2011, 2012 and now 2013. He is becoming the Michael Schumacher of central banking for those keeping score. This representing a country that was among the hardest-hit during the Asian financial crisis continues to amaze. As I said before, some people learned from their crisis. Others didn't.

BTW: Mario Draghi getting an A- demonstrates that being a Western crisis-hit entity is no excuse. Good riddance, Bernanke. You will not be missed by your own people or the rest of the world.

Saudi Arabia, Probably the UN's Worst Crybaby

♠ Posted by Emmanuel in , at 10/18/2013 05:35:00 PM
This must take the cake for the worst tantrum in international relations for the year: Saudi Arabia's movers and shakers have, in recent years, been lobbying hard to become one of the ten rotating members of the UN Security Council. Then, having secured this berth just recently, the country pulls out:
A decision of such magnitude would have to have been taken by King Abdullah or Crown Prince Salman, said a Saudi analyst who asked not to be named. "Saudi Arabia has been working on (getting onto the Security Council) for the last three years. They trained diplomats, male and female, the cream of the Foreign Ministry, our best talented youths. Then somebody made the decision suddenly to pull out," he said.
Until the Saudis winning selection as a temporary security council member for 2014-2016, no country has ever turned down such a selection. Having done the oozing and schmoozing, Saudi Arabia is acting out over three pet issues not going its way: tougher sanctions on Syria to support Sunni rebel groups it funds; tougher sanctions on its would-be hegemonic rival in the Middle East (Shi'ite) Iran's alleged nuclear weapons program; and the continuing stalemate in Israel-Palestine negotiations:
The failure "to find a solution to the Palestinian cause for 65 years" had led to "numerous wars that have threatened world peace," the foreign ministry said. It also criticised the UN's "failure" to rid the Middle East region of weapons of mass destruction, including nuclear weapons [take that, Iran...and Israel too!]. And it accused the UN of allowing the Syrian government "to kill its own people with chemical weapons... without confronting it or imposing any deterrent sanctions".
Saudi Arabia likely believes it is locked in a contest for its very survival. Not only is the Islamic-Jewish invoked here but also the Sunni-Shi'ite schism. That the US is not willing to "act tough" is the cause of Saudi calls for UN reform, whereas before the Yanks were presumably viewed as being more accommodating of Saudi wishes:
Unlike in the past, when Riyadh's frustration was mostly directed at Russia and China, it is now also aimed at Washington, its oldest international ally, which has pursued policies since the Arab Spring that Saudi rulers have bitterly opposed [...]

Saudi concerns that the U.S. decision to avoid [Syria] strikes demonstrated weakness were underscored by signs of a tentative reconciliation between Washington and Tehran, something Riyadh fears may lead to a "grand bargain" on Iran's nuclear programme that leaves Gulf Arab states at a disadvantage. In an earlier sign of mounting Saudi anger, Foreign Minister Prince Saud al-Faisal two weeks ago cancelled his speech at the U.N. General Assembly in what a diplomatic source said was a response to international inaction on Middle East issues.

It has been sharply critical of U.S. policy in the Middle East since the Arab Spring, not only on Syria but also in Egypt, where Washington cut off aid to the military after it ousted a Muslim Brotherhood government that Riyadh saw as a threat. In an interview with pan-Arab daily al-Hayat on Tuesday, Saudi Arabia's ambassador to the U.N. Abdullah al-Muallami described U.S. policy on Egypt as "arm-twisting".
This whiny behavior has more to do with geopolitics than with the unfairness of the UN Security Council setup. I do agree that it's unfair that we continue to accede to the wishes of victors of a conflict that ended almost seventy years ago. However, the Saudis acting in such an immature manner is hardly the sort of thing to get the ball rolling in terms of UN reform.

After all, it's hardly acting in the interests of all members but in its (rather petulant) self-interest. Had its former American buddies given Saudi Arabia its way, I hardly think it would be acting so very immaturely. In any event, the IPE Zone's "Best Dramatic Performance About the Unfairness of the World" award for 2013 goes to Saudi Arabia. No one even comes close.


Japan to Privatize Its Forex Reserve Management?

♠ Posted by Emmanuel in at 10/17/2013 10:24:00 AM
Here's an experiment in foreign exchange reserve management that looks interesting. We've heard of sovereign wealth funds (SWFs) that invest in non-traditional reserve assets, i.e. those other than sovereign debt of major currency-issuing countries or precious metals alike gold. These SWFs may place funds in equities and so forth. However, the innovation insofar as SWFs are concerned is on the portfolio side: they are diversifying placements of reserve assets in search of greater yield. In other words, SWFs are state-owned in their charter.

