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Sunday, January 9, 2011

US & China on the threshold of new opportunities

BEHIND THE HEADLINES
By BUNN NAGARA



US Defence Secretary Robert Gates arrives in Beijing later today at a crucial time.

Backed by Japan and South Korea, the United States is prodding China to restrain a wayward North Korea that is unnerving its pro-US neighbours again. Following joint military exercises in the South deemed provocative, Pyongyang’s artillery claimed several lives south of the border.

The near-autarkic North Korea has few friends, so China as an accommodating neighbour and its least likely foe is often seen as its closest ally. At a time of potential instability on the Korean peninsula, any help Beijing can provide would be useful.

Like everyone else, China would like to see continued stability on the peninsula. How­ever, its actual leverage on North Korea can be limited.

US envoy Stephen Bosworth has described his visits to Beijing and Tokyo in recent days as “useful”. China may recommend that Japan, South Korea and the US resume six-party talks with Pyongyang, Beijing and Moscow, as North Korea is now proposing, as a way forward.

However, the larger prize of Gates’ visit to Beijing today is renewed relations between the US and China.

At a time of China’s pivotal “rise” and continuing uncertainty in the US economy, the implications of the world’s most important bilateral relationship between the planet’s two largest economies have never been greater.

Preparations for President Hu Jintao’s visit to Washington from Jan 18 make Gates’ presence in Beijing even more significant. Issues of mutual concern like trade, currency, energy, subsidies, the environment and military postures are likely to impact on much of the world.

The latter subject will be the core of Gates’ talks from tomorrow. The next few days will see China and the US signalling a new phase in bilateral military cooperation, building on a fresh start seen last month.

Both the range and the depth of US-China relations these days are vast, and thus of corresponding importance for other countries as well. Unfortunately, certain vested interests are spoiling the moment by playing party pooper.

A warming of ties between Beijing and Washington would be seen as improving relations, placing pressures on defence budgets. The US military-industrial complex and rightwing Obama-bashers are thus concerned, particularly after costly adventures in Iraq and Afghanistan have constrained US expenditures.

Another interested party is the Western international media, with some adopting a China-bashing slant in recent weeks. A China bogey over a range of issues helps to sell press space and air time, besides armaments.

A non-issue that has been massaged into a double predicament concerns “China’s military build-up” and “US defence cuts”. Both are supposed to be happening simultaneously, increasing the sense of urgency, even panic, among sections of the US public.

Repeatedly increased defence budgets in China may seem disturbing to a potential foe. However, greater wealth that facilitates larger expenditures all-round applies to all countries.

China has clearly had rapid military expenditures in recent years, but government spending in other sectors has grown even faster. Unless seen in perspective, scaremongers are likely to claim more victims.

China currently spends around 2% of its GDP on the military, compared to the US spending nearly 5% of a much larger GDP.

The US consistently spends on defence about the same as the rest of the world, including China, put together.
Independent figures for 2009 place US military expenditure at more than US$660bil (RM2tril), and for China at almost US$100bil (RM307bil), after adjusting for official underestimates.

The allotment that Gates has applied to Congress for 2012 is some US$100bil less. But far from being cuts, the reduction comes from eliminating wastage such as unused, redundant or obsolete items and services.

As an indication of how these savings can easily be made, the different branches of the US military have already identified a total of more than US$100bil they do not need, a sum more than China spends or has ever spent on its armed forces.

Gates’ “budgeting” is in fact reorganisation, involving updated priorities and more focused needs. The US$553bil (RM1.7tril) he now hopes to get for 2012 will still have allotments for additional items such as advanced technology, new warships and more drones.

China’s military forces are characterised by two major features that are negative in international perceptions: a large standing army, and low-grade technology.

A universal principle in defence budgets is that most of the allocation goes to the salaries and benefits of personnel. To have a large army not only looks threatening, it also increases the allocations to personnel, with less funds available for armaments and even less for offensive weapons systems.

Low-grade technology is not only unimpressive, it also means more effort and funds are needed to upgrade it.
Then when technological advances are made, critics assume there is so much of a military build-up, forgetting the low technological base to begin with.

China today is the world’s second largest economy with the greatest potential for growth, trade and investments. It also has the world’s largest population, one of the largest land areas, considerable coastlines and some challenging border regions.

It is continuing to demobilise in reducing the number of troops, with the problem of having to find new jobs for retired soldiers. Its navy, reputedly stronger than its air force or its army, still has no aircraft carrier while the armed services are still dependent on second-hand Russian technology.

These realities seldom make world headlines. However, when China finally gets its first aircraft carrier later this year, more sensationalist reports about a “China threat” can be expected.

