And 2015's Top Stock Market is...Jamaica!

♠ Posted by Emmanuel in at 12/29/2015 07:28:00 PM
You aren't smokin' ganja--Jamaica's stock market is tops in the world for 2015.
Channeling Steve Harvey announcing Miss Universe 2015 in the post title, I don't believe that I made a mistake in this instance. In the rest of the world, 2015 was a rather forgettable year when investing in nearly anything made you next to no money (or lost you money). Stocks, bonds, was all a big blah. But wait, there was one exception: while other stock markets worldwide were busy going nowhere (or down), Jamaica's rallied over 80% this year:
Amid the middling returns of the world’s best known indexes -- the Dow Jones Industrial Average dipped about 1 percent, the Euro Stoxx 50 lost 6 percent in dollar terms-- foreign acquisitions, stronger investor safeguards and a rebounding economy helped the Jamaica Stock Exchange surge more than 80 percent in 2015.

With a market capitalization of about $5.3 billion (the Dow has $5.23 trillion), Jamaica lives on the fringe of frontier status. And although the exchange’s benchmark index lost 5 percent last year and 13 percent in 2013, investors should pay attention, according to Carl Bennett, a vice president of investor relations at Bank of New York Mellon. “I’m really impressed with what they’ve done to attract capital to the market,” he said, pointing to new measures to combat insider trading and market manipulation.

With economic growth forecast to accelerate for a third straight year, reaching 1.4 percent in 2015 according to estimates compiled by Bloomberg, the Caribbean island of 2.8 million people is slowly emerging from recession while struggling with one of the world’s highest debt burdens. The government has restructured local bonds twice since 2010, accepting an International Monetary Fund-led financing package in 2013. That didn’t deter individual Jamaicans and institutional investors from pouring money into local stocks this year, said Jovano Johnson, an equity trader at Kingston-based Mayberry Investments Ltd.
To be sure, economic growth reaching 1.4% in 2015 is hardly spectacular for a developing country. It also has one of the world's highest debt service burdens. Nor has the country definitively solved its high crime rate. Still, following the saying that every dog has its day, even the perpetual laggard Jamaica's stock market has done well because everyone else's isn't really doing any better by comparison.

Call it a case of Jamaica's situation not possibly getting worse resulting in a stock market rally of sorts. The real question is if this momentum can be continued.

Miss Universe and US Hegemony in Beauty Pageants

♠ Posted by Emmanuel in at 12/25/2015 05:18:00 PM
"Yay, the Americans declared me winner of an 'international' event!"
Given my nationality, I suppose I shouldn't complain too much about the outcome of the 2015 Miss Universe pageant. Still, one thing that struck me is that, despite the obviously commercial nature of these pageants--to paraphrase Robert Cox, they wouldn't be held if they didn't make money for someone--American hegemony is all too apparent for what is ostensibly an "international" competition. For a long time, the franchise was owned by real-estate, er, impresario Donald Trump. Then, late this year, it was sold together with the Miss USA property as legal settlement after the the broadcaster NBC had a falling out with Trump in the aftermath of calling Mexicans "rapists" and offending the entire Latin America.

The interesting thing is that alike Mr. Trump, the new owner--events organizer IMG (sports, media, and fashion), is very much an American organization. If Miss Universe were truly an "international" event, then its participation would be truly representative. Yes, the contestants represent several countries the world over which do not mind young women parading in skimpy outfits. But no, the judges are actually...very, very Amerocentric. The global headline-grabbing gaffe of an American host declaring the runner-up as winner brought this to light as far as I'm concerned:
The panel of judges included [celebrity blogger Perez] Hilton, Miss Universe 2012 Olivia Culpo, comedian Niecy Nash, and former football star Emmitt Smith.
Come to think of it, it's all too frequent that finals judges are American for a supposedly "universal" event. Call it another example of American hegemony that has gone unnoticed. By virtue of the event's organizers being American, so too are the judges of "global" beauty standards. In other words, the winner must invariably cater to what Americans would consider as attractive. 

Oh well, I suppose it's better to sort out hiring a host who has no problems reading cue cards first. And it's still better than having Mike Tyson as one of the celebrities promoting a beauty pageant. Speaking of whom, maybe Manny Pacquiao can be invited to judge again.

What is the selection criteria for being a judge for one of these things anyway? It seems that professionalization has not yet reached the ranks of beauty contest judges.

It's Officially Over: WTO Kills Doha Round (2001-Never)

♠ Posted by Emmanuel in , at 12/23/2015 03:53:00 PM
Never again: nobody will be meeting to discuss Doha anymore.
During the last WTO meeting, its members decided to discontinue reaffirming the Doha Development Agenda's mandate, effectively killing it off. What's especially notable is that the country which was most adamant in launching it and styling it as a "development agenda" instead of a "round"--the United States--has been wishing to kill it off for quite some time now:
The World Trade Organisation is facing the biggest shake-up of its agenda in a generation after its members in effect abandoned the long-stalled Doha round. For the first time since the round was launched amid great fanfare in 2001, the WTO’s 164 members, ending a conference in Nairobi at the weekend, declined to “reaffirm” Doha’s mandate.
They also opened the door to discussing new issues and focusing more on delivering smaller packages of trade reforms. Agreements included a global ban on farming export subsidies that Roberto Azevêdo, the WTO’s director-general, called the “most significant” achievement on agriculture in the organisation’s history. The new line in Nairobi, said one senior trade official, amounted to “the death of Doha and the birth of a new WTO”.

It also marked a victory for the US and EU, who alongside other developed economies have argued that clinging to the long-stalled Doha negotiations was making the institution irrelevant in a changing global econom. Instead of aiming to complete these vast, cross-cutting rounds like before, the WTO is moving towards more tractable issue-focused negotiations, which probably makes more sense in this day and age when there are so many different parties with differing interests. Moreover, delegates the world over tired of meeting on something which became moribund quite some time ago:
Doha was launched in 2001, two months after the September 11 attacks, with much rhetoric about gestures of global unity but too little support from businesses to keep it going. It was also oversold as a “development round”, with the aim of helping poorer countries trade their way out of poverty, with a particular focus on agriculture.

Three problems rapidly became evident. One, behind the mask of solidarity between developing countries lay deep divisions, for example between agricultural net importers and exporters, preventing constructive proposals for liberalisation. Two, countries such as China transformed beyond recognition during the round, becoming global export powerhouses yet continuing to plead developing country status. Three, the US in particular proved to be largely spineless in taking on its own farm lobby, which demanded improbable amounts of market access abroad in return for subsidy cuts at home.
The mistake globophobes make it to assume that because the Doha Round is dead, so is the WTO. Actually, it's just attempts to push through vast, broadly inclusive trade rounds that's over, not the WTO which is actually moving forward on sectoral interests such as the Information Technology Agreement (ITA). Whatever you think of it, the WTO goes on after Doha.

More on How Aging Societies Hinder Growth

♠ Posted by Emmanuel in at 12/22/2015 04:45:00 AM
There's an interesting article on Bloomberg drawing on recent work from HSBC on how aging populations in different countries are likely to be a drag on their growth. Japan is, of course, today's most prominent example of the difficulties encouraging growth against a backdrop of demographic disaster. However, the situation of Japan will hardly be unique over the coming decades as the forces of depopulation replicate themselves all over the world. Worryingly, it is not only developed but also developing countries which will likely experience this phenomenon:
From such advanced economies as the U.S. and Japan to developing countries, such as China and India, the change in the shape of population pyramids is poised to crimp productivity growth over the next decade, HSBC contends. "The population structure in many economies does not lend itself to an increase in productivity, with a higher share of older (or younger), less productive workers," wrote the economist. "The change is huge, suggesting that the make-up of these populations will be less conducive to productivity growth in the future than it has been in the past."

