Systemic risk a puzzle or mystery?

THINK ASIAN By ANDREW SHENG

MALCOLM Gladwell deserves his reputation as one of the most brilliant and popular writers today. His books – The Tipping Point: How Little Things Make a Big Difference, Blink: The Power of Thinking Without Thinking, Outliers: The Story of Success – all became No. 1 bestsellers.

I just read his latest book, What the Dog Saw, actually a compilation of his New Yorker magazine articles. He is brilliant because he looks from an angle that most of us miss. He did not think what you and I think when talking about a dog; he looked at what the dog thinks.

In the chapter titled Enron: Open Secrets, Gladwell posed the right question: Was the failure of Enron a puzzle or mystery?

A puzzle is something that can be solved with extra information. A mystery is a question that may not have simple answers, requiring judgment and the assessment of uncertainty. “The hard part is not that we have too little information, but that we have too much,” he wrote.

He concluded that Enron was not a puzzle, but a mystery, since Enron disclosed most of the information according to the (then) accounting rules. Exactly like the current crisis, Enron had the best professionals working for the company, but no one stopped the company producing misleading accounts until it was too late.

In this age of high transparency, crises happen openly. Why? In Enron, Gladwell posed the issue: “It’s almost as if they were saying, ‘We’re doing some really sleazy stuff in footnote 42, and if you want to know more about it, ask us.’ And that’s the thing. Nobody did.”

Gladwell asked, “Had we taken the lessons of Enron more seriously, would we have had the financial crisis of 2008?”

Right question. But why did nobody, especially policymakers and regulators, ask the right questions? Is the current global crisis a puzzle or mystery?

There is general acceptance by financial regulators (in hindsight) that what we all missed during the current crisis is systemic risk, which is defined in Wikipedia as “the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system”.

It can also be defined as the serious destabilisation of the financial system, caused or exacerbated by failures in parts of the system that spreads through the financial system and the real sector.

Systemic risks are risks passed through common interlinkages and interdependencies in a system or market, through contagion that leads to a system-wide cascading failure.

Most regulators would agree that systemic risks are not usually measured by micro-prudential regulators, who focus mostly on institutions or processes. It is now fashionable to talk about “macro-prudential regulation”.

The current reforms in the United States and European Union vigorously debate how to measure, monitor and control systemic risks. These range from creating an independent “financial stability council” specifically to comment on systemic risks, the use of a tax to reduce systemic risks, and more regulations and reporting requirements.

Everyone seems to agree that we need to control the “too big to fail” banks and the “too interconnected to fail” smaller institutions, such as hedge funds. There is general agreement that all scope of regulation should cover all institutions that generate systemic risks.

The trouble with controlling systemic risks is that they are not easily identified. We know that systemic risks are generated by behaviour, that they are inherent in eco-systems and that they have macro as well as micro origins. But we do not know the trigger when these risks begin to cause real problems.

We now face the Gladwell question: Is systemic risk a puzzle or mystery?

If it is a puzzle, then if we find the right information, we can have the right solution. But if it is a mystery, then we may have to think about the problem completely differently.

Gladwell thinks that puzzles are “transmitter-dependent”, depending on what we are told. Mysteries are “receiver-dependent”; they depend on the skills of the listener. If the public does not understand the risks, then the risks will happen.

Systemic risks are related to the system as a whole and also the behaviour within the system and also the commonalities within the system that create the contagion.

Understanding this means that we need to understand not just the dynamics of the financial system itself (what is endogenous to the financial sector), but also the complex exogenous inter-relationships within the financial sector and the real sector.

It means that we have to understand the reflexive actions between parts of the real and financial sectors.

This is an epistemological question, the science of the limits of knowledge. Suppose we have a super computer that is able to digest every bit of information, can we accurately estimate systemic risks? What if systemic risk stems from the fact that the externality of what we do (everyone in the financial system) generate enough spillover effects that create a massive disaster?

In other words, are we dealing with the unknown unknown? These are sometimes called acts of God.
Perhaps the recent preoccupation with risk management models and information systems that assume that we can calculate all the risks is wrong.

We now know that the current generation of risk models cannot cope with Black Swan or extreme event risks.

