FiNETIK – Asia and Latin America – Market News Network

Asia and Latin America News Network focusing on Financial Markets, Energy, Environment, Commodity and Risk, Trading and Data Management

Latin America: Investors News Letter 14 March 2013

Top Ranking Banks in Latin America
After a decade of unusual success, the LatAm banking sector has slowed its growth
The year 2011 closed with disturbing news. Banco Santander decided to sell its subsidiary in Colombia, which finally Chile’s Corp Group bought for US$1.225 million. At the time, the chairman of Santander, Emilio Botin, said the measure was taken to “strengthen the balance sheet” of the crestfallen Spanish giants. As he explained, “Our market share in commercial banking in Colombia is far from the 10% which we aspired to get in the markets where we operate.” …

LatAm Hedge Fund Experts Weigh In
On the Current Political and Economic Context
Though 2011 and 2012 have been strong years for LatAm hedge funds, particularly relative to other regions, the political and Workings macroeconomic context in which local managers are investing has been fraught with complicated developments.  For instance, the slowdown in China has affected commodities markets, the lifeblood of many of the region …

Investors Ditch Brazil For Mexico, Colombia

Gramercy Adds to Latin America Private Equity Investment Team

IFC Invests $100M in Energy for Caribbean, Latin America

Brazil

2013 Oil & Gas Industry Perspectives  Brazil
Brazil is heralded as the largest and most significant new oil and gas prospect of the last few decades. However, there is still a long way to go to realize the promise of a new non-OPEC stable source of supply in the top 5 world oil producers by 2020. Progress toward this ambitious target has been slow in the last year, as project development, execution and political risks have taken their toll …

Brazil Real Drops on Speculation Credit Rating May Be Lowered

First meetings on Guyana-Brazil infrastructure project begins

Paraná green lights process to start Paranaguá port infrastructure works in Brazil

ETF investors avoid Brazil

Brazil Seeks Recipe to Attract Investors at Lower Cost

Brazil May Be Next Health-Care Frontier for Global Investors

Troubled Brazil fund Laep to sell 40 mln new shares-filing

BTG Pactual shuts macro hedge fund to new money

Argentina

Argentina Is Replaying Another Inflationary Collapse

Mining investment in Argentina grows 72% despite risky business climate

Fernandez Angers Investors While Ducking Argentine Austerity

Colombia

Foreign direct investment in Colombia seen down in 2013

Chile

Top LatAm selector on working Chile’s red tape

Banchile builds with Fidessa’s sell-side trading platform and connectivity network

Costa Rica

Costa Rica Constructing $96M Oil Terminal

Peru
Peru announces major upgrade to Lima’s water infrastructure

Peru’s Private Pension Funds Want Higher External Investment Limit

Qatar “looks favorably upon” investment-friendly Peru

Peru’s Private Pension Funds Want Higher External Investment Limit

Velarde Says Peru May Allow Pension Funds to Invest More Abroa

Venezuela

Venezuela to Create New Parallel Exchange Rate, Ramirez Says

Venezuela will establish a new parallel exchange rate as it seeks to crack down on a black market in which the dollar is worth about four times more than the official rate, Oil Minister Rafael Ramirez said.

Filed under: Argentina, Banking, Brazil, Central America, Chile, Colombia, Latin America, Mexico, Peru, Venezuela, , , , , , , , , , , , , , , , , , , , ,

Latin America: Investor News Letter 21.September 2012

Mexico

Analysis: China worries spur Mexico stock market flows

MEXICO CITY – Mexico has been on the wrong side of China’s economic boom for the last decade, but is now seeing an upturn in its fortunes as the Asian powerhouse’s economy slows and international stock pickers look to hedge their bets.

Can Mexico live up to its investment potential?
Deutsche Bank Downbeat On Brazil In Wake of Intervention; Mexico Retail Sales Up

Mexico, the “Forgotten” Emerging Market


Brazil

Brazil mulls raising Mexico car trade quota – sources

Brazil is considering raising a three-year bilateral auto trade pact quota it agreed to with Mexico in March, potentially allowing Mexican exporters to sell around $350 million worth of additional vehicles to the Brazilian market annually.

Brazil: PE cools in Brazil, warmes in Mexico and Andes

US urges Brazil in “clear terms’ not to hike tariffs

Brazil reacts to US stimuli saying it will keep the Real ‘devalued’ and competitive

Brazil ethanol returns to US as biofuel rules pave way

Goldman Sachs Plans Private-Equity Comeback in Brazil


Latin America

Colombia rapidly becoming another “positive surprise” from Latinamerica

Uruguay’s economy suffers slight deceleration in 2Q but on track to the 4% target

IMF calls on Argentina to implement measures on the quality of official data

Moody’s changes Argentina rating outlook to negative from stable

Deal Analysis: Panama City Metro Line 1

Gazprom in talks with Argentina’s YPF on LNG supplies

Private equity in LatAm: less new money, more deals

Shadow banking to dominate in LatAm projects

Cuba struggles with foreign investment, growth

China Steps Up Push Into Latin America

Korean Art fair highlights Latin American art

Filed under: Argentina, Banking, Brazil, Central America, Chile, China, Colombia, Energy & Environment, Events, Latin America, Mexico, Peru, Risk Management, Wealth Management, , , , , , , , , , , , , , , , , , , , , , ,

Latin America: Investors Newsletter 19 August 2012

Mexico

Diageo May Buy Jose Cuervo for $3 Billion, Sunday Times Reports
Mexico Ousts Brazil as Investors’ Top Choice in Latin America
Santander Bank’s Mexican unit files for U.S. IPO

Brazil

Overpriced Brazil to Be Profitable for Latam

Latin America and Asia

LatAm and Asia form bright spots for CitiIndia seeks to deepen trade ties with LatAm, Caribbean nationsChina to boost ties with Latin AmericaSpanish Companies Need Latin America For Economic ExpansionNo substitute for domestic strength in Latin AmericaIndia’s trade with Latin America may touch $50 billion by 2014

See also LIQ Latin America Infrastructure ALI Alternative Latin Investor  or MercoPress more information about Latin America.