Pomeroy adds that along with peak productivity, the 45- to 54-year-old age bracket also boasts the highest consumer spending in the U.S. People aging out of this category present another channel by which the graying process will drag on growth. And health care, a segment that will be in high demand among the elderly, is a sector with notoriously poor productivity growth.
Another thing is that investment growth tends to track labor force growth. With labor forces the world over shrinking--Japan being today's case in point--the trends look worrisome.
Investment growth, meanwhile, tends to track the growth of the labor force rather closely:
It would likely take a breakdown in this historical relationship—in which capital supplanted rather than complemented labor—to allow for the possibility that productivity growth could offset the deleterious effect of lower hours worked on GDP.

"Unless something changes and we see more investment from either public or private sources, the rest of the developed world may succumb to a similar fate to Europe today, where the dearth of investment is hampering output growth," concludes Pomeroy.

Like Pakistan's...or Zambia's? China's H-Shares

♠ Posted by Emmanuel in , at 12/15/2015 04:31:00 PM
How the mighty have fallen: a few months ago, Bloomberg noted that Hong Kong-listed stocks were even cheaper than Taliban-infested Pakistan's on a price/earnings ratio basis. As you can see above, that remains true. However, among these HK stocks, there are even worse performers: mainland China shares listed in Hong Kong or H-shares ("Hang Seng China"). Slightly cheaper than Lebanon's but still marginally dearer than those of Laos and strife-torn Zambia (whew!), I guess international buyers aren't too keen on mainland China's prospects circa year-end 2015.

At the beginning of the year, the H-shares were flying high. Now they're eating dirt:
It was all going so well for Chinese stocks in Hong Kong. Just seven months ago, the Hang Seng China Enterprises Index was surging to the highest levels since 2008 and strategists couldn’t raise their targets quick enough. Now, the gauge of so-called H shares is tumbling at the fastest pace among global peers, analysts are downgrading their forecasts and valuations have dropped to levels approaching those of Zambia.
With most of the H shares being dominated by (state-owned) financial concerns, the hope was that lower rates and cross-border opening would benefit these shares:
Even by the volatile standards of emerging markets, it’s a dramatic fall from grace for stocks that bulls had expected to surge as China cut interest rates, opened up cross-border capital flows and revamped state-owned companies. Investors have instead been driven away by weak economic growth and an anti-graft campaign that led to the disappearance or arrest of some of China’s most high-profile corporate executives. "I was fooled," said Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong. "Cheap is not enough."
They are turning into something of a joke if you consider their "peers," crisis-hit Zambia and Laos with stocks that can be counted on one hand:
Selling by investors, meanwhile, has dragged down the H-share index by 37 percent from this year’s high in May, the steepest drop among equity gauges in the world’s 50 biggest markets. It now trades at 6.9 times earnings, lower than every benchmark index apart from Zambia, the southern African country facing a economic crisis, and Laos, which only has four listed equities. The Hang Seng China gauge is valued at the biggest discount versus the MSCI All-Country World Index since 2003, according to data compiled by Bloomberg.
The interesting though is that mainland stock markets like that in Shanghai have not fared as badly, but that's a story for another day.

China's 'Extraordinary Rendition' of Executives

♠ Posted by Emmanuel in , at 12/13/2015 01:32:00 PM
Detaining executives without due process or explanation: Does the PRC's actions constitute economic terror?
Leave it to the Communist Party to find a way to roil Asian markets one way or another. Having (sort of) learned their lesson not to suddenly and drastically devalue their currency as per the events of this past August, they are now devaluing slowly but surely. But, you do have to wonder about its continuing habit of locking up corporate executives without an undisclosed location. In honor of the American's "extraordinary rendition" of anyone anywhere in the world without due process for detention and interrogation, well, China's powers-that-be are practicing exactly the same thing on corporate types.

With world markets unsettled by China's economic slowdown, falling commodity prices, and the impending rise in US rates, the timing could not have been worse for the PRC to make the the head of one of its largest non-state-owned conglomerates vanish. Imagine what would happen if the head of, say, General Electric was detained and held incommunicado indefinitely and you wouldn't be far off:
The baffling disappearance of Chinese executives in recent weeks has drawn attention to the ruling Communist Party’s practice of holding people incommunicado either as targets of investigations themselves or to help with probes of others.

The most recent example came last night, when Caixin magazine reported that Guo Guangchang, the billionaire chairman of Fosun International Ltd. couldn’t be contacted. Fosun suspended its shares today and its bonds plunged by a record before the company said Guo was assisting justice authorities with a probe. Other high profile cases in recent weeks included two members of Citic Securities’ executive committee who became unreachable earlier this month, along with Yim Fung, the chief executive officer of Guotai Junan Securities Co.

The Chinese word for unreachable -- shilian, which means “lost contact” -- has become a euphemism in China for the party holding executives and officials for questioning or arrest, often indefinitely and at an undisclosed location. That practice has long been criticized by human rights activists who say the lack of transparency and accountability opens the door to abuses such as torture.
Despite being extraordinarily curious to non-Chinese observers, these acts have become so ordinary as to even have terms as to whether the detainees are party or non-party members:
The detentions, known as “shuanggui” if the party detains one of its members and “shuangzhi” if a non-party member is held as part of a probe, has featured prominently in President Xi Jinping’s campaign to root out corruption that he says is now rife in the ranks of the party’s more than 87 million members. People can be detained even if they are not the target of a probe themselves. reported today that Guo was helping with a corruption investigation into former Shanghai vice mayor Ai Baojun. Fosun didn’t specify the subject of the probe, other than to say Guo will be able to participate in the company’s decisions on “substantial issues.”

The Central Commission for Discipline Inspection, the agency leading the anti-corruption campaign, didn’t respond to a fax seeking comment. The main problem with the practice is that it isn’t transparent, said Zhu Lijia, a professor of public policy at the Chinese Academy of Governance. “Nobody really knows what happens inside the room, and that’s dangerous without regulations,” Zhu said.
The larger point is this: markets hate uncertainty, and detaining prominent industrialists is hardly the way to increase market confidence. For one thing, we don't even know if Guo Guangchang is being charged with corporate malfeasance. Stay tuned. 

12/14 UPDATE: The elusive Guo Guanchang has made a public reappearance. Supposedly, Fosun in not under investigation. If so, it makes you wonder why the PRC would inflict so much harm on an unsuspecting company:
Fosun said on Sunday it was not the focus of the investigation. Liang Xinjun, chief executive, added that Mr Guo was “assisting the judicial authorities with an investigation, but it is not because the company has problems”. When Mr Guo entered the conference room in Shanghai on Monday, employees applauded for an extended period, according to a person present at the meeting. 

A European executive whose company works closely with the Chinese conglomerate said that all of the group’s portfolio companies had sent representatives to the conference. “They weren’t expecting Guo to be there and there was relief when he showed up. Fosun suggested that he had been helping with an investigation but that neither he personally nor the company is under investigation,” the executive said. “They are not expecting any more public updates, either from Fosun or from the investigation. He has done his bit now and it is over.”

Did China Get Its $234B Worth in Stock Intervention?