Saturday, January 8, 2011

Regional currencies to rise on China factor

By CECILIA KOK  cecilia_kok@thestar.com.my



SPECULATION about China's intention to allow its currency to appreciate soon has been strengthened after an official paper over the week said the Chinese government would let the yuan, or sometimes called the renminbi, rise about 5% against the US dollar this year.

That's about two-percentage point higher than the expectations of most investors, who thought the maximum that the Chinese government would allow this year would just be an appreciation of 3% in the value of the yuan against the US dollar.

Needless to say, any appreciation of the yuan would certainly be welcomed by Western powers, especially the US government, which has long blamed China's currency policy of keeping its exchange rate significantly undervalued against the others as the main cause of global imbalances.

Western powers claim that China's significantly undervalued currency has given the country unfair trade advantage, and they point to China's ability to continuously enjoy huge trade surpluses over the years, while leaving the West with continuously huge trade deficits, as support of their claim.

Economists at Washington-based Peterson Institute for International Economics say their recent calculation show that the yuan remains 17%-20% undervalued against the US dollar to this day. That, the institute claims, is a deliberate manipulation to gain export competitiveness.

So, given the perceived significant undervaluation of the yuan, many economists do not think that the (probable) 5% rise in the yuan's value would be enough to appease the Western governments. Market observers believe China will remain under tremendous international pressure to let its currency rise faster to help in the global-rebalancing effort.

But to be fair, China has indeed made an effort to reform its currency policy the only thing is that it is doing it gradually. This is to maintain stability in its own financial and economic system.


Inflation management tool
In June last year, the Chinese government removed the two-year peg of the yuan to the US dollar, which had stayed at around 6.83 per US dollar since July 2008, to allow its currency to appreciate.

The removal of the yuan peg resulted in the yuan gaining about 3.33% against the US dollar as at the end of 2010. Nevertheless, the yuan was still an under-performer last year compared with other currencies in the region (as shown in the chart).

According to the China Securities Journal, a leading voice on the country's economic affairs, the Chinese government would most likely allow the intended rise of the yuan to be accelerated in the first half of this year. This comes as the Chinese government concedes to the use of currency as a tool to manage its fast-rising inflation.

China faces mounting inflation pressures after its November consumer price index (CPI) soared to a new 28-month high at 5.1%, and some economists had warned that if no urgent measures were implemented, the country's CPI could grow by 7%-8% over the next two months.

Economists say that by allowing its yuan to appreciate, China can alleviate the inflationary pressure as its imports of goods and services will naturally become cheaper. A higher value of its currency can also help reduce the impact of rising global commodity prices, especially that of crude oil and crude palm oil, on its domestic economy.

Regional currencies to advance
Besides the urgent need to curb rising inflation pressure, many believe that China President Hu Jintao's upcoming visit to the United States in the middle of this month, will also lead to the yuan rising faster in the first half of this year.

And with growing expectations of the yuan's appreciation in the near term, economists say regional currencies, including that of Malaysia, will likely gain further momentum, particularly in the early part of this year. Regional currencies tend to move in tandem with the changes in China's yuan, as the latter is often regarded as the “anchor” currency of the region.

Last year, the China factor had also played a role in lifting regional currencies, as wide expectations of a yuan revaluation then attracted many investors to put their bets on Asia-Pacific. Of course, the region was also attractive to investors because of its growth prospects and wide interest rate differentials with major developed economies.

And as foreign capital poured into the region, Malaysia's ringgit turned out to be the top-performing currency last year, having appreciated from 3.424 against the US dollar from the beginning of 2010 to 3.0635 against the US dollar at the end the year.

(As at the time of writing yesterday, the ringgit was quoted at 3.0698 to the US dollar.)

Based on local economists' report so far, the ringgit is expected to strengthen further in 2011, but only marginally, as policymakers are expected to intervene to minimise its rise. Economists believe the ringgit would end the year trading within the band of 3.00-3.05 to the US dollar.

They also believe that the strengthening of other regional currencies will also be somewhat curtailed, as Asian policymakers become increasingly concerned over the impact of the rise of their currencies on export competitiveness.

On the back of all these recent developments, it will be interesting to see how Asian governments adapt their currency policies this year to balance between the need of maintaining export competitiveness to support economic growth and boosting their purchasing power by allowing the currencies to rise, and hence, promote domestic demand.

It’s wise to invest, but invest in what you understand

HOUSING INVESTMENTS
By THEAN LEE CHENG



IN the parable of 10 gold coins, a man of noble birth gave each of his servants a gold coin before going away to a distant land. “Put this money to work (invest it) until I come back,” he told them. On his return, he called each of his servants and asked what they did with the money.