Filed under: Argentina, Brazil, Chile, China, Colombia, India, Japan, Latin America, Mexico, News, Peru, , , , , , , , , , , , ,

Finamex: It’s a Fine Time to Cross the Border – Mexico the Emerged Market of Growth

In January of this year the theme of emerging markets became more of a primary investment rather than that of an alternative one. Many people ventured toward countries that have had rocket high growth over the last few years such as the BRIC countries of Brazil, Russia, India and China which received the preponderance of excitement in the emerging market approach.

Read full article Mexico the Growth Market

Today, the BRIC countries have been challenged to maintain upward momentum. The simmering down of the American market crisis and the expanding concerns for the Eurozone present a dilemma and are showing the effects. The Institute of International Finance (IIF), a global association of financial institutions, says that “net private capital flows to emerging market economies remain quite volatile and subject to disturbance from the euro area”. According to the research, data capital flows fell in 2011 to $1.03 trillion from $1.09 trillion in 2010 and are expected to fall again this year to $912 billion before rising to $994 billion in 2013.

The woes of the Eurozone monetary crisis have influenced investors to move money out of country and to seek safe haven in securities markets elsewhere. Brazil, Indonesia, China as well as others are no longer experiencing upward momentum and are now even in decline or negative.

However year after year, analysts continue to see strong signs of growth and long term prosperity in Mexico as many of the emerging markets troubles are not being seen in Mexico, in fact quite the opposite.

Brazil with its lucrative energy industry capitalized by the largest South American exchange, has attracted many investors to seek opportunities in Latin America. Brazil has enjoyed the influx of foreign investments and has gone further to encourage more interest from the North by recently lowering some of its staggeringly high tax penalties on returns and additionally allowing the shares of foreign instruments to take more of a part in portfolios of its domestic shareholders. “Investors are more cautious with Brazil,” Gustavo Mendonca, an economist with Oren Investimentos in Sao Paulo said this week. “The country has slowed very sharply and the prospects for long-term growth have gone downhill.”

Policy adjustments invite and attract investments, but many of these actions are late and under pressure by issues developing in other countries such as Spain. On the other hand, the opportunities for a rudimental Northern investor looking South of the Border to Mexico remain solid.

A key factor with Mexico is that it has  some of the most definitive metrics that provide the level of transparency needed in a volatile global market.  Unlike Brazil, Russia, India or China, Mexico is directly tied to American monetary policy with a correlation that does not exist in other Emerging Market countries and not surprisingly is also growing alongside the American economy.

Is Mexico beyond ridicule and examination? Of course not, but to begin to understand the benefits of investing in Mexico for the short and the long term we should begin with how Mexico plays a key role as a member of NAFTA (North American Free Trade Agreement). The implementation of NAFTA along with close inter-country relationships, ties Mexico’s trade and currency valuation to that of the US and Canada.

 For example, in 2010 many believed the US would remain flat for the next two years, but we now see this was not the case. As a result of American performance, Mexico’s markets have also increased working in parallel a framework portfolio managers find affirmative Mexico has also maintained a weak peso over the last ten years. The Mexican peso has been priced at a competitive advantage with China.

 Currency rates have helped Mexico realize an economic boom that continues to rise since the 90’s. The move to NAFTA in 1994 could be the key contributing factor for Mexico’s 600 percent increase in sales to the US. With inflation no longer under control in countries like China and  Brazil, analysts are discovering that Mexico’s policies have proven successful in weathering many global financial catastrophes.

…..

As opportunities within the developed markets diminish, the Mexican marketplace is standing strong. As a top emerging market for the global investing community, particularly in Latin America, Mexico represents a substantial alternative to Brazil, home of the leading Latin American stock market. Mexico, although not a BRIC country, certainly has more promising economic stability and growth potential than some of the most mature economies. With a clear goal in sight, the local markets in Mexico continue to take measures that enhance liquidity in equities and derivatives trading which provide surety to its financial institutions and reach more investors abroad.

Source: FINAMEX /Dan Watkins, 01.08.2012  dwatkins@cc-speed.com

Filed under: Asia, BMV - Mexico, Brazil, China, Exchanges, Latin America, Mexico, News, Trading Technology, , , , , , , , , , , , , , , , , , , ,

Mexico replaces China as U.S. Supplier with no Wage Gains.

Bloomberg 15.06.2012 – Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.

In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.

The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.

“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”

Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.

Sounder Footing

This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.

President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.

“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”

Trade Agreements

Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.

Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.

Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.

The latest company to expand operations is Plantronics Inc. (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.

Human Capital

Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.

Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.

“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.

Low Inflation

Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.

A press official from the Mexican finance ministry didn’t respond to a request for comment.

Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.

Time Lost

The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.

“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”

Poor Performance

Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.

The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.

Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.

Skill Shortages

Delphi Automotive Plc (DLPH), the former parts unit of General Motors Co. (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.

While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.

“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.

That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.

“I supervise 15 workers,” Chavero said. “I should be making more money.”

Source: Bloomberg, 15.06.2012   Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

Filed under: Brazil, China, Mexico, News, , , , , , , ,

The Global Crisis Reaches China: Unrest Spreads as Growth Stalls

China’s leaders are currently contending with declining demand, rising debt and a real estate bubble. Some factories are laying off workers, suffering financial losses or even closing as orders from crisis-plagued Europe dry up. The economic strains are frustrating workers and consumers in the country, threatening the political establishment and Beijing’s economic miracle.

This October was the third straight month Chinese exports decreased. Along with it, the hopes of German manufacturers that Asia’s growth market might help lift them out of the global crisis as it did in 2008 are also evaporating. This time China faces enormous challenges of its own — a real estate market bubble and local government debt — that could even pose a risk to the global economy.

Related article: Every Chinese Province bankrupt like Greece –  Chinese Regime nearly bankrupt  – 17.11.2011

A police special forces unit appears suddenly. One moment, a worker named Liu* is marching back and forth in front of city hall in Dongguan, China, with about 300 colleagues from the bankrupt factory Bill Electronic. “Give us back the money from our blood and sweat!” they chant.