♠ Posted by Emmanuel in , at 12/09/2015 03:20:00 PM
OK, so the title is a bit of a trick question insofar as the intent of official actors in intervening in stock markets was not to make money but to calm investor sentiment. Still, we are in the dark somewhat over how much the Chinese government spent to prop up equities, and if this effort was money-making. BAML recently estimated that the amount poured into PRC stocks was $234 billion. What is more astounding to me though is that it bought nearly every other China-listed stock out there. Such is the reach of the PRC:
According to Bank of America Merrill Lynch, the Chinese government spent at least 1.5 trillion yuan ($234 billion) in the third-quarter alone, buying shares in at least 1,365 stocks – or 49% of the total number of listed shares – to shore up its stock markets. It has since covered most of its losses.
Merrill derived these numbers based on top-10 shareholder information disclosed by companies. It looked at holdings by China Securities Financial Corp. (the official bailout fund), domestic sovereign fund Huijin, the broker-funded Stabilization Fund, as well as the five mutual funds funded by the securities regulator CSFC. Merrill also included in its estimates the 120 billion yuan ETF bought by the CSFC – this number is based on local media reports.

Beijing seems to have recuperated most of its losses. While the government agencies have lost an estimated 224 billion yuan as of the end of September, by November 11, they collectively gathered 44 billion yuan in capital gains – or about 3% – according to strategist David Cui.
As is usually the case, you have to wonder for how long official actors will keep their money in place to ultimately make sense on whether official actors "gained" from this action over the entire investment period. Also, if they devalue the yuan again, they will likely have to intervene more to keep PRC stocks from falling like they did in August. There are so many things you have to consider when intervening that turning a "profit" doesn't really seem to be a sensible objective in the bigger scheme of things. 

OPEC, From Cartel to Stand-Up Comedy Club

♠ Posted by Emmanuel in at 12/07/2015 01:30:00 AM
There was a time when OPEC was feared. Nowadays, it's a laughingstock.
Oftentimes the most humorous things in life are unintentional. People want to be taken seriously, but their actions seem to belie should I put this...comic tendencies.Today's case in point is the once-mighty Organization of Petroleum Exporting Countries (OPEC). At the height of its powers in the early Seventies, it was instrumental in sending oil prices through the roof worldwide as motorists bore the brunt of its will.

Let's just say there was more third world solidarity forty-some years ago than there is today. United they stood; nowadays, they fall divided as divisions that always existed now tear OPEC apart: Latin America (Venezuela) versus the Middle East (Saudi Arabia); Shia (Iran) versus Sunni (Saudi Arabia, Iraq, etc.) Of course, you also have to account for the increased production of non-OPEC members, but still, OPEC countries cannot get their act together by any means. The party line--or what passes for it nowadays--is that OPEC cutting members' production won't matter when two-thirds of it is in the hands of non-OPEC members pumping out the stuff as furiously as OPEC:
The group considered cutting production but decided that a reduction “even of 5%” wasn’t likely to push prices higher if non-OPEC producers, which make up about two-thirds of global production, join in cutting, said OPEC President Emmanuel Ibe Kachikwu, Nigeria’s petroleum minister. Instead, the group will maintain its current production—about 31.5 million barrels a day—and “closely monitor market developments in the coming months,” according to a statement released at the end of the meeting. “We just felt comfortable to wait and watch,” said Mr. Kachikwu.
The group, which gave up individual production quotas several years ago in favor of an aggregate production ceiling, also appeared to have largely done away with those restraints, as well. The ceiling, which has been set at 30 million barrels a day, has been breached routinely by the group.
Allowing Indonesia which has long since become a net oil importer to re-join OPEC was just the comic warm-up. The most recent meeting in Vienna was the pinnacle of inaction, which spurred all sorts of comments from member states that struck me as excuses of the most hilarious variety to pretend all is well when it isn't the case.

Take Nigeria's representative again who says observers shouldn't worry so much about the "semantics" of it all. What's more, it's supposedly doing right by customers by keeping oil prices low:
Emmanuel Ibe Kachikwu, the Nigerian minister, reinforced the message, saying the market shouldn’t worry about the “semantics” of targets or real production. “We aren’t going to go back to a cartel and work against the customers -- that time has passed,” said United Arab Emirates Minister Suhail Al Mazrouei.
How touching; OPEC is concerned about the welfare of oil users (probably for the first time ever if true, which I doubt). His Iraqi counterpart ups the hilarity quotient by suggesting that this erstwhile cartel shouldn't establish a production ceiling since other, non-OPEC producers don't have one (which again defeats the purpose of having a cartel):
Most of the market “doesn’t have any ceiling,” Iraqi Oil Minister Adel Abdul Mahdi told reporters. “Americans don’t have any ceiling. Russians don’t have any ceiling. Why should OPEC have a ceiling?”
Because it should act as a global swing producer? The final word probably belongs to bigwig Saudi Arabia's oil minister, who explains that OPEC still "matters" somehow despite doing no appreciable actions to act together in their common interest:
OPEC will “continue its pivotal role in production and investment no matter how much prices fall,” Saudi Arabian Oil Minister Ali al-Naimi said in an interview with Al Eqtisadiah newspaper published Saturday. 
I guess us oil users should just enjoy low oil prices that should hold a little while longer, though I still think they should be lower still since crude oil price falls don't fully reflect at prices at the pump, but that's another story for another day. Meanwhile, it's OPEC comedy hour...

How many OPEC oil ministers does it take to establish an output ceiling? Take my oil cartel, please [BADA-BOOM], etc., etc.

Brazil's So Broke Olympians Don't Get Air-Conditioning

♠ Posted by Emmanuel in , at 12/05/2015 02:11:00 PM
It must get hot wearing these Olympic outfits when there's no A/C.
It wasn't supposed to be like this. Brazil during the tail end of the Lula years was riding high on elevated commodity prices as China fueled a seemingly endless demand for what Brazil was selling...then the party stopped when the PRC's economy slowed down, ending a commodity supercycle in which Brazil was one of the biggest beneficiaries. With the 2014 World Cup and the forthcoming 2016 Summer Olympics, Brazil has essentially been left holding the bag with costly international sporting events it can barely afford as perma-recession has taken hold.

As bad as things are, perhaps the ultimate humiliation for Brazil is yet to come. Imagine one of the southern hemisphere's major energy exporters not even being able to provide Olympic athletes with air-conditioning. Due to cost overruns--is anyone really surprised when these Games are concerned--budget slashing has to happen somewhere. As it so happens, Brazil is keen on shifting the burden on the Olympic committees:
Shifting the cost for air conditioning and other amenities from the host city to each nation’s Olympic committee – or to the athletes themselves – is a big deal, said Nick Symmonds, a two-time Olympic runner. “The world wants to tune in and watch the world’s greatest athletes compete at the absolute highest level," Symmonds said. "If you don’t provide them with good food, a good place to sleep and comfortable temperature, they won’t be able to recover and bring the A-plus product that the world is demanding. To cut the budget on athletes’ hospitality and comfort, that’s just going to cheapen the games.”

[Rio 2016 spokesperson Mario] Andrada said air conditioning is an “absolute necessity” in some areas, though not bedrooms. The 17-day event, which kicks off on Aug. 5, takes place in Rio’s winter, and the average daytime temperature is in the mid-20s Celsius (mid-70s Farenheit). Some days are much hotter, though, with highs last August creeping into the mid-90s.

Others worry that the cuts will further underscore the chasm between athletes from wealthy countries and those from poorer ones. (Already some top athletes, including the NBA players who join the USA Basketball squad, choose luxury hotels over accommodations in the Olympic Village.) Those who can afford extra for air conditioning or who travel with laptops or iPads (the host committee has scrapped plans to provide TVs in individual bedrooms) will have it; others may not.
It all goes back to the notion of "economic diversification." Brazil has some world-leading manufacturing concerns like Embraer which makes smaller-capacity regional passenger jets, but for the most part, it remains over-reliant on commodity exports. Even in calendar year 2015, it lives by high commodity prices and dies by low commodity prices. Interestingly, its newfound austerity will further disadvantage fellow athletes from developing countries by forcing them to do with al fresco accommodations.