Risks can be reduced in four main ways: avoidance, diversification, hedging and insurance by transferring risks. The current generation of regulators thinks that diversification, hedging and insurance is a science that can be measured. This crisis proved that they are wrong. There is much about systemic risks that we do not understand.

Hence, it is better to have ample capital and simple “avoidance behaviour” or prudence in whatever we do. Regulators have the unpleasant task of saying no when no one understands what the risks are.

Risk prevention or avoidance is still an art, not a science. We need to be humble that we do not yet fully understand how our systems work or fail, hence the need to be “balanced” or finding the golden mean. When everyone thinks something is right, it could very well be wrong.

·Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council.

U.K. Scraps FSA in Biggest Bank Overhaul Since 1997

U.K. Chancellor of the Exchequer George Osborne speaks at Mansion House in London. Photographer: Chris Ratcliffe/Bloomberg 

Chancellor of the Exchequer George Osborne said he will abolish the Financial Services Authority and give most of its power to the Bank of England, undoing the regulatory system set up by Gordon Brown in 1997.

In the most sweeping changes to financial regulation since then, the watchdog will be wound down and replaced by three bodies over the next two years, the chancellor said. A Prudential Regulatory Authority will be created as a subsidiary of the central bank. Osborne will also set up a Financial Policy Committee at the bank and establish a consumer protection and markets agency.

Osborne, whose Conservative Party took power after the May 6 election, is delivering on a promise made almost a year ago to shake up the way the U.K.’s banks and markets are policed. He’s blamed the system established by former Labour Prime Minister Brown for failing to prevent a financial crisis that saddled taxpayers with liabilities of as much as 1.4 trillion pounds ($2.1 trillion) and plunged the economy into the worst recession since World War II.

“At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent,” Osborne told bankers at his first Mansion House dinner in London’s financial district last night.

Northern Rock

Brown’s government had to nationalize Northern Rock Plc, the first U.K. casualty of the credit crunch, in February 2008. The lender nearly collapsed in 2007 after it had to seek emergency funding from the central bank and then suffered a run on its deposits. The government also had to take controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

With the economy emerging from recession, Britain now faces the deepest spending cuts since the 1970s to tackle the record budget deficit, overshadowing prospects for recovery.

“Many in the City had felt that giving the Bank of England responsibility for macro-prudential regulation would be a positive step, but there will be disappointment that the government has decided to launch such a radical overhaul of the regulatory system at this particularly difficult time in the economic cycle,” said Nathan Willmott, a lawyer at Berwin Leighton Paisner in London.

Tripartite System 

Osborne’s plan scraps Brown’s tripartite system of regulation -- in which the central bank, FSA and Treasury shared responsibilities -- and places most of the onus on Bank of England Governor Mervyn King. Legislation to replace the FSA will be in place by 2012, Osborne said.

Osborne’s predecessor, Alistair Darling, defended the tripartite system and blamed the crisis partly on the “quality, skills and judgment” of individual regulators that failed to examine “the connections between institutions.”

“Can every country, every regulator, hand on heart, say they have sorted out the problems of their individual banks, and are regulators in different countries aware of any residual problems,” Darling said in an interview on Bloomberg Television today. “These problems don’t go away. It’s rather like having a bad smell in the house. There’s no point in ignoring it. You need to get the floorboards up.”

The FSA’s chief executive, Hector Sants, 54, will stay on at the authority while it is wound down and will take up new roles on the bodies that replace it, becoming a deputy governor of the central bank.
‘Macro Issues’

Executive power over financial supervision will go to the Financial Policy Committee at the central bank, which will operate in a similar way to its rate-setting monetary policy panel. The new committee “will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and the tools to take effective action in response,” Osborne said.

The committee will be chaired by King and will include Sants among its members. The panel’s work will be scrutinized by Parliament’s Treasury Committee, the chancellor said.

The Prudential Regulatory Authority “will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies,” Osborne said. Sants will be its chief executive and King its chairman. Andrew Bailey, the head of the central bank unit that deals with failed banks, will be Sants’s deputy.

‘Authority, Knowledge’ 

“Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future,” Osborne said. “They must also be responsible for day-to-day micro-prudential regulation as well.”

Angela Knight, the chief executive of the British Bankers’ Association, a lobby group, said she welcomed steps to make the system “clearer and more effective” and pledged to support the government during the transition.

