Yuan to stay cool

The best thing American politicians can do to encourage a stronger Chinese currency is keep calm

ONE of the few good things about the Great Recession of 2008-09 was a merciful absence of complaints from America’s Congress about China’s currency. The yuan’s gradual appreciation stopped in July 2008, and China has since kept its currency tightly pegged to the dollar. But even as America suffered its worst downturn in the post-war period, its legislators steered clear of ranting against China.

That restraint was driven partly by fear. At the depths of the crisis even the most myopic Congressmen worried about a descent into 1930s-style protectionism. And it was driven partly by the facts. As investors’ flight to safety strengthened the dollar in late 2008, the yuan rose along with it. With America’s imports slumping it was hard to blame Chinese workers for American joblessness. And thanks to its huge domestic stimulus China added to global demand last year, as its current-account surplus shrank sharply.

Now things have, unfortunately, gone into reverse. As policymakers in both countries shift from cushioning recession to managing recovery, the rigidity of the yuan is, once again, becoming a source of tension—one that a still-fragile global recovery can ill afford.
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Euro rises against the dollar on Greek austerity plan

The euro has risen against the dollar as Greece unveiled a new series of austerity measures to cuts its debt.

The euro rose 0.6% to $1.3698, but was slightly lower against the pound at 90.70 pence.

On Tuesday, the currency fell to its lowest level against the dollar for 10 months amid continuing concerns over Greece’s debt crisis.

Persistent worries over Greece’s 300bn euro ($419bn; £259bn) debt have weighed on the European single currency.

The pound rose against the dollar, trading at $1.512.

Protests

The Greek government approved an austerity package of tax rises and spending cuts worth 4.8bn euros, hoping to convince financial markets that it can pay off its debts and persuade European leaders it is doing enough.
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Davos 2010: Sarkozy calls for revamp of capitalism

French President Nicolas Sarkozy has called for a fundamental rethink of capitalism in the aftermath of the financial crisis.

“We need deep profound change,” he said in his keynote speech at the World Economic Forum in Davos.

His comments came as bankers and regulators clashed over proposals to break up banks that threaten the whole financial system.

Mr Sarkozy said he wished to restore a “moral dimension” to free trade.

“Were we not to change, we would be showing tremendous irresponsibility,” he told the bankers and politicians that gather annually in the Swiss alpine resort.
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Fear of the dragon

China’s share of world markets increased during the recession. It will keep rising

MANY people start the new year by resolving to change their old ways. Not China. On December 27th Zhong Shan, the country’s vice-minister of trade, declared that China will continue to increase its share of world exports. Figures due out on January 11th are expected to show that China’s exports in December were higher than a year ago, after 13 months of year-on-year declines. China’s exports fell by around 17% in 2009 as a whole, but other countries’ slumped by even more. As a result China overtook Germany to become the world’s largest exporter and its share of world exports jumped to almost 10%, up from 3% in 1999 (see chart).

China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.
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Flagrant harbour

Hong Kong’s stock exchange looks beyond China

RUSAL, the world’s largest aluminium company, desperately needs money to support mountains of debt but, as its recently issued prospectus suggests, there are reasons why funds may be tricky to raise. The prospectus repeatedly warns would-be investors that they could lose everything; it also admits that the firm does not meet the profit test for listing on the Hong Kong stock exchange.

That apparently does not bother the exchange itself, which will host Rusal’s planned multibillion-dollar share offering, the first by a Russian company, later this month. The bourse is making a vigorous play for foreign listings from companies outside China, the source of its recent success but a stamping-ground that may soon be lost to resurgent local exchanges in Shenzhen and Shanghai.

If the Rusal offering is pounced upon by investors, there is hope that another six or seven big Russian companies will quickly follow. In short order Hong Kong could usurp London’s AIM market, which proved to be a popular destination for Russian listings in the past.
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Square-root reversal

America will recover, but too weakly for comfort

The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.

Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.
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Chinese fund to receive $200 billion

Beijing, China (FT) — China Investment Corp, the Chinese sovereign wealth fund, is expected to receive another injection of capital from the country’s foreign exchange reserves in the coming months, according to government officials and people familiar with the fund.

While a final decision has yet to be made, these people said CIC would likely receive a similar amount to the initial $200bn it was given on its establishment in 2007.

Chinese media have also reported the government is considering a new capital injection of $200bn for the fund.