The first said he had earned 10 times the capital given to him, the next five times. The third came and said he buried it in the ground. The master was very angry and asked him why he did not put the money on deposit to enable him to at least collect some interest. The third servant justified himself by saying that out of fear for his master, he did nothing.

Putting our savings in the bank may not be a popular option today but that aside, if the story of stewardship and investment was relevant in a simple agrarian society during biblical times, it is all the more relevant today.
The over-riding principle of that parable is that investing is not wrong. In fact, it is wise to invest.

The parable remains relevant because today, unlike before, all sorts of financial instruments are available. Although options may be limited when compared to the West, technology has allowed many to ignore national borders and many have invested globally. There is a need for wisdom and simplicity. Invest in what you understand.

Secondly, it remains relevant because the principle of investment takes into account the time element. The nobleman went away to a distant land. In those days, it takes time to travel from one place to another. He gave time to the servants to invest. It was long-term gains he was looking for. Consider the time element of your investment choices. Invest for posterity because it is a legacy that you want to leave behind.

Granted, the spectre of inflationary pressures then and today are vastly different. The world did not have seven billion hungry people. They grew their own food, unlike today where food prices are experiencing a spike. It is this volume in numbers feeding on each other in this pursuit for gains that gives the strength to this tidal wave that is just beginning to form in Asia. Be wary of mass exuberance.

Whether it is time deposit, properties, stocks or gold, we are all servants of the market. Conversely, we are also the force and strength behind the market.

We invest for three reasons to speculate, to hedge against inflation, or to arbitrage. Speculators do so to make a quick profit. They buy a house only to “flip” it when it is completed. They do not need the house or want the house for what it is. They use is as a channel to make quick gains.

Retirees and the more conservative investors hedge to preserve the value of their nestegg. That is a strong motivating factor amid today's inflationary pressures. An investor buys a house to hedge against inflation, hoping that the value of the house will remain. He also derives an income from it for future gains.

The arbitrageurs take advantage of the discrepancies in the markets. They buy a house in London because of the weak sterling and low interest rates in the hope that currency will appreciate in future, together with better house prices. In the meantime, they use it as a holiday home.

Everyday, while someone is making money, another is losing the shirt off his back. As the FBM KLCI takes on new peaks in the coming months with expectation to surpass the 1,700 mark, and property prices continue to trend upwards, it is time to return to the parable and the simplicity it represents.

The story concluded with the master taking away the third servant's gold coin only to give it to the first, the one who made 10 times the profit. The other servants protested, saying that he already has a lot, to which the master said: “To those who have, more will be given.”

Warren Buffet, one of the world's greatest investor, began with little. He had an interest in saving and making money. One of his strategies is patience. Like Buffett, Microsoft Bill Gates is counted among the world's richest because he did what he like. Both of them enjoyed their work. Likewise Jim Rogers, the other great investor of our times.

Not many of us will be able to enrich ourselves from the work we do. But we are given opportunities to invest. What is the motivating factor?

Assistant news editor Thean Lee Cheng does not think fear should be part of the equation. Remember the third servant who did nothing out of fear? But she does realise that wisdom is very much a scare commodity in today's times.

Consulting is no child’s play

OPTIMISTICALLY CAUTIOUS
By ERROL OH

 

YEAR Four pupil Gerald Khoo (not his real name) hopes to be a consultant one day. His mother, Patricia Teng (not her real name either), says: “Gerald is not your average 10-year-old boy. He's always been precocious, especially when it comes to anything about business and finance. He has problems mixing well with other kids since he had started talking. He operates on a different wavelength and it frustrates him that they don't treat profits as a priority.

“Playtime is particularly difficult for him. When joining the others to play house when he was younger, he insisted on being a property developer. Then, they would quarrel over the home prices.

“He got excited when the girls started a session of masak-masak. But it always ended in tears because he had volunteered to be a restaurant owner and had got angry when the other kids had refused to pay for the food'. I remember that time when somebody suggested a game of hide-and-seek. I still laugh when I think about it. (And indeed, she cackles for a good two minutes.) This was what he said: Okay, I'll be the accountant. Who'll be the auditor?'”

The boy's father, Khoo Liang Huat (for the last time, not his real name), maintains that his son's deep interest in business and finance comes naturally, and that the parents have not at all steered him in that direction. When asked about the couple's occupations, the elder Khoo refuses to offer any information other than that his job “has something to do with shares” and that his wife “handles the money side of it.”