The third pillar of Osborne’s regulatory overhaul will come with the creation of a Consumer Protection and Markets Authority. Osborne said the agency will regulate financial firms “providing services to consumers” and maintain the “integrity of the U.K.’s financial markets.”

King told the Mansion House dinner that the new framework will assure the stability of the financial system.
‘Credible Regime’

“A credible macro-prudential regime could help forestall both excessive exuberance and unnecessary caution,” King said. “By altering the pressure on the financial brakes according to circumstances, regulation, far from being an inflexible foe, would become a flexible friend.”

FSA Chairman Adair Turner said he welcomed Osborne’s plans.

“The overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA’s achievements over the last few years of major change,” Turner said in an e-mailed statement.

“It is ironic that while in opposition the Tories identified the tripartite system as the root of all regulatory evil, yet here they are as government inventing multiple front- line agencies and creating distracting confusion in the process,” said Ash Saluja, a lawyer at CMS Cameron McKenna in London.

Osborne also said he will bring under one roof the handling of “serious economic crime,” which is currently dealt with by a number of organizations.

The chancellor also gave the names last night of the people who will work alongside former Bank of England Chief Economist John Vickers when he leads a panel on the future of banking.

Martin Wolf of the Financial Times, Bill Winters, the former co-chief executive of JP Morgan’s investment bank, Martin Taylor, formerly of Barclays Plc, and Clare Spottiswoode, the former head of the gas regulator Ofgas, will work with Vickers on the Independent Banking Commission, Osborne said.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net.

Major US financial reform agreed

President Obama: "We've all seen what happens when there is insufficient oversight"

The US Congress has all but finalised the biggest reform of US financial regulation since the Great Depression.

President Obama said the reforms would "hold Wall Street to account".

Legislators stayed up all of Thursday night for 19 hours of non-stop negotiations to reconcile separate versions of the bill that had been passed by the two houses of Congress.
Agreement was reached to impose strict limits on banks' ability to take risky speculative bets on markets.

MARDELL'S AMERICA 

Continue reading the main story 

 

It will be a political tool for Obama. He's trying to take the initiative after a difficult few months

Mark Mardell BBC North America editor Read Mark's blog in full

 

Speaking before the start of the G8 and G20 summits in Canada, President Barack Obama said he was "gratified" by the progress made by Congress.

Treasury Secretary Tim Geithner said the bill that had emerged was "strong" and described it as "the most sweeping set of financial reforms since those that followed the Great Depression".

US bank shares greeted the news positively, with Citibank rising 3% in early trading, Goldman Sachs was up 1.75% and JP Morgan 2.25%.

All-nighter 

The debate only ended at 0540 Washington time (0940 GMT), with compromises reached on all major points.

The bill represents a second major legislative victory this year for President Barack Obama - following healthcare reform - and rode a popular backlash among American voters against Wall Street.

"We worry about big money," said Democrat Barney Frank, who headed the negotiations.
"I worry about big money having a corrupting influence, but it is reassuring to know that when public opinion gets engaged, it will win."

Volcker rules

 The bill introduces the so-called Volcker rule - named after the former Federal Reserve chairman Paul Volcker, who proposed it.

 

Chairman Barney Frank and colleagues stayed up all night negotiating 

   
The rule is intended to ban banks from risky entanglements in the financial markets.
US banks will be barred from taking big trading bets on markets.

They will also be limited to investing a maximum of 3% of their capital in speculative businesses such as hedge funds or private equity funds.

The bill will also set up a powerful consumer financial protection bureau, with powers to clamp down on abusive practices by credit card companies and mortgage lenders.

It now has to be passed by both the Senate and the House. When asked whether this would happen, President Obama said, "you bet".

Sticking points 

Analysis Continue reading the main story John Mervin, Editor, BBC World Business Report, New YorkMake no mistake, some on Wall Street feel they've dodged a bullet.

However much their revenues will be hurt by the new laws' provisions, things could have been much worse. Fuelled by deep public rage at banks that nearly destroyed the US economy, lawmakers seriously considered much more drastic action than this.

The Brown Kaufman amendment in the Senate would have limited the size and leverage of banks. Needless to say the giants of Wall Street were appalled at that prospect.