The next moment, their shouts turn to screams as a few hundred uniformed police with helmets, shields and batons, along with numerous plainclothes security forces, leap out of olive green police vans. The demonstration leaders, including Liu, are rounded up on the side of the street by police dogs. Within just a few minutes’ time, the communist authorities have successfully suffocated the protest.

The men and women, most of them young adults, are packed into yellow buses and hauled back to their factory, where the government exerts massive pressure: By afternoon, they must consent to make do with 60 percent of the wages they are owed by the employment office. Anyone who refuses, officials warn, will receive nothing at all.

The new global crisis has reached China. Debt problems in Europe, the country’s most important trading partner, are starting to dim prospects here in the nation that has effectively become the world’s factory, as well. The unstable United States economy and threat of a trade war between the two superpowers make the situation even more uncertain. As the US presidential election campaign starts too heat up, American politicians are vying to outdo one another in protectionist declarations directed toward their communist rival.

Disillusioned Workers

For Liu, the factory worker, his country’s economic miracle is certainly over for now. Until recently, he worked 12 hours a day assembling accessories for DVD players. But then there was less and less work to do, he says, and a while back, the boss informed workers that fewer orders were coming in from Europe.

After the police break up the demonstration, Liu, now daunted, wanders through his city’s dusty streets, passing row upon row of factories and residential buildings. “We just wanted our full wages, but they set the police on us,” he says. He’s lost his faith in the party and the government.

Especially here in the export region of Guangdong, an experimental laboratory of Chinese capitalism, hardly a day goes by without new bankruptcies or protests. The Yue Chen shoe factory in Dongguan, which produces athletic shoes for a parent company in Taiwan that supplies brands such as New Balance, is in a state of emergency. With orders dropping off, the manufacturer has fired 18 managers. Workers have seen overtime pay eliminated, and normal wages are barely enough to live on. Frustration is so high that some shoe factory workers also went to protest in front of city hall. About 10 of them were injured in the clash with police, some young women from the factory report.

The situation outside the gray factory complex is tense. Thugs in plainclothes guard the entrance, photographing and intimidating anyone who talks to the workers. Inside the factory, the showdown between bosses and employees goes on. Workers sit inactive in cheerless factory rooms. The management has switched off the power in some of the halls where workers normally sew and glue together shoes.

In the rest of China as well, more and more assembly lines are grinding to a halt. In Wenzhou in eastern China, a city known for making cheap lighters, shoes and clothes, a large number of business owners are on the run from their creditors, the private shadow banks that last lent them money. Some of these businesspeople even secretly removed machinery from their factories before taking off.

Demand Drop in Europe and China

China’s showcase industries are also feeling the crunch of the drop in European demand. Suntech Power Holdings, for example, which manufactures solar panels in Wuxi, near Shanghai, reported third-quarter losses of $116 million (€87 million). During the same quarter of the previous year, the company generated $33 million in profits.

Just recently, Asia’s champion exporter was the object of admiration from foreign executives and politicians, a victor in the global financial crisis. Some even believed they’d found a superior alternative to crisis-ridden Western-style market economies in Beijing’s authoritarian-style capitalism.

German carmakers, in particular, let themselves be carried away by China’s growth and made enormous investments. China is Volkswagen’s most important market, and the company hopes to sell 2 million cars there by the end of this year.

But the car boom is slowing. “We haven’t received a single new order in nine days,” admits a smartly dressed salesman at Dongguan’s Porsche dealership. “We’ve never experienced that before.” Many business owners are short on cash, he adds. “They used to mostly pay cash, but now they prefer to buy on credit.”

Cheap Chinese brands such as BYD (“Build Your Dreams”) are also having a harder time selling their cars. Important governmental tax incentives for buying cars ran out last year, and major cities such as Beijing are attempting to ease their congested streets by restricting the number of new automobiles. In October, people in China bought roughly 7 percent fewer cars than in the previous month.

Economic Missteps?

At first, it seemed as if Beijing’s state capitalists had found the magic recipe for endless growth. In 2009, they pumped 4 trillion yuan (the equivalent of €430 billion) — China’s largest stimulus package in history — into building ever more modern highways, train stations and airports. Tax incentives led millions of farmers to purchase refrigerators and computers for the first time.

More or less on the party’s orders, banks threw their money at the people’s feet, and local governments were particularly free about getting themselves into debt. By the end of 2010, outstanding debt stood at 10.7 trillion yuan — nearly a quarter of China’s entire economic output.

Much of these funds went, directly or indirectly, into real estate construction. Local governments discovered that selling land for building made for a lucrative source of revenue — and of collateral, so banks would continue to issue new loans. Thousands of farmers were driven off their fields so that villas and apartment buildings could be built.

Many of those development projects, often megalomaniac undertakings from the start, are now ghost towns. In China’s 15 largest cities in October, the number of newly auctioned building plots decreased by 39 percent compared to October 2010.

While many in the West hold out hope that China can solve the euro and dollar debt crisis with its foreign currency holdings, the rift between rich and poor within the country is growing. The “harmonious society” promised by Hu Jintao, head of the government and of the Communist Party, is at risk.

The country’s central bank has increased interest rates five times since mid-2010 to get inflation under control, while at the same time forcing banks to hold larger reserve funds. Beijing hopes this method will allow it to orchestrate a “soft landing” from its own economic boom. But the maneuver entails risks. Along with the construction industry, the motor driving China’s economy up until now, other sectors such as cement production, steelmaking and furniture construction stand to lose vitality as well.

Part 2: Will Rising Middle Class Turn against Government?

If the real estate bubble bursts, it is sure to turn China’s rising middle class against the government. Until now, the nouveau riche has viewed the Communist Party as a guarantee of their own prosperity. Recently, however, outraged apartment owners organized a demonstration in downtown Shanghai, protesting the decline in the value of their property.

Wang Jiang, 28, points to a nearly complete apartment block in Anting, one of the city’s suburbs. The software company manager bought an apartment on the 16th floor of the building for €138,000 in early September. It was a steep price for 82 square meters (883 square feet), especially since the building is located in an industrial area, hemmed in by factories and highways. But Wang was determined to get in on the boom. He didn’t even take the time to view the housing complex before he bought the apartment. Where else, after all, should he have invested his assets, if not in real estate?

