Target the yuan? It's politics at play
Saturday, 22 October 2011 09:35
By Linda Lim, For The Straits Times
Many people believe a majority of senators were willing to vote for the Act because it has little chance of becoming law. That is fortunate for the world, since no country would benefit economically from it, and most would be hurt by it. -- PHOTO: REUTERS
THE United States Senate's recent bipartisan passage of the proposed Currency Exchange Rate Oversight Reform Act of 2011 is yet another indication that the US presidential election season next year is definitely, if prematurely, upon us.
Most people believe that so many senators (62 out of 100) were willing to vote for the Act (which has been around in some form for years) because it has little chance of becoming law.
That is fortunate for the US, China and the rest of the world, including Singapore, since none would benefit economically from it, and most would be hurt by it. It would punish countries whose currencies are 'misaligned' - or undervalued and thus subsidising their exports - by imposing large tariffs on their imports into the US.
The Act will impose hardship on US consumers, especially price-sensitive low-income consumers who are already hurting from the weak economy. It would raise the cost of buying China-made products (for which there are often no good domestic substitutes) and reduce the amount of income left to purchase other US-produced goods and services.
It will also hurt the many US-based businesses whose supply chains are heavily dependent on intermediate input imports from China, causing them to lose competitiveness and market share at home and abroad, as their costs rise and their profits are squeezed.
Any jobs created by reduced US purchases from China will most likely be created in other developing countries which share China's comparative advantage in relatively labour-intensive activities, not in the US.
China's likely retaliation would hurt US exports and might hurt US companies operating in China and profiting from its booming domestic market. Such retaliation is likely to arise from the Act not being compliant with World Trade Organisation rules, which permit the imposition of punitive 'countervailing duties' against export subsidies, but have never considered an undervalued currency as an export subsidy.
Definition of what constitutes 'currency manipulation' is also problematic, since the world is full of countries that fix or manage their currencies for one reason or another. In the unlikely event that the Act does become law, Singapore could be among those targeted for having a 'misaligned' currency, since it runs the world's largest current account surpluses as a percentage of gross domestic product (GDP) - between 20 per cent and 25 per cent of GDP - for more than two decades.
The protectionist sentiment behind the Act will also discourage Chinese investment in the US. With US consumer spending, business investment and government expenditure all stagnant or declining, exports and inward foreign direct investment remain virtually the only sources of growth for the anaemic (but not yet recessionary) US economy.
As a means to pressure China to strengthen its currency, the Act is unnecessary and may be counterproductive. China's government decided years ago to let the yuan appreciate, given the costs to its economy of an undervalued currency - which include domestic inflation, loss of consumer welfare and the devaluation of its accumulated foreign assets in yuan terms as the currency strengthens.
The yuan has already appreciated by 30 per cent in nominal terms since 2005, and by much more in real terms, taking into account high inflation in China since the global financial crisis. Any residual undervaluation is likely to be relatively small, given that China's current account surplus (excess of exports over imports) has already shrunk from 10 per cent in 2007 to under 3 per cent last year.
The Chinese government has also shown its displeasure about the Act by slowing and perhaps even stopping the yuan's gradual appreciation (though this is as likely to be motivated by the slowing growth of China's export markets in Europe and the US). With its own leadership transition coming up also next year, it cannot afford to be seen by its own population to be ceding to foreign pressure.
More rapid yuan appreciation also means the Chinese will buy less or sell more US dollar assets - including US Treasuries, which fund the US government budget deficit. This could raise US interest rates, making it more costly to fund consumer purchases, business investment and the budget deficit, further slowing GDP growth and causing job loss.
In any event, current account imbalances are determined by domestic macroeconomic imbalances rather than by exchange rates, with the US deficit resulting from low domestic savings and a large budget deficit, and China's surplus from high domestic savings. Thus, a quarter-century of yen appreciation (from 250 yen to the US dollar to the current 75 yen) has not eliminated Japan's current account surplus with the US.
Why, then, did the Senate pass an Act that is so clearly a 'job killer', and so risky for the stability and recovery of an already shaky world economy?
The answer, as so often, lies in domestic politics. Nearly every US presidential candidate since Mr Bill Clinton has used China as a bogey in his election campaign - and that includes not just Mr George W. Bush (Harvard MBA) and President Barack Obama (Harvard JD), but also current Republican candidates Mitt Romney (Harvard MBA) and Jon Huntsman (Wharton MBA), both of whom are former business leaders who should, and do, know better. The Mandarin-speaking Mr Huntsman is even a specialist on, and former US ambassador to, China (and before that, to Singapore).