“For the longest time, Gerald's ambition was to be the CEO of a listed company. When he gets back from school, he won't ask what's for lunch. Instead, he'll check the stock market index at the mid-day break. He calls a family reunion dinner an AGM. When his little sister was born, to him it was a bonus issue. And his school has complained that he kept pestering the teachers for quarterly report cards,” says the father.

“But recently, he told us that he had changed his mind. His ambition now is to be a consultant. When we asked why, he said he was convinced that a consultant's work got the best rewards. He added that he shouldn't say more about it because he didn't want too many people to know about how great it was to be a consultant. Neither did he tell us what sort of consultancy work he was interested in.”

StarBizWeek was unable to interview Gerald because, according to his parents, he now spends his free time pitching for consultancy contracts. In addition, he prefers to keep a low profile so as not to spook potential clients.

Fortunately, last week, Gerald's class was assigned to write an essay titled “My Dream Job”. Courtesy of the Khoos, below is his effort (bear in mind that this is a boy whose bedtime reading includes Fortune, The Wall Street Journal and Financial Times, and whose favourite Astro channels are Bloomberg and CNBC):

My Dream Job
By Gerald Khoo
When I grow up, I want to be a consultant, just any type of consultant. I have Googled the subject, and I know there are hundreds of jokes and quotes about consultants, questioning the usefulness of the consultants' advice and services. I found on the Web this popular definition of a consultant. I have changed it a little to follow the school rules on appropriate language, and here is my version: Someone who knows 101 ways to make out, but cannot get a date.

And then there is this guy, Norman Ralph Augustine, an American aerospace businessman who obviously isn't very fond of consultants. According to him, when you ask consultants what is two and two, they will respond with “What do you have in mind?” He was also quoted as saying this: “Hiring consultants to conduct studies can be an excellent means of turning problems into gold, your problems into their gold.” Ha, ha, very funny, Mr Augustine.

Perhaps, he and the other critics are right. I am sure the consultants are not always right and maybe, they are not always as good as they claim to be. But boy, do consultants get paid well. It's almost as if all you need to do to get a big sum of money is to call yourself a consultant, or go along with it when others call you a consultant. In some cases, you don't even have to do any real consulting work.

Those who say there are limited opportunities in Malaysia have clearly never charged consultancy fees. For example, last month, when the US Securities and Exchange Commission (SEC) charged Paris-based telecommunications company Alcatel-Lucent SA with violating the Foreign Corrupt Practices Act (FCPA) by paying bribes to foreign government officials to illicitly win business, it was alleged that an Alcatel company paid two Malaysian consultants US$700,000 for market research several years ago.

“However, the work product these consultants prepared could not justify the size of Alcatel Standard's payments. In fact, Malaysian Consultant A and Malaysian Consultant B did not appear to render any legitimate services to Alcatel Malaysia in connection with these payments,” said the SEC in a complaint submitted to a Florida court on Dec 27.

Just before that, Sime Darby Bhd had announced civil suits against ex-CEO Datuk Seri Ahmad Zubir Murshid and a few others for huge losses incurred in relation to four engineering projects. After reading the company's two statements of claim, I have no doubt that my dream is to work in the consulting line. One of the documents contends that there have been wrongful appointment of consultants. On one project, seven consultants were paid a total of RM102mil.

Sime Darby says there were “no objective grounds” for appointing six of these consultants, claiming that none of the six added value to the services that the Sime Darby group could offer to the securing and proper implementation of the project.

I can't think of an easier way to earn big bucks than to be a consultant. Can you?
When he was 10, deputy executive editor Errol Oh (yup, that's his real name) wanted to be a zoo-keeper. He still thinks it's not too late. On some Sundays, you can see him at Zoo Negara, looking wistfully at the animals.

Friday, January 7, 2011

China and America to lead global mega-boom -HSBC


HSBC sees China and America leading global mega-boom

The greatest global boom of all time has barely begun. Over the next forty years, economic growth will quicken yet further as the rising powers of Asia, the Middle East, and Latin America reach their full stride