Now China’s state-run banks are paying their customers negative interest and Shanghai’s stock market is considered a high-risk casino, where a few major governmental investors are believed to manipulate exchange rates at will.

Wang’s apartment isn’t even finished yet, but he no longer feels any joy about moving in — not now that the real estate company is offering similar apartments in the same complex for about 20 percent less.

Wang feels he was deceived about his apartment’s resale value. “What are they thinking?” he demands. “Surely they can’t just erase a portion of my assets?”

But they can.

Wang and many other furious apartment owners went to the real estate company’s salesroom to protest the drop in value. Suddenly, Wang relates, someone started smashing the miniature models of apartments. After that, in the blink of an eye, the company’s guards grabbed him and hauled the protesters to the police in minibuses. “We were interrogated until 2 a.m. in the morning,” Wang says. Some of the protesters, he adds, are still in prison and authorities won’t tell their families anything.

A Political Quandary

Whether in Dongguan or Shanghai, cracks seem to be forming everywhere in Chinese society. As long as the one-party dictatorship kept growth in the double digits, most people accepted their lack of freedom. Now, though, Beijing is facing a dilemma. Tough police crackdowns will hardly get the consequences of the stagnating economy under control in the long term. But nor are government subsidies enough to stimulate the economy. It seems neither money nor force will help.

Chinese Premier Wen Jiabao recently announced a “fine-tuning” of his economic policy: Banks should grant more generous loans, especially to small and medium-sized export companies, he said.

The economic situation now is far more complicated than it was after the 2008 global financial crisis, says economist Lin Jiang. In 2008, Chinese exports collapsed and roughly 25 million migrant workers had to return from factories to their home provinces.

Back in Dongguan, authorities have no cause at the moment to fear any further protest from Liu, the factory worker. He’s too busy looking for a new place to stay. When he lost his job, he also lost his spot in one of the electronics factory’s residences.

* Liu’s name has been changed by the editors in order to protect his identity.

Source: Spiegl Online, 08.12.2011 By Wieland Wagner

Filed under: China, Countries, News, Risk Management, , , , , , , , , , , , , ,

Every Chinese Province bankrupt like Greece – Host Says Chinese Regime nearly bankrupt

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.

Related Article:

Bobsguide - China reduces lenders’ ratio requirements (02.12.2011)
EpochTimes – China’s Economy on the Brink of Collaps (Nov.2011)
The Guardian – IMF sounds warning  on Chinese Banking System (Nov.2011)
 
The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube. 

In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.

Lang’s assessment that the regime is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Several commentators have expressed broad agreement with Lang’s analysis.

Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.”

Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.”

Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the “China model” is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves. “They pay little attention to things such as whether people’s basic rights are guaranteed, or their living standard has improved or not,” he said.

Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.

Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.

According to Cheng, the goals of regime officials (to enrich themselves and increase their power) are in direct conflict with those of the people–so social injustice expands, and economic propaganda meant to portray the situation as otherwise prevails.

Few scholars inside the country dare to speak as Lang has, Cheng said. And that’s probably because he has a professorship in Hong Kong.

Source: TheEpochTimes, 15.11.2011

Filed under: Asia, Banking, China, News, Risk Management, , , , , , , , , , , ,

Mexico Credit: Beating Brazil Bonds after 2008 crisis

Mexican government and corporate bonds are outperforming securities sold by their Brazilian counterparts as investors bet Latin America’s second-largest economy is better prepared to weather a global slowdown.

The 27-basis point drop in Mexican government dollar bond yields in the past month compares with a decline of 25 for Brazilian notes, snapping five straight months of underperformance, according to JPMorgan Chase & Co. The two- basis point increase in Mexican corporate borrowing costs in the past month compares with a jump of six basis points, or 0.06 percentage point, for their Brazilian peers. Previously, Brazilian corporate securities had outperformed for two consecutive months.

President Felipe Calderon’s administration has lined up a $72 billion credit line from the International Monetary Fund, extended debt maturities and shunned capital increases embraced by Brazil, the region’s largest economy, to protect against a slowdown in the U.S., which buys 80 percent of the Latin American nation’s exports.

“They are strengthening public finances here in Mexico,” Gabriel Casillas, chief Mexico economist for JPMorgan Chase & Co. in Mexico City, said in a telephone interview. “The Mexican market has become much easier and flexible to trade as Brazil boosts capital controls.”

100-Year Bond

Mexican government bonds yield 4.65 percent, or 6 basis points less than Brazilian debt, according to JPMorgan. The gap has swelled from one basis point on July 28. Notes sold by Mexican companies yield 6.31 percent, compared with 5.93 percent for Brazilian corporate securities. The 37-basis point gap is down from 53 on July 28.

Mexico sold $1 billion of 100-year bonds overseas yesterday, taking advantage of a plunge in benchmark U.S. borrowing costs to bring back a record-long maturity it unveiled a year ago. The government issued the notes due in 2110 to yield 5.96 percent, or 242 basis points above 30-year U.S. Treasuries, according to data compiled by Bloomberg.

“Mexico financially has never been as well protected and sound as it is today,” said Alejandro Diaz de Leon, head of the finance ministry’s public debt unit in an interview yesterday. “Mexico has been able to take advantage of a privileged position because of the steps it has taken.”

Standard & Poor’s cut Mexico’s rating to BBB, the second- lowest investment grade, from BBB+ in December 2009, citing declining oil output and “diminishing” prospects for widening the tax base to replace oil revenue. Brazil is rated one level lower at BBB- by S&P.

The Brazilian finance ministry declined to comment in an e- mailed statement.

IMF Credit Line

The IMF renewed and boosted the size of Mexico’s credit line in January from $48 billion. The Washington-based fund originally approved the facility in 2009 to boost confidence in the economy. The central bank has been buying as much as $600 million monthly though options since March 2010 to bolster foreign reserves, which surged 84 percent in the past two years to a record $133.9 billion, according to the central bank. Brazil’s reserves rose 65 percent over the same period to $349.6 billion.