Hence Japan purporting to allow non-governmental entities to allocate part of its $1.27 trillion stash looks unique insofar as the management side rather than the placement involves the private sector:
Japan is looking to allow private sector funds and trust banks to manage a part of its $1.27-trillion pool of foreign exchange reserves in a drive to manage them better, a government source told Reuters on Sunday. Until now the government has managed the foreign exchange reserves itself, but its ability to do so has been stretched as the reserve roughly doubled over the past decade, thanks to massive yen-selling interventions to weaken Japan's currency.

The government needs to clear legal hurdles on its use of foreign exchange assets if it wants to draft in the services of private financial institutions and will propose amending the law during a parliamentary session that begins on Tuesday. The government is now restricted to lending its foreign securities only to banks, but the new law will also permit brokerages to borrow securities, the source said, with the fees borrowers pay going to replenish government coffers. "
Although we do not think the Japanese government will outsource all of the foreign exchange reserve to the private sector, even just a 10 percent outsourcing will become a $120 billion business," Tohru Sasaki, head of Japan rates and FX research at JP Morgan Tokyo, told clients in a note. 
Interesting if risky stuff. If large losses are sustained though, who's to blame--the Japanese government, the fund manager or both? It's the governance issue that needs sorting out if this experiment in forex reserve management is to be conducted. There's also the qualification for would-be managers that Japan being America's stalwart ally in the Asia-Pacific, assets must be kept in dollar-denominated securities.

Lame PRC Exports Can't Stop Ascendant Yuan

♠ Posted by Emmanuel at 10/15/2013 09:37:00 AM
It is fairly common knowledge by now that Chinese economic growth is slowing down from the double-digit to high single-digit range of years gone by. Among other things, weakness in demand in overseas markets has dented its vaunted export machine. The most recent external figures indicate that this trend is still continuing:
The currency moves came hot on the heels of official data showing Chinese exports slid in September [2013] by 0.3 percent from a year earlier. The figures confounded expectations for a 6 percent rise and marked the worst performance in three month [...]

In addition, the unexpected weakness in September's exports raised fresh concerns that economic growth - which has fallen in nine of the last 10 quarters - could stumble once again just as it has shown signs of picking up.
With exports on the wane and economic growth slowing down, have PRC authorities let up on the pace of yuan appreciation? Actually, no. It appears China is really serious about rebalancing its economy this time by allowing its currency to appreciate to a semblance of a market-determined exchange rate. In so doing, the hope of course is to rebalance their economy towards a domestic consumption-led economy that is less vulnerable to external shocks despite the expected complaints from exporters:
A stronger yuan is a key goal for policymakers trying to wean the economy off a heavy emphasis on exports more towards consumption-led growth. But they face complaints from Chinese exporters that the yuan's enduring strength is putting their products at a disadvantage in overseas markets even as foreign demand remains tepid.

The intraday record high of 6.1073 per dollar leaves the yuan up 2 percent in 2013, in marked contrast to slides posted by other Asian currencies, and more than 35 percent higher since a revaluation in 2005. "Domestic businesses hope there won't be more rises for the yuan, because exports are still really weak. If the yuan keeps rising, the results could be really ugly," said a currency trader at a European bank in Shanghai [...] 
Some economists predicted the central bank would be forced to let the yuan slip back, at least symbolically. Instead, it held a firm line. The currency has also risen in trade-weighted terms every month since Sept 2012 until finally declining slightly in August, data from the Bank for International Settlements (BIS) shows. BIS data for September should be released later this week.
What's interesting is that, absent Westerners haranguing China to revalue its currency, PRC authorities will actually do so on their own. There's a moral to the story about letting people figure out what they should do by themselves somewhere in here. Also, the article mentions public pressure to stop accumulating dollar-denominated (demoninated?) reserves given America's non-existent federal government as well as potential reductions in energy import costs. The price action is also in keeping with making the yuan attractive as a reserve currency, but in my case they are already preaching to the converted.

As an erstwhile marketing student, I am especially curious about how China's domestic-oriented strategy may involve producing innovative, higher-quality goods instead of competing solely on price:
Despite exporters' complaints Beijing's reformers see a stronger yuan as key to moving China to an economic model focused on producing higher-quality goods for domestic consumption, instead of churning out low-grade exports competing only on price.
I am not sure if locals are more demanding quality-wise than foreign consumers, but one thing is certain: China's salad days relying solely on a strategy of pile 'em high and sell 'em cheap are numbered. So it's a "creaking export model," according to some, but it's probably by design. Alike the rest of us, the Chinese appear to have realized that it's time to move on.