Electoral candidates may pander to the voting public, who cannot be expected to understand the arcane analytical and empirical complexities of exchange rates, and who often seek foreign scapegoats to blame for their domestic woes (in which case Europe should be more of a target than China this year).
A president, however, cannot do this, as he must act in the best interests of the country at large (and also relies on the business community for much of his campaign's financial support). This makes him vulnerable to accusations on the campaign trail of 'selling out to the Chinese'.
Fortunately, despite the current predilection of Republicans and Democrats for blaming each other for everything under the sun, so far Mr Obama has been helped by Republican House Speaker John Boehner in preventing the Act from coming up for a vote there (where it would probably pass by a wide margin, forcing a presidential veto). Now that is the kind of bipartisanship that America - and the world - could use
The writer is professor of strategy at the Ross School of Business, University of Michigan, in the United States.
Source - The Straits Times (http://www.straitstimes.com/Review/Others/STIStory_725905.html)
|
China's financial system comes of age
Saturday, 25 June 2011 17:00
By Howard Davies
The financial authorities in Beijing, especially the People's Bank of China (above) and the China Banking Regulatory Commission, have a good record of managing incipient booms and busts. They have already been tightening the screws on credit growth for several months, with positive effects. -- PHOTO: REUTERS
THE Chinese financial system's evolution in recent years has been extraordinary. I have observed its transformation as a member of the International Advisory Council of the China Banking Regulatory Commission (CBRC).
Back in 2002, all of China's major banks were awash in non-performing loans (NPLs), which in some cases amounted to more than 10 per cent of the total balance sheet. None of the major banks met even the Basel 1 standards for capital adequacy. Few financiers in London or New York could have named any bank other than the Bank of China, which was often wrongly thought to be the central bank. And to suggest that the United States Federal Reserve, or Britain's Financial Services Authority, might have anything to learn from China's financial authorities would have been thought absurd.
Less than a decade later, much has changed. The old NPL problem was resolved, primarily by establishing asset-management companies to take over doubtful assets and injecting new capital into the commercial banks. Now, reported NPLs amount to little more than 1 per cent of assets. Foreign partners have been brought in to transfer skills and minority shareholdings have been floated. Current valuations put four Chinese banks in the global top 10 by market capitalisation. They are now expanding overseas, fortified by their strong capital backing.
Of course, challenges remain. Even in China, there is no magic potion that can revive a loan to a defunct exporter. And the country's big banks have lent large sums, willingly or otherwise, to local governments for infrastructure projects - many of them of dubious economic value. There is an ever-present risk that the property market might one day collapse, though banks would emerge in better shape than have those in the US and Britain, because much speculative investment has been funded with cash, or with only modest leverage.
The authorities in Beijing, especially the CBRC and the People's Bank of China (the real central bank), have a good record of managing incipient booms and busts, and I would not bet against their success this time. They have considerable flexibility, owing to a range of policy tools, including variable capital and reserve requirements and direct controls on mortgage lending terms. They have already been tightening the screws on credit growth for several months, with positive effects.
It would be flattering to think that this turnaround in China's financial system has been attributable to the wise counsel of foreign advisers. But, while external influences have been helpful in some ways - the stimulus of Basel 1 and Basel 2 strengthened the hands of those in Beijing determined to clean up the banking system - the Chinese now, not unreasonably, treat advice from the City of London and Wall Street with some scepticism. For example, recent criticism of Asian regulators by US Treasury Secretary Timothy Geithner is viewed across the region with scorn, not to mention incredulity. A little more humility is in order, given US regulators' performance in the run-up to the crisis. People who live in glass houses should not throw even rhetorical stones.
The most interesting development is that we can now see increasing convergence in the regulatory philosophies and toolkits of Beijing, London and New York. Until the recent near-implosion of Western capitalism, the North Atlantic authorities thought that the end of financial history had been reached. Financial conditions could be controlled with one tool - the short-term interest rate - deployed exclusively in pursuit of a target, implicit or explicit, for consumer price inflation.
Banks' capital-adequacy ratios were set globally, and once set, remained fixed. Otherwise, the market knew best. Banks had their own incentives to lend wisely, and controls on lending would necessarily prove ineffective. By contrast, in China, all aspects of a bank's business were directly overseen. Indeed, most banks were under the sway of the central bank.
Now, in Beijing, officials see the advantages of a more hands-off approach, and of institutions with a primarily commercial focus. But they have not eschewed the use of variable capital and reserve requirements, loan-to-deposit ratios, and thresholds for minimum deposits and maximum leverage as controls on property lending.