“All these contingency plans and credit lines are favorable factors for an investor, who may say that in the case of another crisis Mexico won’t likely be as volatile,” Eduardo Avila, an economist with Monex Casa de Bolsa SA in Mexico City, said in a telephone interview.

Currency Tumble

The peso tumbled 20 percent in 2008 as U.S. demand for the country’s exports slumped. Mexico’s gross domestic product shrank 6.1 percent the following year, the most since 1995 and the second-worst contraction of the economies tracked by Bloomberg after Russia. The U.S. economy contracted 3.5 percent in 2009.

Yields on Mexican government debt in the two months after Lehman Brothers Holding Inc. filed for bankruptcy in 2008 surged 165 basis points, compared with an increase of 142 for Brazilian securities.

“We are a lot better prepared, especially relative to other countries, for a situation that could deteriorate externally,” Deputy Finance Minister Gerardo Rodriguez said in an interview at Bloomberg’s headquarters in New York on June 2. “All this points to a broad framework of creating additional spaces for a potential adverse scenario going forward. That’s what we are here for — to prepare for negative scenarios.”

Mexico’s total net debt is 35 percent of GDP, below the 40 percent for Brazil. The government has been extending local debt maturities to a record 7.3 years in 2011, from 6.4 years in 2009.

Capital Controls

Brazil imposed a 1 percent tax on some currency derivatives on July 27, the latest government measure aimed at stemming the 42 percent appreciation of the real since the end of 2008. Since October, Brazil has also tripled to 6 percent a tax on foreigners’ purchase of bonds, raised the cost of foreign borrowing by local companies and restricted bank bets against the real. The peso has gained 9.1 percent during the same period.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed three basis points to 184 at 7:47 a.m. New York time, according to JPMorgan Chase & Co.

The peso weakened 0.3 percent to 12.5958 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years rose five basis points yesterday to 161, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Growth Forecasts

Mexico’s central bank lowered its forecast for economic growth this year and next while keeping its consumer price forecasts unchanged, according to its quarterly inflation report published yesterday. It cut its 2011 growth forecast to a range of 3.8 percent to 4.8 percent and its 2012 forecast to 3.5 percent to 4.5 percent. The bank said in its May report the economy may expand as much as 5 percent this year and up to 4.8 percent in 2012 growth. It kept its 2011 and 2012 consumer price forecasts at 3 percent to 4 percent.

“The balance of risks for growth in the Mexican economy has deteriorated,” the bank said in the report, citing lower global growth prospects.

JPMorgan’s Casillas and Iker Cabiedes reduced their 2011 Mexican growth forecast yesterday to 4.2 percent from 4.5 percent.

‘Aversion to Risk’

Economists in Mexico will likely continue to cut growth forecasts this quarter after the Federal Reserve indicated that it will keep rates low through mid-2013, said Javier Belaunzaran, who helps manage about 40 billion pesos at Interacciones Casa de Bolsa SA in Mexico City.

“If the Fed is saying it’s keeping rates steady through 2013, than things aren’t going well at all,” Belaunzaran said in a telephone interview. “There may be an aversion to risk toward long-term securities if the outlook worsens.”

Mexico will wait until November 2012 to raise the benchmark lending rate from a record low 4.5 percent, according to trading in TIIE futures.

While Mexico’s annual inflation rate slowed to a five-year low in March and is within the central bank’s target range of 3 percent to 4 percent this year, Brazil has struggled to contain price increases. Inflation quickened to 6.75 percent last month, the highest in six years and almost double the 3.55 percent rate in Mexico in July.

“There are a lot of factors that make Mexico stand out from the rest of the emerging markets,” Monex’s Avila said.

Source: Bloomberg, 11.08.2011 by  Andres R. Martinez amartinez28@bloomberg.net, David Papadopoulos papadopoulos@bloomberg.net

Filed under: Brazil, Mexico, News, , , , , , , , ,

10 Trends for 2011 by Gerald Celente

After the tumultuous years of the Great Recession, a battered people may wish that 2011 will bring a return to kinder, gentler times. But that is not what we are predicting. Instead, the fruits of government and institutional action – and inaction – on many fronts will ripen in unplanned-for fashions.

Trends we have previously identified, and that have been brewing for some time, will reach maturity in 2011, impacting just about everyone in the world.

1. Wake-Up Call In 2011, the people of all nations will fully recognize how grave economic conditions have become, how ineffectual and self-serving the so-called solutions have been, and how dire the consequences will be. Having become convinced of the inability of leaders and know-it-all “arbiters of everything” to fulfill their promises, the people will do more than just question authority, they will defy authority. The seeds of revolution will be sown….

2. Crack-Up 2011 Among our Top Trends for last year was the “Crash of 2010.” What happened? The stock market didn’t crash. We know. We made it clear in our Autumn Trends Journal that we were not forecasting a stock market crash – the equity markets were no longer a legitimate indicator of recovery or the real state of the economy. Yet the reliable indicators (employment numbers, the real estate market, currency pressures, sovereign debt problems) all bordered between crisis and disaster. In 2011, with the arsenal of schemes to prop them up depleted, we predict “Crack-Up 2011″: teetering economies will collapse, currency wars will ensue, trade barriers will be erected, economic unions will splinter, and the onset of the “Greatest Depression” will be recognized by everyone….

3. Screw the People As times get even tougher and people get even poorer, the “authorities” will intensify their efforts to extract the funds needed to meet fiscal obligations. While there will be variations on the theme, the governments’ song will be the same: cut what you give, raise what you take.

4. Crime Waves No job + no money + compounding debt = high stress, strained relations, short fuses. In 2011, with the fuse lit, it will be prime time for Crime Time. When people lose everything and they have nothing left to lose, they lose it. Hardship-driven crimes will be committed across the socioeconomic spectrum by legions of the on-the-edge desperate who will do whatever they must to keep a roof over their heads and put food on the table….

5. Crackdown on Liberty As crime rates rise, so will the voices demanding a crackdown. A national crusade to “Get Tough on Crime” will be waged against the citizenry. And just as in the “War on Terror,” where “suspected terrorists” are killed before proven guilty or jailed without trial, in the “War on Crime” everyone is a suspect until proven innocent….