And who helped kill that amendment? The Obama administration itself. So it's worth bearing in mind that up to a point he has actually also been Wall Street's protector.

Mr Obama said the final bill "represents 90% of what I proposed when I took up this fight".
But concessions had to offered in order to win over Republican backing for the deal.

The US Congress is dominated by President Obama's Democratic party, which holds majorities in both houses.

However, following the death of Edward Kennedy last year, Republicans won his Massachusetts seat in the Senate, giving them a crucial blocking minority there.

Indeed, the 3% permitted investment in speculative businesses was a dilution to the Volcker Rule demanded by the new Massachusetts senator, Scott Brown.

Agreement was also reached on higher capital requirements for banks.
This means banks will either need to do less risky lending, or they will have to raise more money from shareholders to hold in reserve against loan losses, or both.

However, congressmen conceded a five-year transition period for banks to meet the new capital rules, and they exempted smaller banks - with less than $15bn in assets - from the rules altogether.

Swap limits

KEY PROVISIONS

• Volcker rule: ban on banks' proprietary trading
• Volcker rule: limit on banks investing in hedge funds or private equity funds
• New Consumer Financial Protection Bureau
• Credit Default Swaps trading moved onto exchanges
• Banks to spin off certain swaps businesses
• New capital adequacy rules for big banks in five years
• New Council of Regulators to monitor systemic risks
• Regulator powers to seize and resolve big troubled banks

Q&A: US bank regulation 

 

Another major sticking point was a Senate proposal to ban banks from dealing in so-called swaps.
Swaps are a type of derivative - financial contracts once described by investor Warren Buffett as "financial weapons of mass destruction".

Under the Senate bill, banks would have been forced to spin this business off into separate affiliated companies, in order to protect them from losses.

But negotiators agreed to water down the Senate bill, exempting the biggest swaps markets - on interest rates and currency exchange rates - from the ban.

But banks will still be banned from dealing in credit default swaps unless they do so through the safety of a financial exchange.

This measure will severely curtail one of the most profitable activities of the big international banks when they do business in the US.

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What To Expect At The G-20

The largest countries, like China and the U.S., should lead by example.

Rebellion, Repression And The Red Shirts

Hatoyama Accommodates The U.S. On Futenma

China: Managing A Summer Of Discontent

The central focus at the G-20 will be to change the composition of world growth as recovery takes hold: current-account-deficit countries should save and export more and consume less while surplus countries should consume and import more. Some of the required measures will not be popular at home as they impact consumer and trade interests that are vested in the unsustainable status quo.

Yet with Europe a drag on world growth and the U.S. consumer no longer the engine a determined effort to rebalance is essential to take up the slack. What needs to be done?

The best strategy to ensure G-20 momentum is for the largest countries to lead by example. A credible medium-term plan of fiscal consolidation would make the United States the natural leader of the Mutual Assessment process. This is unlikely until after the November 2010 mid-term elections, however, when the bipartisan National Commission on Fiscal Responsibility's report comes due.

The Chinese authorities have a rebalancing strategy that includes nominal exchange rate appreciation, shifts domestic demand towards consumption and shifts job generation more towards labor-intensive production in services as well as manufacturing. They need to follow through. Unfortunately, the euro's recent depreciation against the dollar has put unanticipated pressures on exporters' margins. So has recent labor unrest. Further delay in nominal appreciation will be inflationary and renew international tensions.

The European stabilization fund and unprecedented central bank intervention have bought Greece time to restructure its finances. But serious questions remain about economic governance in the euro zone where deeper coordination is required to restore and maintain fiscal prudence. Clearly future economic growth will have to be sought by raising productivity through politically-difficult and long-delayed structural reforms in a slow-growth environment. Germany as the large surplus economy should stimulate domestic demand to facilitate such changes.

The G-20 co-chairs, Canada and South Korea, both have successes from which others can learn.

Few realize that Canada completed a major fiscal adjustment in the mid-1990s when it moved from a deficit of 8.7% of GDP to a small surplus helped by public support for consolidation, a growing world economy and a flexible exchange rate.