Will the Eurozone/Euro Benefit From a US Dollar Crisis?

♠ Posted by Emmanuel in , at 10/14/2013 11:09:00 AM
With the US supposedly flirting with being the first Western country since 1933 Nazi Germany to default, attention needs to be paid on those other Westerners and their economic plight as a consequence.

As a holder of euros myself and other non-junky stores of value--not gold, not Treasuries or any of that riffraff--I of course wish that the United States' self-inflicted crisis wallops their godforsaken currency. No ifs, not buts. However, the opinion of ECB policymakers is decidedly more guarded. Sure, it may increase the prestige of euro currency at a time when the Eurozone is just exiting a very long recession if its share of global currency reserves increases further. Then again, the bifurcation of Northern and Southern states' economic performance is worrying. Sure the likes of Austria and Germany can survive with the single currency at, say, $1.40. But the hobbling "Club Med" countries declared no mas a long time ago.

So yes, (nominal) Austrian CB guv'nor Ewald Nowotny expresses concern with what happens Stateside:
The dollar's role as the world's leading reserve currency is at risk because of the political impasse in the United States, which has raised fears of a debt default, European Central Bank policymaker Ewald Nowotny said.
Then again, Nowotny wears two hats since he is also a member of the ECB's governing council and must therefore consider the plight of the Euro-laggards:
"This discrepancy is very dangerous and in my view will have a negative impact on the long-term role of the dollar.
Interviewed in Washington during meetings of the International Monetary Fund and World Bank, Nowotny said jitters over the U.S. budget standoff were already pushing the euro higher. This was not such a big problem for Austrian exporters but posed more of a threat to southern euro zone members, said Nowotny, who is also governor of the Austrian central bank.
What's that saying about the weakest link(s)? It's what holding the Eurozone from wishing the US and its currency a well-deserved oblivion. Sure the Eurozone has taken its lumps, but even the likes of Greece and Portugal didn't default outright.


IMF Returns; Will Pakistanis Hate US Even More?

♠ Posted by Emmanuel in , at 10/13/2013 01:28:00 PM
I entitled an earlier post about Pakistan, the US and the IMF "When Cash & Hate Collide." To underline that assertion, here's Exhibit A: In a recent Pew Global Attitudes poll, the country which assigned the lowest favorable opinion rating to the United States was--wait for it--Pakistan at a ridiculously low 11% [click for a larger image]. It even outdoes places where Amerihatred is keenest based on current events alike Egypt and the Palestinian territories. As for the cash part, in case you haven't read about it, Pakistan recently inked another IMF bailout for $6.6 billion. That's its eighth--that it not a typo--since 1988. Talk about a state of perma-crisis.

Recently I assigned US-Pakistani ties as a term paper topic to my students. They are well aware of what binds these two reluctant "allies": the danger of a failed nuclear state, the constant Taliban menace, and the strategically advantageous location of this country. The truth is that no matter how badly Pakistan mismanages its economy, the US through the IMF will always come to its "rescue":
In 2008, Pakistan agreed to an $11.3bn loan from the IMF to avert a balance of payments crisis. It received $7.6bn but failed to get the remaining $3.7bn because of its slippages in meeting the performance criteria. That led to the suspension of the programme in May 2010. The programme was extended in December 2010 for nine months, but disbursements were not resumed because of the country’s failure to take fiscal measures as demanded by the IMF. Ironically, Pakistan has availed itself of the new $6.6bn loan to repay the old loan to the IMF of which about half – some $4bn – is outstanding [my emphasis].
From where I come from, borrowing to repay previous borrowing is called a "Ponzi scheme." Whether the IMF does more harm than good is an open question as the IMF readies fairly harsh conditionalities once more. That said, there is hardly reason to believe that Pakistan can work its way out of trouble on its own despite the constant IMF debt overhang. Misplaced subsidies, huge budget deficits, moribund investment, next to non-existent FDI, lack of basic law and order in most places...Pakistan has almost all the negatives humanly possible.

But, going back to the title of the post, can Pakistan be made to hate the US even more after unauthorized incursions via drone strikes, bin Laden strikes, perceptions of IMF neo-imperialism and so on? You can argue that America's 11% favorable rating has nowhere to go but up. I actually expect that it will in the near future as a "dead cat bounce" phenomenon.