Is Brazil being shamed? They now say they will provide free A/C, but you never know:
Throw away the floor fans. Rio de Janeiro Olympic organizers have changed their minds and said Friday that athletes will have free air conditioning in their bedrooms at the athletes village. The decision to have free air conditioning comes after The Associated Press reported this week that about 10,000 Olympic athletes would have to pay for it because of budget cuts.

“The sports department found a solution that could allow us to have the air conditioning,” said Mario Andrada, the spokesman for the 2016 Games. “So were buying air conditioning for all the athletes’ bedrooms and social rooms.”
This may be true, but even suggesting that no one gets free air-conditioning suggests evident desperation is at work here.

That Makes 5: Chinese Yuan a Part of IMF SDR

♠ Posted by Emmanuel in ,, at 11/30/2015 07:07:00 PM
Here's another step towards the Chinese currency becoming a globally important one. Everyone sort of expected this, but for the Chinese, it's a major achievement nonetheless. While the inclusion of the yuan in the basket of currencies the IMF uses as reference will not result in a massive surge in RMB holdings there, the symbolism matters quite a lot. As in, China becomes the first developing country to have its currency included in the SDR. From the IMF blurb:
The Executive Board of the International Monetary Fund (IMF) today completed the regular five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR). A key focus of the Board review was whether the Chinese renminbi (RMB) met the existing criteria to be included in the basket. The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound. Launching the new SDR basket on October 1, 2016 will provide sufficient lead time for the Fund, its members and other SDR users to adjust to these changes.

At the conclusion of the meeting, Ms. Christine Lagarde, Managing Director of the IMF, stated: “The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

The value of the SDR will be based on a weighted average of the values of the basket of currencies comprising the U.S. dollar, euro, the Chinese renminbi, Japanese yen, and British pound. The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies. The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies in the SDR basket. Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the IMF, its membership and other SDR users in their currencies. The paper presented to the Board will be released soon.
What weight will the yuan have in the SDR basket? Bloomberg suggests a bit over 10%. It may not sound like a lot, but it will immediately leapfrog the yen and the pound:
The addition will take effect Oct. 1, 2016, the IMF said. The fund said the yuan would have a 10.92 percent weighting in the basket. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound. The dollar currently accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
There is talk that China has been cautious about devaluing its yuan again after the tumult caused by events in August so that its currency could achieve this very event of SDR inclusion. With that out of the way, I hope PRC authorities avoid any sudden moves.

Fortress Europe: Trade Costs of Re-Establishing Border Controls

♠ Posted by Emmanuel in , at 11/29/2015 04:45:00 PM
"Welcome to the EU!" [not]. Yes, Hungary is part of the Schengen area...for now.
With lurid scare stories about the endless flows of migrants emanating from the Middle East--especially jihadist/terrorist-affiliated elements--Europe's days as a largely border control-free area are supposedly limited. It's a long story, but do note that not all countries in the EU are part of the Schengen area which has abolished passport and border controls. Examples include Ireland and the UK. (There are newer accession countries like Croatia that are expected to join the Schengen area in the future.) Conversely, there are Schengen area members not in the EU like Norway and Switzerland.

At any rate, increasing hostility to migrants may not only result in the re-establishment of border controls among Schengen area members, but also increase the transaction costs for doing trade as collateral damage. First, we begin with the politicization of migration:
This tightening of borders is part of an urgent struggle to preserve freedom of movement for citizens between European countries. That freedom was ushered in by the 1985 Schengen agreement, whose relaxing of intra-European border controls has become part of both European identity, and, with the Euro itself, a pillar of European economic integration.

But public anxiety linking this year’s influx of Syrian refugees with last week’s attacks are putting Schengen under unprecedented pressure. Far-right voices, including that of French politician Marine Le Pen, are calling with increased passion for the reversal of the agreement. Even before the attacks, several nations had temporarily suspended portions of Schengen to better deal with the refugee crisis. Meanwhile, even as he issued a stark declaration of war against ISIS, French President François Hollande emphasized the importance of controlling access at Europe’s outer borders, rather than those between member states.
Next, we move to the potentially crippling economic costs of each nation trying to enact its own version of "Fortress Europe":
Because, however awful the human cost of last week’s attacks, the economic impacts of restricting trade lanes would be at least as far-reaching. According to the procurement agency Beroe, 75% of E.U. freight trade moves by road. Checking immigration documents for truckers, potentially at multiple borders per day, would be extremely costly.

Even before Friday’s meeting, there was already evidence of the effects of tighter border security on European trade. Refugees attempting to reach Britain aboard trucks and trains at the French port of Calais through the early parts of 2015 caused accidents and delays costing the British freight industry more than one million euros daily. When Germany and Austria set up temporary border controls in September, massive traffic jams were reported. According to a spokesperson for the Dutch transportation industry in September, a one-hour delay at each national border would cost Dutch shippers alone more than 600 million euros annually.

But the indirect costs of tightened borders would be even greater. In a 2014 study, researchers found that a 1% increase in migration between two Schengen signatory nations resulted in a nearly equal increase in interstate trade. Curtailing that trade would have a particular impact on Europe’s automotive and agricultural sectors, which rely on speedy delivery.
With European economic growth still being moribund at best--especially post-global financial crisis--the continent hardly looks set to benefit from further de-integration.

UPDATE: Plans are being mooted by current EU rotating chair Luxembourg to temporarily suspend the Schengen area by allowing the re-imposition of border controls:
EU ministers will on Friday discuss suspending the Schengen passport-free travel zone for two years, on the basis that the migrant crisis has exposed “serious deficiencies” at the Greek border that endanger the overall area. This resort to the most drastic emergency measure available in Schengen’s rule book underlines how the 20 year-old integration project has been gravely threatened by the political pressures of at least 1.2m irregular migrants entering the bloc this year.

The option of invoking “Article 26” is proposed in a leaked discussion paper for EU home affairs ministers prepared by Luxembourg, which holds the rotating presidency of the EU. If ministers support the proposal the European Commission would be able to recommend closing one or more internal borders within Schengen for up to two years. In effect, this would see the temporary border checks introduced this summer between countries such as Austria and Germany become a long-term fixture, fracturing the passport-free zone.

Like Clockwork, Russia Cuts Gas to Ukraine in Winter

♠ Posted by Emmanuel in ,, at 11/27/2015 01:30:00 AM
There are certainties in life that mark the turn of seasons: Cherry blossom season begins in Japan as March gives way to April. Oktoberfest begins in mid-September in Germany. Meanwhile, in Eastern Europe, the Russians will cut gas off to Ukraine as the coldest winter months begin over delayed payments. It was ever thus: even before the Russians commenced military adventures there, Ukraine always felt the brunt of gas being cut during winter. Ho-ho-ho, merry Christmas.

You don't have to be a cynic to wonder why Russia never cuts off or slows the gas supply to Ukraine during, say, the summer months. For what it's worth, the same thing is happening again without or with Western sanctions now:
Russia's state-controlled gas company is halting supplies to Ukraine, its chief executive said Wednesday, less than two months after the two countries struck an EU-sponsored deal. Gazprom's CEO Alexei Miller said Russia sent the last shipment to Ukraine at 10 a.m. local time on Wednesday and send no more because Ukraine has not paid in advance for future supplies.