South Korea is a graduated emerging market economy which has recovered from severe crises a decade ago. Others can learn from South Korea's strategy to reduce export dependence through domestic investments in human capital, technology and a "Green Korea" strategy of energy conservation, clean energy R&D and energy efficient transportation.

Other East Asian economies could contribute more to global demand by reducing export incentives and increasing exchange rate flexibility; increasing domestic demand by deregulating services and encouraging green and other needed infrastructure projects; and supporting household consumption as the economies adjust by creating social safety nets.

None of these recommendations is a slam dunk because most imply painful macroeconomic and structural adjustments. But the G-20's credibility to restore global growth is on the line.

The outlines of a successful summit began to appear this past week as President Barack Obama, in a June 16 letter to G-20 leaders, committed to reduce the U.S. deficit to 3% of GDP by 2015 and stabilize the debt-to-GDP ratio. On June 19-20 the People's Bank of China committed to greater nominal exchange rate flexibility. Follow through is needed in both countries, and from the Europeans, or renewed global imbalances will threaten global stability.

If growth in the heavily-indebted advanced countries continues to be modest threats of protectionism and political pressures to turn back globalization will rise. Few have much room to maneuver in the face of still-high unemployment.

Thus, the second G-20 summit, and the first to take place in Asia in Seoul in November, may turn out to be extraordinarily fortuitous if President Lee Myung-bak achieves further progress by persuasion and example.

We cannot afford more of the deadlock and inertia of Doha and Copenhagen. To prod governments to act--and to prevent backsliding--the IMF's Mutual Assessment analysis should be published (the April 2010 World Economic Outlook provides a more general but no less urgent assessment). Name-and-shame tactics helped mute protectionist actions during in the heat of the crisis. Such tactics, or a high-profile independent wise persons group, may be necessary to rally public support.

The stakes for the G-20 are high. There must be forward momentum or its credibility and effectiveness will ebb away. And the burdens of global financial crises on future generations will only grow.

Wendy Dobson, a professor at the University of Toronto, is a former Associate Deputy Minister of Finance in Canada. Her most recent book is Gravity Shift: How Asia's New Economic Powerhouses Will Shape the 21st Century.
 
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Europe to focus on growth

Geithner tells Europe to focus on growth

Timothy Geithner says the world "cannot depend as much on the US as it has in the past"

Europe must focus on growth as well as cutting spending to reduce national deficits, US Treasury Secretary Timothy Geithner has told the BBC.

Speaking in Washington ahead of G8 and G20 meetings this weekend in Toronto, Mr Geithner said that world leaders must concentrate on the "paramount" challenges of growth and confidence.

He added the world could not rely as much on the US as it has in the past.

The European Union says securing growth "remains a priority".

The Group of Eight and Group of 20 rich and developing nations are assembling on Friday for three days of talks on how best to emerge from the worst financial crisis since the Great Depression.

But the Reuters news agency reported that world leaders at the meeting would admit that sickly public finances could hurt long-term growth.

'Hand in hand'

Many European governments, including the UK, have implemented severe austerity measures in recent weeks in order to cut debt levels.

Continue reading the main story  

In pictures: G8/G20 leaders arrive Cameron urges focus at G8 summit

 

UK Prime Minister David Cameron, who has arrived in Canada along with other leaders, said in an article for the Globe and Mail newspaper: "No-one can doubt the biggest promise we have to deliver: fixing the global economy."

"I believe we must each start by setting out plans for getting our national finances under control," he added.
Herman van Rompuy, the president of the European Council, said that the EU's key words this weekend would be "growth, confidence and medium term".

"The restoring of confidence in budgetary policies go hand in hand with effective growth strategies," he said ahead of the meetings.

Growth challenge

  When asked if Europe faced the possibility of Japanese-style stagnation if it carries on with debt reduction policies, Mr Geithner said "Europe has the capacity to prevent that".

Continue reading the main story  

G8/G20 summits security map

 

But he added: "Europe can make a choice to put in place the reforms and policies that will provide the possibility of stronger growth rates in the future.

"This meeting gives us the chance to sit together and look at whether we've got a broad strategy across the country that's going to strengthen this recovery."

"Our job is to make sure we're all sitting there together to focus on this challenge of growth and confidence because growth and confidence are paramount."

Some commentators in Europe argue that austerity measures should only be introduced once strong growth has been secured in the wake of the global downturn.