Meanwhile, in developed capital markets, we are busily reinventing these 'macroprudential instruments', to use the term now in vogue in Basel. We can now see the utility of a more flexible toolkit to respond to excessive credit expansion, or asset-price bubbles, where the manipulation of short-term interest rates can be a blunt instrument, or worse, a double-edged sword. An interest-rate rise might take the heat out of the mortgage market, but it will also chill the rest of the economy.
Regulatory philosophies are converging, too. Former British prime minister Margaret Thatcher's famous injunction that 'you cannot buck the market' was part of the regulatory mindset in the pre-crisis 'Anglosphere'. And former Fed chairman Alan Greenspan resisted any attempts to rein in the animal spirits of the wealth creators on Wall Street.
The Chinese were less ideological. They had no compunction about calling a bubble a bubble, or in intervening to deflate it. Now, only former Alaska governor Sarah Palin reveres Mrs Thatcher's views on all issues, and Mr Greenspan has been airbrushed out of financial history, Chinese-style.
When the Group of 7 morphed into the Group of 20 in early 2009, many were understandably worried that, with such a diverse range of participants coming from such different traditions, it would be difficult to achieve consensus on regulatory matters in the Basel Committee and elsewhere.
These concerns turned out to have been overstated. The elements of a broader consensus on the future role of financial regulation are in place, as long as Americans like Mr Geithner can resist their constant desire to tell the rest of the world to do as they say, not as they do.
The writer is the former chairman of Britain's Financial Services Authority and former deputy governor of the Bank of England.
PROJECT SYNDICATE
Source - The Straits Times (http://www.straitstimes.com/Review/Others/STIStory_683667.html)
Looking to China's role as global player
Wednesday, 08 June 2011 07:38
By Loh Su Hsing , FOR THE STRAITS TIMES
IN FEBRUARY, China voted in favour of UN Resolution 1970 authorising sanctions against the Libyan government. The following month, China chose not to veto UN Resolution 1973 imposing a no-fly zone in Libya, the freezing of Colonel Muammar Gaddafi's assets and the referral of Col Gaddafi to the International Criminal Court.
These gestures going against China's usual stance of non-interference have been widely perceived as a positive reaction to calls for China to become a responsible stakeholder of the world.
But is China really irresponsible in the first place?
As of December last year, China has dispatched 17,390 military personnel to 19 UN peacekeeping missions. Currently, China has more peacekeeping troops at the UN than any of the other permanent members of the UN Security Council. Last year, China started deploying naval frigates to patrol the Gulf of Aden, and while their primary mission is to escort Chinese merchant vessels, they are available to protect other ships upon request.
Since 1999, China has not taken loans from the International Development Association (IDA) of the World Bank, and in 2007, China went from being a receiver of aid to becoming a contributor to the IDA. The World Food Programme made its last donation to China in 2005, after rendering assistance for 25 years.
At the UN High Level Plenary Meeting on the Millennium Development Goals on Sept 23 last year, Premier Wen Jiabao pledged to increase foreign assistance. He shared China's plans to build 200 schools for the developing nations, send 3,000 medical experts, train 5,000 medical staff, and offer medical equipment and medicine for 100 hospitals. China will also donate US$14 million (S$17 million) to the Global Fund to Fight Aids, Tuberculosis and Malaria in the next three years. The Chinese government, by the end of 2009, has exempted 25.6 billion yuan (S$4.8 billion) of debt for heavily indebted poor countries and the least developed ones.
Since July last year, China has given
zero-tariff treatment to the exports from 33 less developed countries for more than 4,700 tariff items, covering the vast majority of the products from these countries. Africa received the largest amount of aid, followed by Latin America and lastly South-east Asia. While the aid to Africa and South-east Asia focused on infrastructure and public works projects, the aid for Latin America was concentrated on natural resources development. It should be noted that this development aid clearly benefits the Chinese economy through repayment in kind (in the form of natural resources) and the awarding of contracts to Chinese companies.
Based on the latest statistics, China is the third largest contributor to the International Monetary Fund (IMF) at 4.01 per cent, after the United States (17.75 per cent) and Japan (6.58 per cent). China was among the first countries to agree to buy the first bonds issued by the IMF for approximately US$50 billion. While there was general expectation that China would sell some of its foreign-exchange reserves to buy the IMF bonds in order to reduce its exposure to the US dollar, China abided by the IMF practice where member states make most of their contributions in local currencies.
China has often been accused of manipulating its currency, despite the fact that after the currency peg ended in 2005, the yuan rose 21 per cent in the following three years, and the appreciation was subsequently halted for two years to help Chinese exporters during the global financial crisis. In the Asian financial crisis of 1997-98, China also chose not to depreciate the yuan, partly in order not to enjoy an unfair advantage over its South-east Asian neighbours, but also because having a stable currency was a requisite to join the World Trade Organisation.