HSBC sees China and America leading global mega-boom. In a sweeping report entitled
In a sweeping report entitled "The World in 2050", HSBC said China at $24.6 trillion (constant 2000 dollars) and the US at $22.3 trillion will together tower over the global economy. 
Crunching everything from fertility rates to schooling levels and the rule of law, HSBC predicts that the world's economic output will triple again by 2050, provided the major states can avoid conflict - trade wars, or worse - and defeat the Malthusian threat of food and water limits. Growth will rise to 3pc on average, up from 2pc over the last decade.
In a sweeping report entitled "The World in 2050", the bank said China would snatch the top slot as expected, but only narrowly. China at $24.6 trillion (constant 2000 dollars) and the US at $22.3 trillion will together tower over the global economy in bipolar condominium - or simply the G2 - with India at $8.2 trillion far behind in third slot, and parts of Europe slithering into oblivion.
Turkey will vault past Russia, settling an Ottoman score. Egypt, Malaysia and Indonesia will all move into the top 20. Muslim societies may start to reassert an economic clout unseen since the late Caliphate. Yet Brazil may disappoint again, stalling at 7th place in 2050 as its birthrate slows sharply and bad schools exact their toll.
The surprise is how well the Anglo-Saxon states hold up under HSBC's model, which is based on the theoretical work of Harvard professor Robert Barro. America's high fertility rate (2.1) will allow it too keep adding manpower long after China's workforce has begun to contract in 2020s and as even India starts to age in the 2040s.
An eightfold jump in the per capita income of China and India will keep growth brisk despite demographic headwinds, but they will not come to close to matching US living standards. Americans will be three times richer than the Chinese in 2050.
Britain at $3.6 trillion also fares well, slipping one rank to sixth place but pulling far ahead of Italy and France, and almost displacing Germany as Europe's biggest economy. This is chiefly due to the UK's healthy fertility rate (1.9), although sceptics might question whether a birthrate inflated by the EU's highest share of unmarried teenager mothers is a good foundation for prosperity.

The low fertility of Korea (1.1), Singapore (1.2) Germany (1.3), Poland (1.3), Italy (1.4), Spain (1.4) and Russia (1.4), more or less dooms these countries to aging crises and population decline unless they open the floodgates to immigration.

Japan is already deep into this phase of atrophy, explaining why the country has had such trouble shaking off the effects of the Nikkei bust. Its total population began contracting outright since 2005. It shed a record 120,000 last year, and will shrink 37pc by 2050.

"Demography matters," said Karen Ward, the report's chief author. The "big losers" are the smaller states of Switzerland, Netherlands, Sweden, Belgium, and Austria, which will mostly drop out of the top 30. "They may struggle to maintain their influence in global policy forums," she said.

HSBC works from the assumption that mankind will avoid the energy crunch and overcome the eco-deficit, a term used to describe the world's depletion rate of non-renewable assets. It calls for $46 trillion of investments in alternative forms of energy to break out of the carbon trap, and head off a supply crisis that could derail growth.

Feeding the world may be harder. The UN expects food demand to rise 70pc by 2050, yet the yield growth of crops has slowed to 1.5pc a year from 3.2pc in the 1960s. The number of people living in areas experiencing "severe water stress" will double from a third of the world population to two thirds between 1995 and 2025. The water basins irrigating the crops of the North China plain are being exhausted at an alarming rate.

HSBC admits that it economic projections are based on a "rather rosy scenario". Yet one thing seems clear. As superpowers of world food output, the US and Canada are sitting pretty.

HSBC: China and America to lead global mega-boom - papers

China and the US will lead the biggest-ever economic boom as global output triples again by 2050, a HSBC report predicts.
Growth will rise to 3% on average over the next 40 years, up from 2% over the last decade, as the rising powers of Asia, the Middle East and Latin America become major players in the world economy, it said.
In a sweeping report entitled "The World in 2050", the bank said China would snatch the top slot as expected, but only narrowly, reports the Telegraph.

China, at $24.6trn (constant 2000 dollars) and the US at $22.3trn will together tower over the global economy in bipolar condominium - or simply the G2 - with India at $8.2trn far behind in third slot, and parts of Europe slithering into oblivion.

Crunching everything from fertility rates to schooling levels and the rule of law, HSBC predicts that the world's economic output will triple again by 2050, provided the major states can avoid conflict - trade wars, or worse - and defeat the Malthusian threat of food and water limits.

Fed unmoved by improving economic data

The US Federal Reserve will push ahead with its $600bn (£385bn) stimulus programme - dubbed QE2 - as it is not convinced by improved economic data in the US, meeting notes show.

Speculation had been mounting the Fed might scale back its controversial stimulus measures given recent signs of an economic recovery in the US.

Factory order figures for November, released yesterday, showed a return to growth.
The Fed minutes from its 14 December policy meeting revealed that "the pace and size of the overall purchase programme" would depend on the strength of the recovery, writes the BBC.

"However, some members indicated that they had a fairly high threshold for making changes to the programme," the notes said.

"While the economic outlook was seen as improving, members generally felt that the change in outlook was not sufficient to warrant any adjustments."


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US and China military balance in the Pacific




The emergence of high-tech weaponry – which would make it more difficult for the US navy and air force to project power close to Taiwan and elsewhere on China's coastline – has prompted concerns that a tilt in the balance of military power in the western Pacific towards China may come sooner than expected