6. Alternative Energy In laboratories and workshops unnoticed by mainstream analysts, scientific visionaries and entrepreneurs are forging a new physics incorporating principles once thought impossible, working to create devices that liberate more energy than they consume. What are they, and how long will it be before they can be brought to market? Shrewd investors will ignore the “can’t be done” skepticism, and examine the newly emerging energy trend opportunities that will come of age in 2011….

7. Journalism 2.0 Though the trend has been in the making since the dawn of the Internet Revolution, 2011 will mark the year that new methods of news and information distribution will render the 20th century model obsolete. With its unparalleled reach across borders and language barriers, “Journalism 2.0″ has the potential to influence and educate citizens in a way that governments and corporate media moguls would never permit. Of the hundreds of trends we have forecast over three decades, few have the possibility of such far-reaching effects….

8. Cyberwars Just a decade ago, when the digital age was blooming and hackers were looked upon as annoying geeks, we forecast that the intrinsic fragility of the Internet and the vulnerability of the data it carried made it ripe for cyber-crime and cyber-warfare to flourish. In 2010, every major government acknowledged that Cyberwar was a clear and present danger and, in fact, had already begun. The demonstrable effects of Cyberwar and its companion, Cybercrime, are already significant – and will come of age in 2011. Equally disruptive will be the harsh measures taken by global governments to control free access to the web, identify its users, and literally shut down computers that it considers a threat to national security….

9. Youth of the World Unite University degrees in hand yet out of work, in debt and with no prospects on the horizon, feeling betrayed and angry, forced to live back at home, young adults and 20-somethings are mad as hell, and they’re not going to take it anymore. Filled with vigor, rife with passion, but not mature enough to control their impulses, the confrontations they engage in will often escalate disproportionately. Government efforts to exert control and return the youth to quiet complacency will be ham-fisted and ineffectual. The Revolution will be televised … blogged, YouTubed, Twittered and….

10. End of The World! The closer we get to 2012, the louder the calls will be that the “End is Near!” There have always been sects, at any time in history, that saw signs and portents proving the end of the world was imminent. But 2012 seems to hold a special meaning across a wide segment of “End-time” believers. Among the Armageddonites, the actual end of the world and annihilation of the Earth in 2012 is a matter of certainty. Even the rational and informed that carefully follow the news of never-ending global crises, may sometimes feel the world is in a perilous state. Both streams of thought are leading many to reevaluate their chances for personal survival, be it in heaven or on earth….

See also http://www.trendsresearch.com/forecast.html

Source: Gerald Celente, Trendsresearch, 18.12.2010

Filed under: Banking, Energy & Environment, News, Risk Management, Services, Wealth Management, , , , , , , , , , , , , , , , ,

Brazil:High Volatility Still Prevailing – December 2010 – IXE BANI-Monthly Analysis

Tension in Europe and USA likely to overshadow positive economic news.
Brazil – Monthly Allocation – December 2010

While key indicators of economic activity in Europe, USA and Asia point to an acceleration of growth in 4Q10, prospects for the international environment up to the year-end cause concern, since chances are that the problems affecting some of the “peripheral” countries in the Euro Zone as well as the USA will continue to weigh on the financial markets. In the Euro Zone, Ireland is likely to remain a major source of volatility in the next few weeks due to the instability of its financial system and the political debility of its current administration.

Nevertheless, even more relevant is the renewed market pressure on Greece, Portugal, Spain and Italy, which has led to the resurfacing of fears on the future of the Euro. Meanwhile, in the USA, legislation on temporary tax breaks to individuals expires at the end of this year and must be renewed. However, the Obama administration is likely to face difficulties in rapidly getting this from the new Congress. In all, despite the possible positive news from the economic front, the international environment is likely to weigh on the financial markets.

Main local risk is the deterioration of inflation expectations, while doubts on the economic policy mix might bring volatility
In Brazil, Dilma’s election was expected to maintain a high degree of economic predictability and indeed, the appointment of the new administration’s economic team underscores the perception of continuity. However, some contradictory signs have generated doubts regarding the economic policy mix in the new administration. For example, the pro-cyclical structure of government spending is not aligned with the supposed goal to reduce real interest rates to around 2% to 3% in coming years. Another example of contradiction is Dilma´s  commitment to control inflation vis-avis the pressure on the integration between the Central Bank and the other economic authorities, which might reduce the BCB´s autonomy.

In this context, a decision on the minimum wage, to be taken by the end of the year, and the Central Bank´s attitude towards the deterioration of inflation expectations are key factors and could lead to an increase in market volatility.  Hence, from the point of view of the macro-economic agenda, prospects for the financial markets in the next few weeks appear more uncertain than usual.

In the face of this, we have changed our portfolio by reducing its size by two names, eliminating CSN and Tractebel. We have also substituted Guararapes for Lojas Americanas so as to reap the benefits of Christmas more efficiently, and we have also increased the weights of Bradesco and Hering (both from 5 to 10%).

Source: IXE-Banif, 01.12.2010

Filed under: BM&FBOVESPA, Brazil, Latin America, News, , , , , , , ,

Mexico to Follow US Expectations – August 2010- IXE BANIF – Monthly Analysis

Indications of a slowdown in US growth

Expectations of pick-up in the US economy for 2010 have cooled down recently. The most recent statements of the FED’s President suggested that a recovery in the US will happen only in the medium or long-term. This is a worsening of an already declining expectation for the US economy that started in June, and that we did not incorporate into our scenario at the time.

Until June, nearly everyone’s attention was concentrated on the Euro zone, with fears for the bankruptcy of local banks. These fears faded as the results of a stress test made with a sample of banks showed that very few names were in trouble. The spotlight then turned to the stronger indications of a weakness in the US economy.

Mexico – Monthly Allocation – August 2010

Mexico likely to adapt to new scenario

The Mexican economy continues to depend on its neighbor for exports, as it accounts for most of the demand for its products. With the growing expectation of a reduction in US growth, we believe that the local Mexican economy will tend to migrate from a manufacturing profile (based on exports) to a consumption profile (based on local demand).