Russia resumed gas shipments to Ukraine less than two months ago after the two countries signed an EU-brokered deal ensuring supplies through March. The Gazprom chief said Ukraine had been buying up gas to store for the coming winter in the past two months but said it was not enough to get it through the winter. Past gas disputes between Russia and Ukraine have led to cutoffs. One standoff in 2009 caused serious disruptions in shipments EU countries in the dead of winter. Temperatures in Ukraine where most homes rely on piped gas for central heating were below freezing Wednesday morning. 
In response, the Ukrainians are closing off their airspace to Russian airlines on top of preventing them from flying to Ukraine's airports:
Yatsenyuk also banned Russian airlines from using Ukrainian airspace, saying the move was “an issue of the national security as well as a response to Russia’s aggressive actions”. Ukraine had already banned Russian airlines from flying to Ukrainian airports, a move that Russia quickly reciprocated, meaning there are no direct flights between the two countries. However, initially, Ukraine still allowed Russian planes to fly over its territory. 
Same old, same old? Actually, the story is slightly more complicated than that. Ukraine's PM claims Gazprom is not refusing to sell gas to Ukraine. Instead, Ukraine simply does not need to buy more gas from the Russian firm since it will be buying gas from Western Europe on better terms. It's a great story and everything if it weren't for the fact that the West obtains most of its gas from Russia.
Russia’s Gazprom said it would not ship any gas to Ukraine until it received prepayment. Later on Wednesday, Ukraine’s prime minister, Arseniy Yatsenyuk, claimed that he had ordered the state gas company to stop purchasing Russian gas. “It is not that they are not delivering us gas, it is that we are not buying any,” he said.

Yatsenyuk said Kiev had been offered a better price by other European countries, who import gas from Russia but could then send it back to Ukraine. Earlier this week, Ukraine’s energy minister said the country had enough gas in reserve to last through winter.
So let me get this straight: Ukraine is boycotting the purchase of supplies from instead buying Russian gas from Western European countries? Somehow, I don't think this "punishment" is all that punitive for Russia.

Re: Russian Jet, Tell Turkey Trade Brings Peace

♠ Posted by Emmanuel in , at 11/24/2015 12:03:00 PM
Does shooting down your second-largest trading partner's jet affect trade? I guess we'll find out soon.
There's a longstanding idea among proponents of capitalism that commerce between nations has civilizing effects. (Albert Hirschman called it the "doux-commerce thesis.") Instead of having to resort to military confrontation to obtain what you want, you can instead get it through comparatively peaceful trade. Or so the theory goes. Sometimes real-world events have the habit of making a mockery of such truisms. Witness Turkey and Russia just a few moments ago.

We have news that Turkey recently shot down a Russian jet assumed to be making a Syria-related mission over what Turkey claims was its airspace. From a security standpoint, this incident may be unexceptional since countries do have a right to patrol their airspace. However, the interesting things here are that (a) the Turks likely knew it was a Russian fighter but (b) they shot it down anyway. This despite (c) Russia being Turkey's second-biggest trading partner:
Russian stocks fell the most worldwide and government bonds slid as Turkey said it shot down a Russian fighter jet close to the Syrian border, threatening trade relations amid an escalation of regional tensions. The dollar-denominated RTS Index fell 2.6 percent to 873.94 by 1:35 p.m. in Moscow as Turkey said it repeatedly warned the pilots that they were violating the nation’s airspace.

The declines were led by Gazprom PJSC, which relies on Turkey for 17 percent of its natural-gas exports outside of the Commonwealth of Independent States, according to BCS Financial Group. Government bonds declined and credit risk rose. “A break in the relationship between the countries will have a direct economic impact,” said Joseph Dayan, the head of markets at BCS in London. “The two sides do not have an interest to completely break down relationships. The probability of military confrontation or a freeze in trade relations is highly unlikely.”

The developments are unravelling a rally in Russian assets last week that was spurred by a rapprochement between President Vladimir Putin and the West as their interests aligned to fight Islamic State terrorists in Syria in the wake of the Paris attacks. Any deterioration in relations between Turkey and its second-biggest trading partner, Russia, threatens to undermine economic ties and growth prospects for companies.
Aside from Turkey not exactly representing "the West," this incident is an interesting one in terms of its implications. Would you so knowingly shoot down the jet of a trespasser--even if it was that of your second-largest trade partner? The important question now is how both countries will react. If they both acknowledge it was the result of a "miscommunication," then things will go on just as they were. However, if Russia makes a big thing out of it, then trade may indeed be affected as a result.

UPDATE 1: For now there's been a lot more bark than bite of the "either you're with us or the terrorists" variety. Another consideration though that I did not think of earlier is the fate of the significant numbers of Turkish migrants living in Russia who have now been singled out in Russia media:
The Russian president clearly feels that Recep Tayyip Erdogan has personally betrayed him. “Today’s loss is a result of a stab in the back delivered by accomplices of terrorists. There is no other way I can qualify what happened today,” he stated. It’s not only Putin who feels double-crossed. For hours, #УдарВСпину, the Russian approximation for ‘stab in the back’ trended on Twitter. Russian people have long regarded Turkey as a friendly country. Millions of them holiday there and there is barely a large Russian city without a Turkish migrant worker presence, with over 20,000 in Rostov alone. That goodwill probably died on Tuesday.
UPDATE 2: Russia has now suspended visa-free travel for Turkish citizens to Russia:
Russia is suspending its visa-free regime with Turkey from January 1, 2016, Foreign Minister Sergey Lavrov said. The announcement comes in response to the downing of a Russian warplane by the Turkish Air Force earlier this week.

“We have decided to suspend the visa-free regime between Russia and Turkey. This decision will come into force on January 1,” Lavrov said on Thursday, after a meeting in Moscow with his Syrian counterpart Walid Muallem. Lavrov also called the suspension of visa-free travel between Russia and Turkey “not an empty threat but a real warning.”

Pfizer-Allergan Merger: Tax Avoidance Mothership

♠ Posted by Emmanuel in , at 11/23/2015 03:48:00 PM
It'd be more appropriate if they depicted two accountants shaking hands.
In trying to be impartial by covering the entire ideological spectrum of IPE, my link list at the bottom includes the Tax Justice Network and Tax Research UK. These folks are frothing at the mouth all the time about persons and corporations (literally, corporate persons) not paying what is due by engaging in all sorts of fiscal tomfoolery. Large multinational corporations are prone to reporting most of their earnings in low-tax locations such as Ireland for obvious reasons. Needless to say, many nation-states are unhappy about their corporations not paying their fair share. Just recently, the US Treasury published guidelines about "tax inversion" to avoid American firms from relocating in the aforesaid low tax locations:
The Treasury Department has unveiled new regulations aimed at reeling in tax-dodging U.S. corporations trying to take advantage of friendly international tax codes. But the guidelines – which were designed to address an issue recognized as problematic by both the right and the left of the political spectrum, from GOP front-runner Donald Trump to President Barack Obama – are merely a bandage over a much deeper problem that will require congressional action to patch up...

It's interesting Obama referenced Ireland specifically, considering U.S.-based Pfizer pharmaceutical corporation is currently in the process of negotiating a merger deal with Dublin-based Allergan. Pfizer last year was sitting on a $74 billion chunk of change that had yet to be funneled back into the U.S. The company has said these earnings "are intended to be indefinitely reinvested overseas," and a deal with Allergan could potentially allow the pharmaceutical giant to avoid its U.S. tax obligations and instead face Dublin's more forgiving 12.5 percent corporate tax rate. If the deal goes through and Pfizer indeed moves its corporate residence overseas, it will become one of the largest companies in history to dodge U.S. taxation via inversion.
Ah yes, Pfizer. Guess what: despite politicians of all stripes including President Obama decrying Pfizer's tax avoidance gambit, its planned mega-merger is going ahead anyway. Just to show you how far this issue has gone in the US public eye, this excerpt is from USA Today:
U.S. pharmaceutical giant Pfizer(PFE) and Irish rival Allergan(AGN) Monday announced a record-breaking $160-billion merger, the largest in health-care industry history and the biggest yet using a controversial tax-saving strategy.