As for IMF lending, I expect the same cycle to repeat itself as it has eight times over the last few decades: Pakistan will try to comply for a while with IMF conditionalities but eventually decide the political price of obsequiously bowing to this American hegemonic institution are too high. After all, if there's a better scapegoat for Pakistani perma-crisis than the IMF with its 11% approval rating by proxy, I don't know what is. Who's more masochistic here, Pakistan or the IMF? Beats me, pal.

Central Banks and Gold: Buy High, Sell Low

♠ Posted by Emmanuel in at 10/10/2013 11:24:00 AM
Despite strides made by central banks worldwide in recent years to control inflation, they are hardly infallible. Take the case of gold: With developed country central banks printing money like there's no tomorrow in order to jump-start their moribund economies--especially after the global financial crisis--you would expect that gold would benefit as an inflation hedge. Indeed, gold prices have increased many time over in the new millennium.

However, central bankers have not really benefited from the rising and now falling of gold prices since they are, after all, public financial managers of a sort rather than speculators. Owning nearly a fifth of all bullion extant, they are major market players. Yet, when it comes to trading gold, their timing tends to be off in the sense that they collectively buy high and sell low. Based on central bank gold holdings, Bloomberg calculates that their combined losses amount to $545 billion since the metal hit its peak in 2011:
Policy makers, who are responsible for shielding their economies from inflation, often mistime gold investment decisions, buying high and selling low. They were reducing holdings when bullion reached a 20-year low in 1999 and as prices as much as quadrupled in the next nine years. Central bankers became net buyers just before the peak in 2011.
There's more detail from Bloomberg on the extent of mistiming the markets:
Holdings were little changed from the start of 2008 through early 2009. Then, policy makers increased gold reserves as prices doubled and they have purchased a net 884 tons since the 2011 peak, International Monetary Fund data show. Russia was the biggest buyer, adding about 171 tons. Kazakhstan bought 67.2 tons and South Korea purchased 65 tons. Turkey’s reserves swelled about 371 tons in the past two years as it accepted bullion in reserve requirements from commercial banks.

In addition to buying when prices rose, central banks sold into slumping markets, disposing of about 5,899 tons in the two decades from 1988, equal to about two years of current mine supply. The U.K. auctioned about 395 tons from July 1999, a month before prices reached a two-decade low, through March 2002. Gold averaged about $277 as the country was selling. The Bank of England’s hoard of ingots and coins, including a bar smelted in New York in 1916, now totals 310.3 tons, or 13 percent of the nation’s total reserves.
Gold bugs will of course argue that continued money printing and developing states' inability to transition away from easy money policies will result in massive price rises in the future. If this scenario comes to pass, then seemingly large losses trading gold now will disappear. Again, though, it's more conjecture than fact at the moment.

Bottom line: there are good reasons why central bankers are where they are instead of at commodity trading desks.

Puerto Rico...Uncle Sam's Next Bailout Victim?

♠ Posted by Emmanuel in , at 10/09/2013 02:29:00 PM
They could use more tourists right about now
 I don't wanna be your lover...I just wanna be your victim - Elvis Costello's "The Beat"

The post title may strike you as unusual: How can someone be a "bailout victim" when a bailout is some sort of "rescue" from financial calamity? Well, read on. Recently I have been on a tear classifying episodes of economic stagnation combined with depopulation as "Detroitification." Unbeknownst to many, the American protectorate of Puerto Rico is in a major financial bind a la Detroit with increasingly unpayable debt and a declining population:
Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.
Since the start of the year, bond prices have fallen 18.1% in a selloff as investors (suckers?) took fright. Fine then, you say--let Puerto Rico declare bankruptcy alike Stockton, Detroit, or any other Brokebank Yank town. Unfortunately for Puerto Rico, it's not that easy. As a protectorate, its status is unlike that of a municipality but rather a nation-state. In other words, it cannot "work out" its issues with creditors since, well, there's no international bankruptcy court out there. Nor can it go to the IMF since it's not a member. So tough:
Detroit, at least, was able to seek relief in bankruptcy court, but Puerto Rico is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy. Another territory, the Northern Mariana Islands, tried in 2012, but its case was rejected.  
Now, to the part about being a "bailout victim." The United States has been roiling the world economy at an increased rate with its myriad dysfunctions and financial chicanery since 2007. When all the (premature) talk about tapering introduced panic into global capital markets midyear, it was the United States' collateral damage that dealt Puerto Rico the knockout blow. As bond investors chased yield in a low-to-no yield environment, Puerto Rico abused its peculiar attractiveness to engage in high-risk borrowing. The worst symptom, as you would expect, is borrowing to pay off previous borrowing:
Until a few months ago, Puerto Rico was the belle of the bond markets. As a territory, it can sell bonds that pay tax-exempt interest in all 50 states, a rare and desirable trait. Puerto Rico’s bonds also pay higher interest than many others because its credit rating is relatively low — but not low enough to scare off investors. Some of its bonds were insured against default; others have special legal structures that make them seem bulletproof. The territory’s constitution explicitly states that general bond obligations have first call on all available resources.