While we believe that slower growth of the US economy is not good, we believe that the pace reduction observed so far is still consistent with our current and unchanged expectation for Mexican 2010 GDP growth of 4.4%. We believe that we were in the lower end of the market range, and now believe that others will adjust their expectations downward. In this way, we should move closer to the upper limit of the range of expectations. One indicator on the local economy that we highlight is internal wholesales, which we believe reached its peak at 7% in June (YoY growth, 6.9% in May) and is likely to slow down during the rest of the year. We expect internal wholesales to reach 3.9% for the entire 2010, taking into consideration the negative figures of the first two months of the year. Internal retail sales are now following the wholesales’ trend as an indication that retail companies are reducing inventories. We also expect July figures, when announced, to indicate a reversion of the local deflation observed in the April-June period.

For August, we have added Geo and Chedraui to our suggested portfolio and have withdrawn Asur, Autlan and Urbi.

Filed under: Banking, BMV - Mexico, Exchanges, Latin America, Mexico, News, , , , , , , , , , , , ,

Brazil: Market now with eyes on US growth – August 2010- IXE BANIF – Monthly Analysis

Spotlight moves from the euro zone to the USA

In August, we foresee the financial markets moving their attention from the euro zone to the USA. We also expect China not to have much influence on market performance this month. The results of the bank stress test released in July seem to have calmed the market and caused fears of bankruptcy to fade. The data did not indicate that problems are over, but left the feeling that they are under control with the adjustments made so far. On the other hand, the hopes that the US economy would gain momentum have diminished after the FED’s Presidential speech at the end of July. Given this, we believe that published economic data are likely to drive the market, as they will give a better idea of trends. However, as we do not foresee any data released this month as important enough to change expectations, we believe the market is likely to move sideways.

Brazil – Monthly Allocation – August 2010

Last month, we foresaw a volatile market with no trend for July and based on this belief, compiled our portfolio with a defensive view. Despite this estimate, the market did rally and our portfolio followed the trend, demonstrating that it was able to perform well in upward as well as volatile movements. For this reason, we decided that, as we do not identify any definite catalyst driving the market in August, we would change our portfolio very little and continue our defensive view. We have reduced the weights on Bradesco and Hering (from 10% to 5% each) due to their recent stellar performance. We have also substituted Tietê for Eletropaulo, with the same weight, and added Telesp.

Focus on slowdown of US economy

The latest indications of a slowdown in the US economy point to a 2.5% GDP growth for 2010, from a previous 2.7%. This reduction, although immaterial, cooled down previous expectations of upward revisions in estimates and turned attention to stimulating growth. On August 10, attention should focus on the FOMC meeting to see if a change in the monetary policy is possible. However, with interest rates already close to zero, there is probably little to be done on this front. Monitoring the labor market (unemployment and payroll) is perhaps the best hope for investors to find economic improvement.

The real start of the Brazilian Presidential race

On August 17, presidential candidates will start their TV campaigns. Although candidates have been campaigning on the road for a while, many people see TV campaigns as the most important and decisive part of the presidential race, so voting polls that start after this are closely followed and should affect the market. Another potential source for market stress is the end of the low inflation period (last two months, caused by food prices) that we foresee for August. Although we expect inflation to remain at around 0.4% per month until December, people may view any rebound negatively.

Source: BANIF – IXE, 02.08.2010

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, Wealth Management, , , , , , , , , , , ,

China’s banking sector Serious Problem with Bad Loans

Professor Pettis at Peking University explains that“in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years.  But things are even worse than the nominal numbers imply.  As I discussed in my April 6 entry, when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations.

This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households.  In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate.  This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up.”

Here are some recent reports from financial press sources regarding the health China’s banking sector:

-”SHANGHAI -(Dow Jones)- The non-performing loan ratio in China’s banking industry declined to 1.58% by the end of 2009, 0.84 percentage point lower than the figure at the beginning of 2009, China’s banking regulator said Saturday.”(1)

-”BEIJING: Chinese financial institutions’ non-performing loans (NPL) ratio edged down 0.1 percentage points to 1.48 percent in January, the China Banking Regulatory Commission (CBRC) said Friday.”(2)

-”BEIJING, Apr 14, 2010 (SinoCast Daily Business Beat via COMTEX) — Non-performing loan (NPL) ratio of China Development Bank, a policy bank, had reached 0.85% by the end of March”(3)

I don’t believe those reported percentages are accurate.

For context, here is an analysis of China’s non performing loan issue from 2002:

“Standard and Poor’s (S&P), which rates China as investment grade, said on Thursday it would take Chinese banks 10 to 20 years to cut average non-performing loans (NPLs) ratio to a manageable five per cent.

It estimates the Chinese banking sector’s average NPL ratio is atleast 50 per cent, higher than the 30 per cent estimate of China’s central bank governor Dai Xianglong.

“The cost of necessary write-offs could be equivalent to $518 billion or almost half of China’s estimated gross domestic product of $1.1 trillion for 2001,” Mr Terry Chan, a S&P director in Hong Kong said.

The agency said China would be unlikely to cut NPLs in its banking sector to 15 per cent within five years, as its central bank wishes, given the current operating performance of the sector.”

I seriously doubt that the problem identified in 2002 has been resolved yet.  There is an analysis here that supports my assertion.

Source:SinoRock, 07.07.2010

Filed under: Banking, China, News, Risk Management, , , , , , , , , , , , ,

China: The collapse of the Asian growth model

Over the last three decades there has been a dramatic shift in the stance of development policy with import-substitution being replaced by the export-led growth. A significant concern with this latter model is that it may risk turning global growth into a zero-sum game. This can happen if one country’s export growth comes by poaching of domestic demand elsewhere or by displacing exports of other countries.