This was a more widely-held position until the Greek debt crisis focused policymakers' minds on cutting debt levels.

The Greek crisis showed that governments with high levels of debt find it very difficult to borrow money from international investors, money that they need to service existing debts.

Common goals

  In a letter to G20 leaders last week, US President Barack Obama warned against cutting national debts too quickly, arguing it would put economic recovery at risk.

Continue reading the main story  

Why we all want to be Canadian Canada row over $1bn bill

 

But Mr Geithner said the US and Europe "have much more in common than we have differences".

"We all agree that we have to restore responsibility to our fiscal positions. Everyone agrees that those deficits have to come down over time to a level that's sustainable," he said.

But he said that the US and Europe would take "different paths, at a different pace" in order to reach the common goal.

"It's going to require different things as we have different strengths and weaknesses," he said.
Mr Geithner said the US was not in a position to work out what were the best policies for European countries to pursue.

The treasury secretary said the US had laid out "very ambitious plans as well" to cut its deficit.
But he said the US was in a stronger position than many other economies to cut its debt levels.

"We're in the very good position of being able to deliver relatively strong growth rates [compared] to what we're seeing in other major economies," he said.

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China's yuan hits new high

Some analysts say the yuan is undervalued against the dollar by up to 40 per cent [EPA] China has revised the exchange rate for the yuan, putting its currency at its highest level yet as international pressure builds on Beijing to allow the yuan to strengthen. On Friday the Bank of China set the central parity rate, or the daily official level, at 6.7896 to the dollar, 0.3 per cent stronger than Thursday's 6.8100. The rate is a weighted average of prices given by market makers, excluding highest and lowest offers. It marks the yuan's strongest level since China freed its currency from an 11-year-old peg in July 2005 and moved to a tightly managed floating exchange rate. On Friday the yuan weakened slightly in early trading to 6.7900 on China's main foreign exchange market. 'Basically stable' In a vaguely-worded statement, the central bank said the yuan would remain "basically stable". "This is not a big move, but it is significant. President Hu can point to it as evidence that China is serious about making its currency more flexible when he meets other G20 leaders in Toronto" Brian Jackson, senior analyst, Royal Bank of Canada China has tweaked the rate up and down this week ahead of the G20 summit and has a history of letting the yuan strengthen slightly before sensitive events, seen as an attempt to defuse criticism that it keeps the currency too low, giving Chinese exports an unfair advantage Friday's move is widely seen as a bid to head off rancour at the upcoming G20 meeting in Canada following intense pressure on Beijing to embrace currency reform as part of efforts to enhance a global economic recovery. Some experts say the yuan is undervalued against the dollar by up to 40 per cent. Barack Obama, the US president, said on Thursday it was too early to determine the impact of China's limited currency reform although he viewed the move as "positive". Speaking ahead of his meeting on Saturday with Hu Jintao, the Chinese president, on the sidelines of the G20 summit, Obama maintained that the "undervalued" yuan provided China "with an unfair trade advantage". For the past two years China had effectively pegged the yuan at about 6.8 to the dollar to prop up exporters during the global financial crisis. Criticism The value of the yuan has long been a source of tension between China and its major trading partners, particularly the US and EU. Critics say the policy gives Chinese producers an unfair advantage and prices competitors out of the market. US legislators, unmoved by Beijing's action, have threatened to press ahead with legislation they said will treat "currency manipulation" as an illegal subsidy and enable US authorities to impose tariffs on Chinese goods. China however repeated a warning on Thursday against "protectionist" retaliation over its currency policy, saying an appreciation in the yuan would not solve the Chinese trade surplus with the United States. Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong, said the yuan's limited moves this week might be enough to deflect criticism at the G20. "This is not a big move, but it is significant," he told AFP. "President Hu can point to it as evidence that China is serious about making its currency more flexible when he meets other G20 leaders in Toronto."

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Best Places In Asia To Be A Landlord

Indonesia tops the list of places where you can make the most by renting out an apartment.

In Depth: Best Places In Asia To Be A Landlord

HONG KONG -- Property prices in some parts of Asia are skyrocketing; since the first quarter of 2009 China's rose 68% and Hong Kong's 31%. But some of the best real estate buys may be farther south. 