Because Puerto Rico’s bonds have these unusual advantages, investors snapped them up year after year, even as the territory’s overall debt load started to snowball. In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds — a red flag. It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system — a risky practice — and it sold still more long-term bonds to cover its yearly budget deficits.
So Puerto Rico was pyramid scheming its debt. Let it pay the price, you say. Once more, it's not that easy. Last I checked, the US (federal) government was closed and could not reach agreement on anything dealing with fiscal matters. With Puerto Rico's credit rating set to be downgraded to junk status, things could get even worse. Uncle Sam is aware of the impending catastrophe, but can he get the legislators on board to execute a rescue? It's certainly an open question:
As a result, officials at the White House, Treasury Department and Federal Reserve have been meeting to discuss the matter and to assess the potential consequences for the overall municipal-bond market, people familiar with the discussions said [...]

A Treasury spokeswoman said: "Given the potential for Puerto Rico's financial challenges to impact U.S. markets, including the municipal market, Treasury continues to closely monitor developments." The Federal Reserve Bank of New York and Fed officials in Washington declined to comment. The New York Fed has regulatory jurisdiction over Puerto Rico. The White House advisory group is coordinating with other federal agencies "to make sure that federal resources are fully utilized for maximum impact for the people of Puerto Rico," one senior Obama administration official said.
In a manner of speaking it's partly the American's fault by worrying capital markets for no good reason whatsoever with vapid taper talk. However, a larger part is due to Puerto Rican financial mismanagement plain and simple. Sammy may have delivered the coup de grace, but PR leaders had already done the bulk of the damage to set it teetering. From where I come from, $87 billion is still a lot of money. Nevertheless, just as jurisidiction over working out the debt issues of an insolvent protectorate is uncertain, so is the culpability of the US government.

At any rate, here's another headache for the Brokebank Yanks when it least needs another one. That, dear friends, is the beat.

'Reshoring' Fad: Fed by 'Made in the USA' Fad?

♠ Posted by Emmanuel in at 10/07/2013 04:16:00 AM
I am in the minority over at Yahoo! News
Country of origin remains a sticking point in IPE no matter what economic liberals say. Today, let us look at a possible 'multiplier effect' where inviting manufacturing back home to America may be complemented by retailers advertising that more of their products are made there. In case you missed it, there's a 'reshoring'  fad going on Stateside wherein manufacturers who once decided to go to China and coming back since the cost savings they expected did not materialize. Often, transaction costs in the from of chronographic, geographic or linguistic differences negated labor cost savings. With China rapidly industrializing and its working age population falling, it was perhaps inevitable that even the labor cost advantage would be eroded. Whatever the cause, the net effect is more American firms coming home to America:
The Boston Consulting Group survey found 21 per cent of a sample of 200 executives of large manufacturers were either already relocating production to the US, or planning to do so within the next two years. A further 33 per cent said they were considering it, or would consider it in the near future.
Retailing giant Wal-Mart recently put more emphasis on selling US-made goods for obvious reasons. In difficult times, it becomes harder to justify selling boatloads of goods made elsewhere regardless of cost savings passed on to consumers. There's even a feature trumpeting "Made in the USA" products on their website. With Wal-Mart setting a quota for Stateside purchases, it was perhaps inevitable that the reshoring movement gained even more momentum:
Wal-Mart's new emphasis on U.S. goods spells opportunity for Lip Yow, a Malaysia-born entrepreneur who until recently made everything in China. Mr. Yow's company, AFC Trident Inc., Ontario, Calif., uses contract manufacturers in Shenzhen, China, to make plastic cases that shield smartphones and tablet computers. In April, Trident began production at a small factory in Rancho Cucamonga, Calif. Mr. Yow aims to shift most production from China to the new California plant, partly to appeal to retailers like Wal-Mart.

Getting on the shelves of Wal-Mart, the nation's largest retailer, is "very important," Mr. Yow said, showing a visitor his new plant where an American flag hangs from an overhead crane. [Yeah! USA #1!]