In a transaction expected to create the world's largest drugmaker, the companies said Allergan shareholders would receive 11.3 shares of the newly combined company for each of their existing shares, while Pfizer investors will get one share of the new company for each of their shares. The stock transaction is currently valued at $363.63 per Allergan share, for a total enterprise value of roughly $160 billion based on the $32.18 per share closing price of Pfizer stock on Nov. 20, the companies said.
The rather transparent ploy that they're using is making it appear as though the smaller Allergan is "acquiring" Pfizer, but nobody is being fooled here...not even USA Today:
U.S. pharmaceutical giant Pfizer(PFE) and Irish rival Allergan(AGN) Monday announced a record-breaking $160-billion merger, the largest in health-care industry history and the biggest yet using a controversial tax-saving strategy.In a transaction expected to create the world's largest drugmaker, the companies said Allergan shareholders would receive 11.3 shares of the newly combined company for each of their existing shares, while Pfizer investors will get one share of the new company for each of their shares. The stock transaction is currently valued at $363.63 per Allergan share, for a total enterprise value of roughly $160 billion based on the $32.18 per share closing price of Pfizer stock on Nov. 20, the companies said.

The deal terms call for the companies to combine under Allergan plc, which will be renamed Pfizer plc and trade on the New York Stock Exchange under the PFE ticker. The new combination would retain Allergan's legal and tax domicile in Ireland. Pfizer would have its global operational headquarters in New York and its principal executive offices in Ireland. The agreement is expected to face substantial regulatory scrutiny before its expected closing in the second half of 2016...
However, the new rules are not expected to have any immediate impact on the deal because the transaction is technically structured to have Dublin-based Allergan, with a market cap of roughly $122 billion, acquire New York-headquartered Pfizer, which has a market cap of approximately $200 billion.
Remember that Allergan itself is the result of a previous tax inversion:

Somehow, I doubt whether "When Irish Eyes are Smiling" and "Danny Boy" are playing at the White House or the Treasury Department right now--or at the Tax Justice Network or Tax Research UK [!]. Political scrutiny of this merger Stateside will be massive, and I for one would not bet on it being scuppered as a result. Watch this space.

China Gangstas II: Smuggling Cash Out of the PRC

♠ Posted by Emmanuel in , at 11/20/2015 02:13:00 PM
Any which way but lose [sic]: Time to get the @#$% out of Dalian.
Here's another no-win situation China confronts: Until a few years ago, people used to try and evade the PRC's capital controls on inflows since the rise in the yuan's value was more or less guaranteed due to external pressures to revalue and the upward trajectory of Chinese growth. Nowadays, you still have the capital controls, but expectations for the currency are different--competitive devaluation as its economy slows down resulting in massive capital outflows.

What to do? PRC citizens are now engaged in a cat-and-mouse game with officialdom on how to best smuggle money out of the country. After all, why hold your cash in yuan when it's a surefire money loser so to speak? With limits to how much yuan you can convert in the mainland, the only way is out if you want to preserve value. Just recently, authorities busted an underground bank that illustrates the scale of these activities: try $64B worth of foreign exchange transactions. That's pretty big even by PRC standards:
China said it cracked the nation’s biggest “underground bank,” which handled 410 billion yuan ($64 billion) of illegal foreign-exchange transactions, as the authorities try to combat corruption and rein in capital outflows that have hit records this year.

More than 370 people have been arrested or face lawsuits or other punishment in the case centered in eastern Zhejiang province, the official People’s Daily reported on Friday, citing police officials. The case brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.

The probe began in September last year and the police took almost a year to sort through more than 1.3 million suspicious transactions, the state-run Xinhua News Agency reported separately. The authorities froze more than 3,000 bank accounts, Xinhua said.
Let's just say the regulators don't have the upper hand here:
The case highlights the nation’s struggle to control capital outflows that have helped to send real-estate prices soaring from Vancouver to Sydney -- even when Chinese citizens are officially limited to converting $50,000 of yuan per year. Some people may be moving the proceeds of corruption, while others may be concerned about the outlook for the economy and the potential for the yuan to weaken.

“The government wants to stem outflows and stabilize the yuan’s exchange rate, but the outflows cannot be stopped unless people change their expectation on yuan depreciation,” said Xi Junyang, a finance professor at Shanghai University of Finance & Economics. Besides illegal banking operations, “a lot of money is leaving the country by legal means,” Xi said.

China’s capital outflows may have climbed to a record $194 billion in September before cooling to $62 billion in October, according to a Bloomberg gauge which also takes into account decisions by exporters and direct investment recipients to hold funds in dollars.
Like in drug smuggling, mainlanders are also using many small transactions to move cash around:
The tactics used by Chinese citizens to defeat the controls include so-called smurfing, where large sums are moved by breaking them down into a series of smaller transfers using the bank accounts and foreign-exchange quotas of a range of individuals.

In the Zhejiang case, a suspect identified as Zhao Mouyi used a different method, setting up more than 10 companies in Hong Kong from 2013 and transferring more than 100 billion yuan through so-called non-resident accounts, which are used by offshore companies in China when they are transferring money abroad, according to the newspaper’s report.

Taking advantage of a “loophole” relating to non-resident accounts -- which has since been filled by banks -- Zhao circumvented the capital controls by directly transferring yuan overseas and then exchanged the money into foreign currencies at banks including HSBC Holdings Plc in Hong Kong, the People’s Daily said. Zhao then allegedly transferred it to his clients’ accounts, the report said, citing the local police.
Times have changed, dear. Instead of foreigners trying all sorts of ways to get money into China, nowadays residents are trying all sorts of ways to get money out of China.

China Gangstas I: Cigarettes & Hong Kong Syndicates

♠ Posted by Emmanuel in , at 11/20/2015 11:21:00 AM
Hong Kong's roaring trade in illicit cigarettes is largely of its own making.
As far as I can remember, the violent, crime-ridden mean streets of Hong Kong portrayed in Bruce Lee movies (or even the Sleeping Dogs video game) have never really existed. During British rule, the excellent police force was able to keep gang members in line and confined to activities that posed minimal physical threat to citizens. During Chinese rule, things have remained largely the same. However, things have taken a turn towards Bruce Lee movieland in recent years. With the Hong Kong government taxing the bejesus out of cigarettes, its smokers have turned more and more to illicit sources. An industry-sponsored study (with the caveats that entails) points out that a quarter of all cigarettes now sold there are considered contraband goods:
One in every four cigarettes smoked in Hong Kong last year was illicit, costing the government HK$2.5 billion lost in tax revenues, according to study released on Wednesday. The “Asia-16” study, conducted by UK-based Oxford Economics and funded by tobacco giant Philip Morris, shows 1.3 billion, or 28 per cent, of cigarettes consumed were illicit. Despite a 5.6 per cent point drop compared to 2013, Hong Kong ranks fourth in illicit cigarette trading out of 16 Asia-Pacific markets studied, behind Brunei, Macau, and Malaysia.