Heavy criticism has been levelled at China's relationship with rogue states. Its relations with countries such as Iran are clearly tactical and the result of having to carve out political and economic space in regions not dominated by the US. Analysts estimate that by 2020, nearly 65 per cent of the oil consumed in China will have to be imported. According to the International Atomic Energy Agency, China will be dependent on the Middle East for 70 per cent of its oil needs by 2015. Iran is perhaps China's most stable strategic option, in view of the pro-US alignment of all the other Gulf oil states.
Since the inception of the UN Security Council, China has exercised its veto only six times, compared to the US, Britain and France which have exercised their vetoes 82 times, 32 times and 18 times respectively. China has not vetoed any action against Iran, North Korea, Sudan, while the US has blocked more than 30 UN resolutions against Israel. The case of Libya has shown that it is possible for China to move from a blanket 'non-interference' policy, to one based on a case-by- case consideration. This is a positive development in Chinese foreign policy that should be encouraged. Despite its strong stance on its policy, China generally avoids being isolated on major global issues. Working to ensure the other main parties are in agreement on key decisions is instrumental in bringing China on board.
China is currently straddling two identities - it is a developing country by many measures and yet, due to the size of its gross domestic product and phenomenal rate of economic growth, it plays in the league of developed countries. It is still wounded by history, and has politically manipulated that history to emphasise its role as a victim. At the same time, it has demonstrated its confidence to use its new-found clout and power. The world is at once confronted by a China that is outwardly assertive, confident and powerful, and a country inwardly-focused on internal problems it considers must be prioritised above anything else.
China is at a critical juncture now where it is coming to terms with external expectations of its global role, and to what extent it should conform to global norms or recalibrate them. The significant efforts made by China in recent decades should not be overlooked. Labelling China irresponsible is unlikely to achieve the desired effect.
The writer, a Singaporean, is an Associate Fellow at Chatham House, London, and a PhD candidate at the School of International Relations and Public Affairs, Fudan University, Shanghai.
Source - The Straits Times (http://www.straitstimes.com/Review/Others/STIStory_677317.html)
End of cheap goods for US, Europe as Asia's wages surge
Thursday, 02 June 2011 07:29
ASIA SLOWING DOWN
HONG KONG: Wages are surging this year in China and in its main low-wage Asian rivals, benefiting workers across the region. But the increases confront trading companies and Western retailers with surging costs, and are making higher price tags likely for American and European consumers.
Mr Bruce Rockowitz, the chief executive of Li & Fung, which supplies Chinese consumer goods to US retail chains, said in a speech here on Tuesday that the company's average costs for goods surged 15 per cent in the first five months of this year compared with the same period last year.
Airline flights to Vietnam, Bangladesh, Indonesia and other low-wage Asian countries are packed these days with executives looking for alternatives to double-digit wage increases in China. But wages are rising as fast or faster in many of these countries, following China's example.
Bangladesh raised its minimum wage by 87 per cent late last year, yet apparel factories there are still struggling to find enough workers to complete ever-rising orders.
The Gap surprised financial markets on May 19 by announcing that a 20 per cent jump in costs from suppliers by the second half of this year would depress its profits, prompting a 17.5 per cent plunge of its shares the next day.
Wages in Vietnam have been rising as fast as those in China, or faster, while India has posed many problems for large-scale manufacturers. Mr Rockowitz said India's roads and ports were 'really poor', while labour issues, including government regulations, make it hard to build Chinese-style factories for tens of thousands of workers.
With costs rising in China and few alternatives elsewhere, 'you have the perfect storm for raising prices', said Mr Bennett Model, the chief executive of Cassin, a Manhattan-based line of designer clothing. The firm's costs have risen 25 to 35 per cent in the last year for cotton and fur garments alike.
NEW YORK TIMES
Source - The Straits Times (http://www.straitstimes.com/PrimeNews/Story/STIStory_675118.html)
Mainland Chinese take to shopping with zeal
Monday, 30 May 2011 17:13
By Cheryl Lim
CapitaMall Fucheng in Mianyang city's Fucheng district in Sichuan province. Australia-based research and consultancy firm Ubris said the number of malls in China has swelled to 1,200, with 100 to 150 new developments built every year. -- PHOTO: CAPITAMALLS ASIA
IT HAS been a long time coming but Chinese shoppers are finally reaping the benefits of the gleaming shopping malls we have taken for granted for decades.
Shopping in the mainland has long been a case of visiting the neighbourhood outlet or local produce markets.