Wal-Mart has promised to increase purchases of U.S.-made merchandise by $50 billion, which would work out to an average of $5 billion a year. That affects just roughly 2% of what Wal-Mart spends annually on merchandise at U.S. stores, said Matthew Nemer, an analyst at Wells Fargo Securities. It is less than 1% of the U.S. trade gap in 2012. 
It could be a perverse sort of trade diversion if US retailers expressed trade preferences for buying American despite the economic case not being there. However, it appears that, in certain instances at least, doing so only reinforces the incentives manufacturers increasingly have of making stuff Stateside.

Literally Dying for 2022 World Cup: Migrants in Qatar

♠ Posted by Emmanuel in ,,, at 10/06/2013 10:31:00 AM
Just when you thought Qatar's 2022 World Cup could not get any more controversial after continuing debates about the procedure used to select the tiny state and the difficulties associated with hosting the event during the peak of summer in the desert, there's more: It is common knowledge that the bulk of Qatar's workforce is composed of migrants who do the 3-D (dirty, dangerous, difficult) while its few citizens enjoy air-conditioned insulation from the harsh desert environment. However, recent reports have brought to light just exactly what the human cost is on migrant workers.

The Guardian got--pardon the expression--the ball rolling by reporting on the death toll of Nepalese workers due to poor living and working conditions out in the blast furnace of the Arabian desert to put up mega-stadiums in time for the 2022 event:
This summer, Nepalese workers died at a rate of almost one a day in Qatar, many of them young men who had sudden heart attacks. The investigation found evidence to suggest that thousands of Nepalese, who make up the single largest group of labourers in Qatar, face exploitation and abuses that amount to modern-day slavery, as defined by the International Labour Organisation, during a building binge paving the way for 2022.

According to documents obtained from the Nepalese embassy in Doha, at least 44 workers died between 4 June and 8 August. More than half died of heart attacks, heart failure or workplace accidents. The investigation also reveals:

Evidence of forced labour on a huge World Cup infrastructure project.
• Some Nepalese men have alleged that they have not been paid for months and have had their salaries retained to stop them running away.
• Some workers on other sites say employers routinely confiscate passports and refuse to issue ID cards, in effect reducing them to the status of illegal aliens.
• Some labourers say they have been denied access to free drinking water in the desert heat.
• About 30 Nepalese sought refuge at their embassy in Doha to escape the brutal conditions of their employment.
Der Spiegel then added fuel to the fire by suggesting that Indian workers are also dying of exploitation out in the desert so that the 2022 show may go on:
There are many indications that the 44 dead Nepalese are no exception. Following the revelations in the Guardian, the Indian ambassador reported that 82 Indian workers had died in the first five months of this year, and noted that 1,460 Indians had complained of poor working conditions. The International Trade Union Confederation [ITUC] fears that up to 4,000 workers could die in Qatar before the starting whistle is blown for the first match -- that is, if working conditions don't change.
The 4,000 worker deaths are an extrapolation of the current rate of fatalities being incurred by South Asian workers in Qatar over ten years. Moreover, ITUC argues that Qatar's efforts are in vain since the structure of migrant construction labor is fundamentally abusive:
"The labour inspection system in Qatar has failed, and the government's announcement would simply add some inspectors into a system that doesn't work and will not make a difference," said Sharan Burrow, the ITUC general secretary. "Workers are not able to speak freely as, under the strict visa sponsorship system, employers retain their passports and they are not allowed to change jobs or leave the country without the employer's permission."
Alike nearly all other migrant-receiving states, Qatar has not signed up to the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families. Hence, Qatar's critics are applying pressure on Qatar being a signatory in another ILO convention concerning forced labor:
Qatar is failing to fully implement an international convention banning the use of forced labour ahead of the 2022 football World Cup, the United Nations' International Labour Organisation (ILO) has warned. Azfar Khan, the ILO's senior labour migration adviser in the Arab states, told the Guardian that despite pledges to do otherwise Qatar did not properly inspect workplace conditions and there was "no coherence" in the state's policies over the use of migrant labour.

"The onus is on the Qataris if they have ratified the convention to better implement it," he said. "Many of the abuses that take place which can lead to forced labour are still happening."
It is turning out to be a fiasco not only for football organizers but also for Qatar. The latter's image is receiving a battering that it's hard to imagine it will recover from in nine years' time. Isn't improving national reputation the goal of the whole enterprise? Qatar seems to be losing sight of it very badly.