China on ‘Treadmill to Hell’ Amid Bubble, Chanos, Faber, Rogoff Say

Rather than focusing on production for domestic markets, countries were advised to focus on production for export. This shift away from import-substitution toward the export-led growth was driven significantly by the economic troubles that emerged in the 1970s. At that time many developing countries, who had prospered under regimes of import-substitution, began to experience slower growth and accelerated inflation.
This led to claims that the import-substitution model had exhausted itself, and that the easy possibilities for growth by substitution had been used up.second factor fostering adoption of the export-led model was the shift in intellectual outlook amongst economists in favor of market directed economic activity. Import-substitution requires government provided tariff and quota protections, and economists increasingly came to portray these measures as economic distortions that contribute to productive inefficiency and rent seeking.
The shift in policy stance was also propelled by the empirical fact of Japan’s spectacular success in growing its economy in the twenty five years after World War II, and by the subsequent growth success of the four east Asian “tiger” economies – South Korea, Taiwan, Hong Kong, and Singapore. All of these economies relied on increased exports.

The problem is that the export-led growth model suffers from a fallacy of composition whereby it assumes that all countries can grow by relying on demand growth in other countries. When the model is applied globally in a demand-constrained world, there is a danger of a beggar-thy-neighbor outcome in which all try to grow on the backs of demand expansion in other countries, and the result is global excess supply and deflation. In this connection, it is not exporting per se that is the problem, but rather making exports the focus of development. Countries will still need to export to pay for their imported capital and intermediate goods needs, but exporting should be organized so as to maximize its contribution to domestic development and not viewed as an end in itself.
Export led growth model prompts countries to shift ever more output onto global markets, and in doing so aggravates the long-standing trend deterioration in developing country terms of trade. This pattern partakes of a vicious cycle since declining terms of trade and falling prices compel developing countries to export even more, thereby compounding the downward price pressure. This vicious cycle has long been visible for producers of primary commodities. However, as a result of the transfer of manufacturing capacity to developing countries who lack the consumer markets to buy their own output, the same process may now be present in all but highest-end manufacturing.
In the 1950’s, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by an Eastern economy, although it was still substantially poorer and smaller than those of the West.
The speed with which it had transformed itself from a peasant society into an industrial powerhouse, and it’s perceived ability to achieve growth rates several times higher than the advanced nations, seemed to call into question the dominance not only of Western power but of Western ideology.
The leaders of that nation did not share Western faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and are willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth that would eventually outperform the increasingly chaotic societies of the West.
China’s economic growth has averaged 9pc a year over the past 10 years, compared with a paltry 1.9pc for the British economy. Last year, despite the credit crunch, China posted a remarkable growth rate of 10.7pc against a British contraction of 3.2pc.some are extrapolating present trends forward, and proclaiming that China will usurp the United States as the world’s largest economy.
However, in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate. When measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that the West has come to owe China over 2 trillion $. China has become the world’s biggest creditor, but creditor nations running persistent trade surpluses has two historical examples. The US economy in the Twenties and the Japanese economy in the Eighties.
In both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis.
The banks in China are lending money at breakneck speed, but China’s state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But the goal of economic policy, is to maximise households’ wellbeing and consumption. Unfortunately, and China’s share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008.
In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.

The story in China has been one of imperiled, marginally profitable enterprises relying on generous state-provided incentives for utilities, credit, etc. now having to deal with slowing global demand. The drying up of trade finance isn’t helping, either. The giant stimulus worldwide, and especially in China, helped the world economy for one year but that has now dried up.

Source and full article at  Israel Financial Experts, 08.06. 2010,

Filed under: Asia, China, Energy & Environment, Hong Kong, News, Risk Management, , , , , , , , , , , , , , , , , , , , ,

Brazil: Volatile Market with no Trend – June 2010- IXE BANIF – Monthly Analysis

Focus spread over euro zone
Last month, we correctly anticipated that the Greek problem would negatively dominate the markets. However, we did not anticipate that fears would spread severely over to other countries, especially the other PIIGS members (Portugal, Italy, Ireland and Spain). After the sharp negative effect on all markets worldwide, we believe that investors continue to be sensitive, with wounds still open and, in the absence of any concrete positive news in June, markets are likely to remain tense, volatile and with no definite short-term trend. This expectation only differs from our view for the previous month in the lack of trend. We chose our suggested portfolio last month to remain defensive, and believe this is also the best choice for June, which is why we have made hardly any modifications. We have only withdrawn Tim, which was the month’s largest winner, and transferred its weight to CSN to keep the weight of the steel industry close to its weight in the Ibovespa. With this move, our portfolio has weights similar of those at the Ibovespa for the oil, mining, banks, steel, transportation and telecom industries, while we keep retail and utilities overweight.

Euro zone pros and cons
For the Euro zone, we highlight some important points. Positives: a) Economic activity in the main countries is not weak; b) Announcement of important measures directed toward stability in Portugal, Spain and Italy. Negatives: a) growth is likely to remain low for at least the next few years; b) risk rating downgrades might occur, particularly for banks, if tension continues at its current level or worsens and c) country debts are likely to stabilize at high levels. From 2008 to 2013, gross debt to GDP ratio will increase in most countries. Based on the assumptions of the European Commission, this ratio for Portugal should go from 66% to 90%, for Spain from 40% to 75%, Ireland from 44% to 93%, Italy from 106% to 118% and Greece from 99% to 135%.

Signs from other regions remain positive
In other regions, the economic trend continues to improve. In the US, the Fed revised its GDP growth estimate upwards to 3.5% for 2010 and we believe recovery is likely to continue slowly but surely. In China, the economy continues strong and on the verge of overheating, although inflation has not surpassed the official 3% limit and we see no reason for any change in course. Finally, in Brazil we also see strong signs of good and unchanged economic activity. At the announcement on June 8 of 1Q GDP we expect a 2.5% non-annualized growth that, if confirmed, would strongly support our estimate of a 7.0% growth for FY2010. On June 9, we anticipate announcement of the IPCA inflation index for May, which we expect to reach 0.45% (for June figures we expect a sharp reduction to around 0.3% that, if confirmed, would increase confidence in the growth trend of the GDP). On the same day, we expect announcement of the official Selic interest rate, when we anticipate another 0.75% hike as part of a measure to avoid the deterioration of the outlook for inflation.

See  full report Brazil_-_Monthly_Allocation_-_June_2010

Source: IXE Banif, 01.06.2010

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, Risk Management, , , , , , , , , , , ,

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