While those shops and market stalls remain a mainstay in China, shiny new malls are mushrooming across the country, delivering huge opportunities to Singapore developers like CapitaMalls Asia (CMA).
A 2003 report from market research agency Euromonitor estimated there were 236 malls in China's major cities.
Mr Peter Holland, director at Australia-based research and consultancy firm Ubris, said that number has swelled to 1,200 malls, with 100 to 150 new developments built every year.
These new shopping malls can trump any here in the size stakes. In fact, China lays claim to three out of 10 of the world's largest malls.
One of them, Guangzhou city's sprawling New South China Mall, has a gross floor area (GFA) of 6.5 million sq ft - more than four times that of VivoCity mall. It even has a replica of France's Arc de Triomphe and an indoor roller-coaster.
China's tier-two cities, once dead zones for upmarket shopping, have leaped enthusiastically onto the mall bandwagon as well. Take Sichuan's capital Chengdu, which has 56 malls with a further 34 under development or in the planning stages.
'Mall space could therefore increase by 80 per cent over the next four years,' said Mr Holland.
Singapore-based mall owner and operator CMA opened CapitaMall Jinniu, one of its first malls in the western region, five years ago.
'It was a struggle for us to open the mall in 2006, to be able to lease out well (to good retailers),' said Mr Chan Kong Leong, CMA's general manager for west China, explaining that retailers were not convinced about operating in a mall.
'We needed to build retailer confidence, it took us a long time to convince them to go in,' he added.
It is a different story now with consumers and retailers. That mall is one of CMA's busiest developments in Chengdu, with daily traffic of 40,000 visitors on weekdays and 55,000 on weekends.
Chengdu's disposable income per capita has been rising. The Bureau of Statistics reported last year that annual per capital income had hit 20,835 yuan (S$3,992), almost 2.5 times the 2001's figure of 8,128 yuan.
The city's cashed-up consumers are not shy about spending, with annual retail spending showing double-digit growth over the last decade, soaring from 62.8 billion yuan in 2001 to 241.8 billion yuan last year.
Mr Chan said: 'Previously, shoppers in west China used to be more thrifty. But after the Sichuan earthquake in 2008, it seems more of them are taking a 'live for the moment' attitude and spending more.
'Chengdu shoppers specifically are willing to spend. Although they are impulsive shoppers, they have a somewhat herd mentality, but are also curious and open to new cultures.'
Retailers have also picked up on this behavioural change. Major Chinese brands such as Shanghai-based sporting goods store Hotwind have recently made inroads into western China.
The movement is not just from tier-one cities to tier-two; tier-three centres are moving up as well.
Mr Chan pointed to Three Countries BBQ, a restaurant chain founded in Yibin, a third-tier city that has opened branches in Mianyang, a second-tier city.
This sort of retail movement is a sign that retailers from all over are eager to gain a share of the rapid growth prospects in western China, noted Mr Chan.
Prominent Singapore brands are a dime a dozen in cities like Shanghai, Beijing and even Guangzhou, where the culture of consumerism has helped them establish firm customer bases.
Singapore retailer Awfully Chocolate has seven outlets in China but Ms Lyn Lee, the brand's owner, said she is always on the lookout for new opportunities.
She recently visited Chengdu for the first time: 'The city's infrastructure looks quite comparable to Shanghai's, but I don't know enough about the Chengdu consumer culture. I look forward to finding out more from locals and people familiar with Chengdu, and most importantly, meeting people who would love to grow Awfully Chocolate in Chengdu.'
But Singapore remains noticeably under-represented in the western region. Only a handful of businesses, including food and beverage operator Old Chang Kee, have made inroads into the territory so far, It seems that while the city holds much promise, many retailers are still reluctant to make headway into the area.
New players like Thai Express say setting up in Chengdu is a possibility, but more research needs to be done before they can give a definite nod.
Ms Gayle Phua, head of business development at Thai Express, said: 'The spicy dishes served here indicate that they might take to chilli well and we have heard they are willing to try new cuisines.
'But we're not so familiar with Chengdu as say Shanghai or Beijing so we have to explore a little bit more, like in terms of whether consumers will spend on something like Thai food and how much they are willing to spend.'
Despite this hesitation, CMA's Mr Chan is optimistic about the company's prospects in western China.
He said: 'We started off with our first-generation malls which were a new concept and now we're moving into developing our third-generation malls to meet the increasingly sophisticated needs of our shoppers.
'Yes, the region has changed a lot. But I feel that if you compare what we have here to cities like Shanghai, Beijing, we've achieved so much but we're still only in the early stages. We can still go much further in the years to come.'
Source - The Straits Times (http://www.straitstimes.com/Money/Story/STIStory_674003.html)
|
|