Any infusion would amount to an acknowledgement from Beijing that CIC has performed well during a time of global turmoil. It would also mark a turnround from a year ago when the fund was under attack for its early lossmaking investments in Morgan Stanley and US private equity firm Blackstone.

Bankers say that despite those hiccups the fund has managed its funds well through the crisis. It stayed mostly in cash last year before switching into highly liquid US dollar assets as the greenback bounced back in November 2008 and again in March this year.

As the global economy began to recover earlier this year, the fund was quick to make investments in commodities-related assets that benefit from a rebound in Chinese growth.
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The other D-word

Is Japan back in a deflationary trap?

WHILE investors have been fretting recently about Japan’s huge debt, another of the dreaded D-words has come back to haunt them. On Friday November 20th, Japan’s Cabinet Office issued a monthly report that for the first time since 2006 acknowledged that the country was suffering from deflation.

Consumer prices have actually been falling for months, but the pace of decline accelerated over the summer. In September prices slumped by 2.2% compared with a year earlier. This is partly because the country is still loaded with excess capacity after the collapse in exports during the global financial crisis, and partly because oil prices were lower in September than in the same month last year. But there are more structural problems, too. As Japan’s population declines, for instance, retailers are being forced to cut prices to gain market share.
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Brazil takes off

Now the risk for Latin America’s big success story is hubris

WHEN, back in 2003, economists at Goldman Sachs bracketed Brazil with Russia, India and China as the economies that would come to dominate the world, there was much sniping about the B in the BRIC acronym. Brazil? A country with a growth rate as skimpy as its swimsuits, prey to any financial crisis that was around, a place of chronic political instability, whose infinite capacity to squander its obvious potential was as legendary as its talent for football and carnivals, did not seem to belong with those emerging titans.

Now that scepticism looks misplaced. China may be leading the world economy out of recession but Brazil is also on a roll. It did not avoid the downturn, but was among the last in and the first out. Its economy is growing again at an annualised rate of 5%. It should pick up more speed over the next few years as big new deep-sea oilfields come on stream, and as Asian countries still hunger for food and minerals from Brazil’s vast and bountiful land. Forecasts vary, but sometime in the decade after 2014—rather sooner than Goldman Sachs envisaged—Brazil is likely to become the world’s fifth-largest economy, overtaking Britain and France. By 2025 São Paulo will be its fifth-wealthiest city, according to PwC, a consultancy.

And, in some ways, Brazil outclasses the other BRICs. Unlike China, it is a democracy. Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbours. Unlike Russia, it exports more than oil and arms, and treats foreign investors with respect. Under the presidency of Luiz Inácio Lula da Silva, a former trade-union leader born in poverty, its government has moved to reduce the searing inequalities that have long disfigured it. Indeed, when it comes to smart social policy and boosting consumption at home, the developing world has much more to learn from Brazil than from China. In short, Brazil suddenly seems to have made an entrance onto the world stage. Its arrival was symbolically marked last month by the award of the 2016 Olympics to Rio de Janeiro; two years earlier, Brazil will host football’s World Cup.
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Breaking up

A dramatic restructuring for ING. Which big European bank is next?

IF ICELAND is the place that has suffered most from the banking crisis, the Benelux countries can make a justifiable claim to second place. After the calamitous sale of ABN AMRO and the subsequent dismemberment of Fortis, ING, the biggest bank in the Netherlands, announced on Monday October 26th that it was splitting itself up. The bank will sell its insurance businesses, divest the American arm of its ING Direct online-banking unit and carve out some bits of its Dutch retail activities. By the time the restructuring is done, in 2013, the bank’s balance sheet will be 45% smaller than it was in September 2008.

That isn’t all. The bank also announced plans for a €7.5 billion ($11.2 billion) rights issue to help repay half the money that the Dutch government injected into ING in October last year. Investors reacted with dismay to the prospect of dilution and the uncertainty of the planned restructuring, sending the bank’s shares down sharply on Monday.

Other equity investors were spooked, too, as they digested the wider implications of the announcement. For shareholders in other banks that have received state aid, the biggest concerns surrounded the European Commission’s role in ING’s break-up. The Dutch bank has its own reasons to act. The rights issue can largely be explained by ING’s desire to start escaping government investment. The break-up is consistent with a “back to basics” plan announced in April by Jan Hommen, ING’s chief executive, that promised to simplify and shrink the institution. Splitting banking and insurance should rid ING of a conglomerate discount. Its shares have historically traded at a 30% discount to bank and insurance indices.
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