The (Delayed) Ascent of PRC Rating Agencies

♠ Posted by Emmanuel in , at 10/04/2013 10:16:00 AM
There was another large controversy about Chinese firms operating Stateside three years ago when the PRC-based credit rating agency (privately-owned, mind you) Dagong was denied by the SEC from being granted Nationally Recognized Statistical Rating Organization (NRSRO) status. As IPE Zone readers know by now, NRSRO status is important insofar as gaining this recognition allows a credit rating agency to legitimately evaluate what is still the most liquid capital market of them all for dollar-denominated debt. Then, the SEC claimed that Dagong could not comply with the Feds' standards for tranparency if so required:
[W]e find that we must deny Dagong's application because, irrespective of the jurisdictional question, it does not appear possible at this time for Dagong to comply with the recordkeeping, production, and examination requirements of the federal securities laws.
The "jurisdictional question" concerns the Chinese SEC equivalent the China Securities Rating Commission (CSRC) having its own set of rules concerning access to such documents. At any rate, Dagong was partly culpable in not properly explaining how it would handle SEC requests for information about ratings in terms understandable to Westerner bureaucrats. Dagong even threatened to sue, but nothing came of it:
Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

In a strongly worded statement posted on the company's website Sunday, Dagong said SEC's sole reason for denying its application is the commission can not conduct cross-border supervision over the Chinese firm.
At any rate, Dagong has not given up on its quest to become a global player in the ratings game. Aside from the publicity stunt of downgrading US debt from AAA status before S&P, it now has done what few PRC ratings firms are willing to do in downgrading local issuances regardless of the argument that the government always stands ready to bail out SOEs which constitute a large part of the Chinese economy:
At the end of June, Dagong Global Credit Rating Co. broke ranks with its local competitors and downgraded three bonds issued by infrastructure-construction companies wholly owned by Chinese cities. It said it was losing faith in the governments' backing of the bonds [...] The three bonds Dagong downgraded—for the infrastructure-construction arms of local governments in Jilin, Jiangxi and Hubei provinces—had their ratings lowered by only one notch and still are rated investment grade.
Another strategy aside from establishing an image of political independence at home is using Europe instead of the US as Dagong's Western beachhead:
Dagong's go-it-alone stance is a measure of its ambitions. Chairman Guan Jianzhong—a trained accountant who took over in 1998 and owns a chunk of the 20-year-old private firm, according to a person familiar with the company—has spoken bullishly about the need to break the lock-hold Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings have on global debt ratings. Dagong hopes investors would be open to a new ratings firm after the global financial crisis resulted in a major loss of faith in the established players.

European regulators have taken note. In June, before the downgrades, six European Union regulators approved the registration of Dagong's Milan-based unit, allowing it to rate companies in Europe. Dagong previously had been turned down by the U.S. Securities and Exchange Commission in 2010 after it applied to do the same in the U.S.
The best way to combat Western discrimination is to tell it like it is when handing out ratings, since being proven right by subsequent bond issuer performance is the best way to gain others' confidence. Besides, who exactly is going to argue that Western ratings firms are any good in this day and age? As bond issuances increase from China in particular and East Asia in general, the clout of Asian ratings firms should increase accordingly.

The lame 2010 NRSRO application aside which appeared to fail due to unpreparedness as much as discrimination, it's only a matter of time. 

Japan 'Defeating' Deflation? Not Quite, My Friend

♠ Posted by Emmanuel in , at 10/03/2013 10:28:00 AM
There is much debate in Japan as to whether the Bank of Japan's efforts to pull the country out of a deflationary spiral are bearing fruit. True, Japan's consumer prince index is actually showing a positive trend, but this may be largely down to temporary factors and not to any structural change. What happens when the central bank spigots close? The questions facing the developed world are  similar in certain respects. Moreover, Japan's shuttering of nuclear reactors in the wake of the Fukushima incident has caused price rises that may soon be undone as more plants come back online:
Japan’s core consumer price index, excluding volatile fresh food prices, rose 0.8% in August from the same month a year earlier. That prompted private economists to raise their forecasts closer to the central bank’s 0.6% rise on average for the current fiscal year ending March.

People familiar with the central bank’s thinking say it sees the index going as high as 1.0% by the end of this year. But private analysts still see any such a rise — driven largely by higher imported energy costs — as unsustainable.
Strip out the energy component of CPI and the news is much less headline-worthy. You guessed it--Japan remains in deflation territory:
Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, underscoring pressure on Prime Minister Shinzo Abe to drive wage increases as he seeks to end 15 years of deflation.