Adrian Cooper, chief executive officer of Oxford Economics, said the city had a “significant problem” with illicit cigarettes. “[It’s] driven in part by the substantial retail price gaps with neighbouring countries that were exacerbated by tax rises in 2009 and 2011,” he said, adding that the price difference created a huge incentive for cross-border trade of cigarettes.

According to the report, the price of the most-sold brand in Hong Kong last year was US$7.1 per pack of 20, significantly higher than US$1.1 in China, US$3.8 in Macau, and US$3.0 in Taiwan. In 2014, excise taxes were raised by 11.7 per cent, which brought up the retail price of the most-sold brand by 10 per cent. 
$7.1 per pack! Is it any wonder that gangs are thriving in such an environment. It's not quite Al Capone during the prohibition since cigarettes are still being sold--albeit at an exorbitant price--but you can see the parallels for black markets to operate:
Concern groups called for stronger action against organised smuggling gangs and syndicates. “Hong Kong’s serious illicit tobacco problem is dominated by cross-border organised crime groups that use the proceeds to finance other criminal activities,” said Jeff Herbert, adviser to the advocacy organisation Hong Kong United Against Illicit Trade (HKUAIT) and a former senior superintendent with the Hong Kong police force. “[The government] needs to get a lot tougher with such organised crime syndicates.”

Herbert suggested three main solutions: use the Organised and Serious Crimes Ordinance as an effective means to seek heavier penalties, freeze assets of organised criminals, and confiscate their crime proceeds; run more public education campaigns; and introduce a balanced excise policy with regular but moderate tax increases in pace with inflation. Herbert also warned against excessive tax increases as he believed that would only push more smokers to consume illicit cigarettes.
Hong Kong is not a "closed" economy wherein the government can tax smokers as much as it wishes. There will be other, illegal sources for those looking for a cheaper nicotine fix. In this case, there is a balance to be struck between public health and crime control that the territory isn't quite finding yet.

If Egypt Hates Foreigners, Why Not Tourists Too?

♠ Posted by Emmanuel in ,, at 11/19/2015 02:36:00 PM
It's all part of a vast conspiracy to defame Egypt's leaders according to, er, Egypt's leaders.
One thing that usually unites all conspiracy theories is that they lack logical coherence. At the broadest level, it is doubtful that so many entities would be conspiring to be against you specifically Similarly, it is often doubtful whether others would go to such extreme lengths to put you down. It is unfortunate that both are operational in modern-day Egypt after the downing of a Russian aircraft. Yes, it's apparently being called a Western plot to defame Egypt's leadership. While even Russian authorities have now concluded that the plane was brought down by a bomb, Egyptian ones are still in denial:
Instead, Mr. Sisi and his supporters have shut down any discussion of possible terrorism, and rallied patriotic passions against the idea, portraying Western alarms as a plot against Egypt. “Of course we are talking about a conspiracy,” Dr. Alaa Abdel Wahab, an adviser to the minister of tourism, said Thursday in a telephone call to a morning talk show. Dr. Wahab argued that Western governments were trying to harm Egypt because they resented “the popular support for President Sisi.”
This sort of pattern has a long history:
Egyptian officials have invoked similar themes for decades in response to crises, from Egypt’s defeat in the Arab-Israeli War in 1967, blamed on the United States and Britain, to the deadly floods this fall in Alexandria, blamed on the plugging of sewers in the city by Islamists.

But with so many jobs at stake — and so many other countries watching the investigation — some say the government’s response to the crash may be testing the limits of Egyptians’ willingness to suspend their criticism and to unite against an ambiguous foreign threat. After Mr. Sisi’s bellicose talk of going without food, “people are just making fun of him,” said Hisham Kassem, a veteran Egyptian journalist sympathetic to the president. “I am disappointed.”

The government has approached every crisis as a shadow war against foreign enemies, Mr. Kassem said, perhaps reflecting Mr. Sisi’s years in military intelligence before he led the ouster of President Mohamed Morsi of the Muslim Brotherhood two years ago. “The president and all of his advisers are from the security services,” Mr. Kassem said, but “if you are going to handle a P.R. crisis using the security services, you are going to bungle.”
If you devote even a smidgen of thought to the matter, it is easy to poke holes in this conspiracy. The most basic one is: if Egyptian leaders hate vile, conspiring Westerners so much, then why do they lament the loss of Western tourists? Theirs is Eddie Murphy logic all over again: kill the white people / but buy my record first. Except here it's...screw the white people / but visit my tourist traps first.

Should you really hate Europeans and all the rest, well, perhaps you shouldn't attempt make a living catering to their tourists to begin with.

PS: Also see Rob Brotherton's new book on the Psychology of Conspiracy Theories that is rather more forgiving of their logical inadequacies as a byproduct of cognitive limitations.

Shaming Israel: EU Labels Goods from Occupied Territories

♠ Posted by Emmanuel in , at 11/15/2015 02:28:00 PM
From the occupied territories--not Israel--to dinner tables in Europe.
Are product labels entirely innocuous things simply meant to disclose factual information about the product? Make no mistake that there is a political economy behind product labeling. In the EU, foodstuffs containing genetically modified organisms must be labeled as such. Today, though, we have concerns not about the contents of products but where they're manufactured. Recently, the EU made a move to label products made in Israel's occupied territories as such:
The European Union published new guidelines on Wednesday for labeling products made in Israeli settlements, a move Brussels said was technical but Israel branded "discriminatory" and damaging to peace efforts with the Palestinians.

Drawn up over three years by the European Commission, the guidelines mean Israeli producers must explicitly label farm goods and other products that come from settlements built on land occupied by Israel if they are sold in the European Union.
As you would expect, the EU and Israel are proffering different explanations of what's going on with the labeling. The EU says it's merely stating where the goods come from out of "technical" interest, whereas the Israeli authorities say it's a "political" move:
Israeli officials, briefed that the decision was coming, were quick to denounce it. The foreign ministry said it was a political move designed to pressure Israel over its settlements policy. It summoned the EU ambassador to Israel and said it would suspend diplomatic dialogue in the coming weeks.

Prime Minister Benjamin Netanyahu, who was in Washington on an official visit, called the decision "hypocritical and a double standard", saying the EU was not taking similar steps in hundreds of territorial conflicts elsewhere in the world. "The European Union should be ashamed of itself," he said. "We do not accept the fact that Europe is labeling the side being attacked by terrorist acts."
To be sure, the EU has never recognized Israel's occupation of these lands:
The EU's position is that the lands Israel has occupied since the 1967 Middle East war - including the West Bank, East Jerusalem and the Golan Heights - are not part of the internationally recognized borders of Israel. As such, goods from there cannot be labeled "Made in Israel" and should be labeled as coming from settlements, which the EU considers illegal under international law.
Ironically, while I do not support Israel's complaints about the unfairness of it all, I am in total agreement that it's a "political" act. Like with the aforementioned GMOs, labeling is not just a "technical" exercise since the act of doing so often has political-economic consequences. Europeans in particular can be finicky about such things, and I think that Israeli leaders recognize this above the symbolism of the entire exercise. 

Korea, 1st Sovereign Issuer of PRC 'Panda' Bonds

♠ Posted by Emmanuel in ,, at 11/13/2015 11:37:00 AM
In East Asia, China and South Korea have generally gotten along better than either of them with Japan due to the latter's WWII-era imperialism. Nor does China have any major territorial dispute with South Korea--they only have minor tiffs over some rock. It should come as no surprise then that the Koreans are becoming financial innovators in a sense. You see, they will be the first sovereign issuers of yuan-denominated bonds in the mainland. Yes, of course there are already RMB bond issuances by offshore entities--the Asian Development Bank and the (World Bank's) International Finance Corporation come to mind.