Indonesia, the Philippines and Malaysia top the list of best places in the region to be a landlord, according to rental-yield data calculated by the Global Property Guide, a research house and website. In those places the cost of buying an apartment is relatively low compared with the money that can be earned by renting it out.

"We try to explain to people where they should be investing," says Matthew Montague-Pollock, Global Property Guide's publisher. "One reason is for income. One is for capital gains."

In Depth: Best Places In Asia To Be A Landlord
 

Montague-Pollock's team collects its information using in-house research, information from accountancy and law firms, and central bank and national statistical data. It ranks 13 Asia-Pacific countries in terms of rental yields (technically, the gross annual rental income expressed as a percentage of the property purchase price) in upscale parts of their major cities. These include areas like Hong Kong Island and the central residential neighborhood of Boeung Keng Kang in Phnom Penh, Cambodia--places where at least moderately well-heeled professionals live, be they expatriate or local.

Jakarta boasts the best rental yield, 12.34%; Manila has 8.98% and in Kuala Lumpur a landlord can make back 8.76%. Rounding out the top five are Bangkok, Thailand, and Auckland, New Zealand.

"Not only will you make more money from the rent, but also the chance that the value of your property will appreciate is greater," Montague-Pollock says. "The yields are an excellent signal of property markets in general."

Local Indonesian markets are attracting the attention of fund managers and property developers from places like Japan, India and Singapore, according to Anton Sitorus, head of research at Jones Lang LaSalle ( JLL - news - people ) Indonesia. But they are finding some obstacles.

"Unlike investing through the stock market or through project-financing schemes, investing directly in real development projects or by buying property in Indonesia is regarded as difficult and complex for investors and individuals from overseas," he wrote in an op-ed in the Jakarta Post. "Current laws and regulations and a lack of market transparency are the main concerns hampering foreign investment."

Meanwhile, the Philippines is a particularly good pick, according to Claire Brown, founder and managing director of Claire Brown Realty, which specializes in investments in Southeast Asia for clients in the region as well as in China, Europe and the U.K.

"Most capital cities are much more expensive now. The Philippines is still really, really cheap for buying real estate," Brown says. "We've got a development in Ortigas, an up-and-coming CBD [Central Business District] in Manila. We have units for $70,000, which is ridiculously cheap compared to Hong Kong."

Number three Kuala Lumpur is another promising buy, Brown adds, pointing to a new residence called Verve Suites in a high-end suburb called Mont Kiara. Three months after opening, this property--a serviced one with amenities like a pool, gym, movie theater and restaurant--is half-owner-occupied and half-tenanted. Malaysia's investment channels are easier to navigate, she says.

"You can get bank financing up to about 80% even if you're foreign. The capital gains tax has been slashed to 5% so it's easy to get in and out of that market," Brown says. "There is an abundance of expats who are happy to rent, but there is also a huge amount of local interest.

If your tenants are a mix of local nationals and a smattering of expats, you’re going to have good, healthy rental income and very few void periods.”


There are some downsides, however, to becoming a landlord in these developing Southeast Asian markets. For one, there are often roadblocks facing foreigners looking to buy property.

"You can't just walk in as a big American fund and buy a building, necessarily," says Andrew Ness, executive director of CB Richard Ellis Research Asia. "The lack of openness is what tends to keep yields high."

By contrast a place like Singapore, he adds, has a "more pronounced boom-to-bust syndrome because of its openness to global capital." Though its yields are lower--and it ranks number nine on the list with a rental yield of 3.79%--it offers other pros.

"It's the most open economy with the least restrictions on foreign investors," Ness says. "It’s the most transparent. The only problem is that a lot of the best assets are held by government-linked properties. It's not a place in Asia where we see a lot of distressed debt."

Ness also warned of the risk of inflation in countries like Indonesia, Malaysia and Thailand, as well as the reservations some foreign investors still hold after the protests in Bangkok this spring and recent terrorist bombings in Bali and Jakarta.

Indonesia, though, didn't suffer the same consequences from the global financial crisis as other Asian nations. The archipelago's economy relies less on overseas investment, which contracted in 2008, and on exports, whose buyers cut back around the same time, according to Bagus Adikusumo, director of real estate research firm Colliers International Indonesia. Those developments make Indonesia's economic climate look more attractive and resilient by comparison to its neighbors, he says, because "the other countries are getting less and less rental yield and revenue." 