Consumer prices excluding fresh food increased 0.8 percent from a year earlier, the statistics bureau said today in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for a gain of 0.7 percent. Stripping out energy and perishables, prices fell 0.1 percent. 
This is non-news in the war against deflation. Can this artifice continue, though? While global energy prices are unpredictable, some commentators argue that restarting more nuclear reactors is tied to the success or failure of Abenomics. Pessimistically and perversely, then, it is possible that souring consumer sentiment caused by greater dependence on foreign energy may instead forestall the reactivation of Japanese nuclear plants:
In all likelihood, the success of Abe’s nuclear agenda will rest upon the success of his economic agenda. If the public and his party remain confident in the direction of Abe’s economic policies, he will likely be able to sell nuclear energy as an integral part of his vision.
What can I say? Japanese political economy is weird even by Asian standards and cannot be directly interpreted from Western example.

Vaporware 3.0? Shanghai Free Trade Zone

♠ Posted by Emmanuel in , at 10/01/2013 10:10:00 AM
In technology-related industries, the term "vaporware" is used for hardware or software that is all hype and no substance. Either the announced products do not even materialize, or if they do, their features are far less impressive than promised. For our purposes, consider them as "vaporware 1.0" and "vaporware 2.0" respectively.

Today, let us consider yet another overhyped entity that is somewhat larger in scale. Try the largest city in the world's largest country--Shanghai, People's Republic of China--boasting a population of an astonishing 23 million. Just yesterday, a 29 square mile chunk of it formally became the Shanghai Free Trade Zone, but no one is entirely sure what this means. Hong Kong billionaire Li Ka-Shing said it may in time overtake Hong Kong as its economic openness--in banking and other services as well as with a more freely traded yuan--would attract more FDI from elsewhere. Yet, for something so highly touted, how Shanghai will achieve this "world capital" status remain unclear even now after its official launch date:
Well, that’s the plan, at least. The government has so far been clear in its intention to introduce financial reforms in the zone, but not as clear on how they will actually take place. The details on what can and cannot be done there, and when certain reforms will be implemented, remain sketchy. The reforms planned for this Shanghai zone will be much more difficult than those that took place in the trade- and manufacturing-focused zones of yesteryear. Factories, and the shirts, shoes and TV sets they make, are easy to monitor and control; not so financial flows, which could surge in and out of the zone with destabilizing speed. Financial firms could also take advantage of different interest rates and currency values inside and outside the zone to turn a quick buck.
In other words, the Chinese authorities need to ensure that arbitrage opportunities are limited. So the rules are not yet finalized, but there was a grand opening, right? Er, no--it was the softest of soft launches, actually:
Officials at the launch of the zone on Sunday promised a far more open and streamlined environment for foreign firms to do business in China, along with the relaxation of policies for a raft of service sectors, including banking.
However, the absence of senior Beijing leaders at the launch and few specifics on bolder reforms such as a more convertible yuan and liberalised interest rates left some disappointed, while officials stressed the zone remains a work in progress.
Vagueness and a lack of Beijing bigwigs does not make for a promising start. How about promises of greater Internet freedom, then? Well...they turned out to be unsubstantiated rumors after all that you could go tweeting and Facebooking to your heart's content:
The People's Daily, the official mouthpiece of China's ruling Communist Party, denied a recent report in the South China Morning Post saying that people would be allowed to access Facebook, Twitter, the New York Times and other politically sensitive, banned websites within a groundbreaking free trade zone set to launch this month in the country's financial hub, Shanghai. "Today (our) journalists obtained the information from a very powerful channel that these reports are wrong," said the People's Daily.
Let us consider what we have learned so far, then. Unspecified promises for greater economic liberalization at a later date, no bigwig apparatchiks on hand to lend support, and no new freedoms of expression. It doesn't sound so promising to me. However, us gweilo (foreign devils) may be thoroughly mistaken as Chinese themselves are speculating by buying up land there at a fearsome clip:
The property market near the soon-to-be free trade zone is also on a roll. Housing prices have soared 20-30 per cent in one month in the area just outside the Waigaoqiao gates, according to Shanghai Yuexin Real Estate “It seems crazy to me. Nobody knows the exact situation about the zone and they didn’t even take a look at the homes before buying them,” said Xi Xinlei, a Shanghai Yuexin agent.
What is the relevant principle here: A sucker is born every minute, or are some people smarter than you and me? If it's the former, perhaps PC World will in the near future consider the Shanghai Free Trade Zone as the top vaporware product of all time. Stay tuned; some folks have already made fairly large bets that Shanghai is entering a new golden age.