But issuance by a sovereign entity? South Korea will be the first:
Korea is poised to become the first sovereign to sell yuan-denominated debt in China, setting a benchmark for companies seeking to expand in the nation’s biggest export market. The need for yuan funding is rising as Korean corporations boost investment in China, Song In Chang, the Finance Ministry’s director general, said in Seoul on Tuesday. The panda bonds will also allow Korea to diversify its foreign-currency issuance, he said.

China wants to increase the yuan’s global use and win its inclusion in the International Monetary Fund’s basket of reserve currencies. It agreed at an Oct. 31 meeting in Seoul between Korean Finance Minister Choi Kyung-hwan and Xu Shaoshi, chairman of the National Development and Reform Commission of China, to back the bond plan as well as direct trading in yuan- won in Shanghai. The Canadian province of British Columbia also said last month it’s in discussions to sell panda debt on the Chinese mainland as it seeks closer business ties with the world’s second-largest economy.

“Local investors have been interested in yuan-denominated bonds, but there were no credible benchmarks,” said Lee Jae-hyung, a fixed-income strategist at Yuanta Securities Korea, in Seoul. A sale by Korea’s government “will be a catalyst for issuance by local companies,” he said.
In effect, it's a trial balloon that, if all goes well, anticipates Korean multinationals also issuing panda bonds to fund their PRC-based operations.

Chinese-Canadian Miss World, Falun Gong & PRC Persecution

♠ Posted by Emmanuel in at 11/11/2015 02:44:00 PM
"Dem commies are evil!" Miss World - Canada Anastasia Lin with Chris Smith [R-NJ].
The Chinese Communist Party has long since banned the Falun Gong--which initially started as a movement doing stretching exercises but then committed the mortal sin of moving into politics--from the mainland. Outside China, the Falun Gong [AKA Falun Dafa] has outposts nearly everywhere you'll find the Chinese diaspora as well as an active press service, The Epoch Times, which is perhaps the most stridently anti-Communist Party media outlet there is. Like any other potential "threat" to single-party rule, most notably Catholicism, the nominally atheist CCP has suppressed the Falun Gong as much as possible. By now you're probably thinking, "What does this have to do with IPE"? Well, read on.

The reigning 2015 Miss World - Canada is none other than Anastasia Lin, a Falun Gong follower [!] who is outspoken about China's human rights abuses [!!] and has testified before the US Congressional-Executive Commission on China regarding this very matter [!!!] Before Marco Rubio and the rest, she had this to say:
When I was crowned Miss World Canada, my father was so proud of me. He received hundreds of congratulatory messages. But within a couple days, my father’s tone changed. He told me nervously that I must stop my advocacy for human rights in China, or else he would have no choice but to sever contact with me. I understand my father was visited by Chinese security agents, who forced him to apply pressure on me in this way. Over the past several years, I have taken on roles in several independent film and television programs that depict human rights abuses in China. My job requires me to be intimately familiar with the stories of those who have suffered unspeakable horrors, including a number of Falun Gong practitioners who were imprisoned and tortured for their beliefs.
You see, unfortunately for the beautiful Ms. Lin, the 2015 Miss World competition on December 19 is going to be held in, er, mainland China. Not exactly pleased with her coming to back to the PRC having tried to sully its reputation at every opportunity, there is a brewing diplomatic row between China and Canada over her attendance at the said beauty pageant. These events are actually big-money events, so it's a political battle set to run till year end:
Canada's China-born Miss World contestant said on Tuesday her visa to travel to the beauty pageant at a Chinese resort has been delayed and her father has been harassed by Chinese officials because she has spoken out about human rights abuses in the communist country. Anastasia Lin, an actress crowned Miss World Canada in May, said her determination to speak out about Chinese abuse of human rights may have cost her a chance to attend the Dec. 19 contest final in Sanya, China.

Lin testified at a U.S. Congressional hearing on religious persecution in China in July. In her testimony, she said she wanted to "speak for those in China that are beaten, burned and electrocuted for holding to their beliefs," according to the full text of her statement on the Congressional-Executive Commission on China's website. "I was interested in human rights way before I even thought of beauty pageants," Lin, 25, told Reuters on Tuesday.

Lin said finalists from other countries have received their invitation from the Chinese host venue that allows them to apply for a visa to attend the finals, but she has received no letter and believes China is trying to block her from the event. Reuters was not able to independently confirm whether other finalists had received their invitation letters. "I don't think this is an administrative issue. It is not. I think this is a matter of principle," said Lin, who also is a practitioner of Falun Gong, a religious group that says it is repressed in China.
My personal belief is that while Falun Gong has indeed been singled out by the CCP, the abuses the Falun Gong claims are beyond what the PRC normally does. If Falun Gong has a sworn enemy, the Communist Party is definitely it, so there is every incentive for creative interpretation here. This story will definitely be one to watch since, without Canadian pressure, I am 100% convinced that she would not be allowed to represent Canada at the year-end pageant.

At the rate these stories are coming out, I'll probably be able to turn this site into the "IPE of Beauty Pageants Zone" in no time ;-)

The Lameness of Western Banks' PRC Joint Ventures

♠ Posted by Emmanuel in , at 11/10/2015 10:28:00 AM
Mainland PRC, where even the mighty barely roam.
It's 2015. Do you know how well international banks' joint ventures in China have done? The perhaps surprising answer is: not well at all. These banks have had to take joint ventures since wholly-owned foreign subsidiaries remain disallowed. With the notion that one cannot be left behind by not having a China presence, most Western majors have piled in at one point or another. Now, HSBC is taking another stab at it, with the advantage of potentially being allowed a majority stake for the first time as a Hong Kong-based entity. That said, the history of these JVs isn't all that promising:
So far, two decades of joint ventures in various forms have produced very limited tangible benefits for the overseas banks involved. Not only have they been limited to minority ownership, but the joint ventures enjoy only so-so profitability and their rankings in banking league tables are unimpressive for top-flight global institutions. 
The most damning evidence of international banks' futility in China is that, despite recent rule changes allowing them to up their stakes in their PRC operations from 33 to 49%, no one has taken up the option. Actually, observers believe that most are instead interested in finding an opportunity to exit their mainland JV operations altogether:
Firms set up variously by Credit Suisse, Royal Bank of Scotland, Deutsche Bank, Citigroup, JPMorgan Chase and Morgan Stanley (again, after it sold its CICC stake) have been allowed to underwrite primary equity and debt issuance but so far have been excluded from the far more lucrative secondary trading markets. All claim publicly to work well but rumours swirl constantly that one or other bank is looking for an exit. Gossip aside, it is worth noting that none of the western banks has as yet taken up the opportunity, since a rule change in 2012, to raise its stake from 33 per cent to 49 per cent.
In all fairness, the Communist Party restricts the profitability of these Western JVs. By limiting their activities to underwriting debt and equity issues--an already-crowded area for financial services instead of the more lucrative secondary market--money-making prospects are hurt:
 To be fair, judging success is not straightforward. JVs that are restricted to primary markets are competitive in the equity and debt issuance league tables but far down the rankings by profit. Most mainland securities houses make their money in trading, not underwriting, where intense competition has squashed fees to levels unimaginable on Wall Street. Many of the ventures have faced culture clashes that have made it hard to implement international practices, according to bankers involved. Some of the overseas banks also privately admit they picked partners who turned out to be weaker than they realised.
The logic of "having to be in China" despite limitations to what you can do has long since lost its luster. HSBC aims to buck the trend, though, and you wish them well even if things haven't gone swimmingly for its peers in the past.