The growth of industry in Indonesia will also help boost property markets. "More and more companies that are growing and expanding are going to bring more and more expatriates," he says, citing companies like U.S.-based Marathon Oil ( MRO - news - people ) and Australia's Pearl Oil as well as financial firms like Standard Chartered ( SCBEF.PK - news - people ). One of Indonesia's biggest banks, CIMB Niaga, is also expanding and bringing Indian and Malaysian expatriates to Jakarta to work. "They need more and more good quality apartments for them to rent."

Aspiring landlords, take note.

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Apple's iPhone 4 makes stellar world debut

SAN FRANCISCO – Apple fans mobbed stores in Japan, Europe and the United States in an iPhone 4 frenzy that promised blockbuster sales despite some opening day blemishes.

A customer looks at an iPhone 4 at the Apple Store 5th Avenue in New York June 24, 2010. [Agencies]

Hundreds of people queued up through the morning on Thursday outside the Apple store in downtown San Francisco, where one person reportedly sold a place in line for 400 dollars and another swapped a spot for an iPhone 4.

Some online complaints about iPhone 4 signal strength being hampered by a troublesome antenna design did not deter those in the queue.

"It's all rumors until we get them," Robert Freedman of San Francisco said as he waited to get his hands on an iPhone 4 to replace a model he had "beat the heck out of."

"People are walking out with them and saying they are using it and everything is fine," Freedman said.

Features luring people to the iPhone 4 include high-definition screens and "Face Time," which uses a forward facing camera to enable video chat.

"I've been an Apple head since I was a teenager," said Richard Polote, a 26-year-old San Francisco man who had been waiting outside the store since 2:30 in the morning.

"I feel pretty confident that whatever problems do arise, Apple will solve them in a timely fashion with upgrades or whatever."

Some new iPhone 4 owners were chagrined to discover that cupping their new smartphones so that their palms covered the lower left corners choked off the strength of the telecom service signals, according to videos posted online.

Based on the intense launch-day demand for the iPhone 4 the analyst thinks Apple will sell them as quickly as they can make them.

"Apple told me today they are building them as fast as they can," Baker said. "Expect a serious constraint on supply, which in turn will add to the hype of people desperately wanting to get one."

Whatever launch day sales figure Apple reports "is going to be huge," the analyst predicted.

In Paris, Senegalese businessman Bassirou Gueye joined some 350 people queuing before the opening of Apple's flagship store in the city, located in the chic underground shopping mall of the Louvre museum.

"I made a special trip to Paris to buy the iPhone 4. I'm interested in its high-tech features," said Gueye, a self-avowed Apple aficionado who already owns half a dozen brand-name devices.

Some buyers in France, however, reported problems activating their new phones because of technical problems with operator France Telecom.

In Germany, there were long queues at Apple stores and phone company Deutsche Telekom complained it did not have enough handsets to meet demand.

"By lunchtime iPhones in the high tens of thousands have already been sold. In Munich we have sold out," said Deutsche Telekom spokesman Dirk Wende.

Some 500 customers waited in line outside Apple's flagship Regent Street store in London when it opened its doors -- far more than those who queued for the launch of the iPad tablet last month.

Japan's eastern time zone put it first in line to sell the phone and hundreds braved sweltering humidity outside Apple's store in the Ginza district to get hold of the smartphone.

"I am truly amazed there were huge lines in Tokyo," Baker said. "It matches the original iPhone roll-out and that just blows me away."

The original iPhone launched in 2007 brought smartphones to the masses. Apple has sold more than 50 million of the handsets in the past three years.

But its latest version enters a crowded market full of rivals boasting bigger screens and running on Google's open-source Android operating system, which is more accessible to developers than Apple's tightly guarded system.

Sales of a white iPhone 4 model have been delayed to the second half of July because of unspecified manufacturing difficulties.

Carriers in the United States and France were forced to suspend early orders because of heavy demand. Apple said last week that it set a single-day record of 600,000 orders for the new smartphone.

The new iPhone will be available in 18 other countries in July and 24 more in August.

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